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Operator: Good morning, and welcome to the Darling Ingredients Inc. conference call to discuss the company's third quarter 2025 fiscal results. [Operator Instructions] Today's call is being recorded. I would now like to turn the call over to Ms. Suann Guthrie, Senior Vice President of Investor Relations. Please go ahead. Suann Guthrie: Thank you, and thank you for joining the Darling Ingredients Third Quarter 2025 Earnings Call. Here with me today are Mr. Randall C. Stuewe, Chairman and Chief Executive Officer; and Mr. Bob Day, Chief Financial Officer. Our third quarter 2025 earnings news release and slide presentation are available on the Investor page of our corporate website, and it will be joined by a transcript of this call once it is available. During this call, we will be making forward-looking statements, which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed in today's press release and the comments made during this conference call and in the risk section of our Form 10-K, 10-Q and other reported filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement. Now I will hand the call over to Randy. Randall Stuewe: Okay. Thanks, Suann. Good morning, everyone, and thanks for joining us for third quarter earnings call. Our core ingredients business delivered its strongest performance in 1.5 years fueled by robust global demand and exceptional execution across all operations. While the renewables market is facing some short-term uncertainty as we wait for clarity on the renewable volume obligation, we're confident that momentum is building. We believe we're on the verge of a shift that will highlight the strength of Darling's integrated model, a competitive advantage that is unmatched in the industry. Our combined adjusted EBITDA for third quarter was $245 million as our Global Ingredients business performed strong with $248 million of EBITDA. As I mentioned, the renewables business continues to be challenged as we posted negative $3 million EBITDA for DGD, which included a lower of cost or market expense of $38 million at the entity level. Bob is going to discuss more details later in the call. But I will say that both LIFO and LCM were negative in the third quarter, which is unusual and does not typically happen for extended periods. In addition, uncertainty and continued delays in getting a final RVO ruling had a negative impact on the overall biofuel environment in the U.S. during the quarter. Now in our feed segment, in our Feed Ingredients segment, global rendering volumes margins were up both sequentially and year-over-year, driven by strong demand for fats and proteins and solid execution by our global operations and marketing teams. In the U.S., robust demand for domestic fats, supported by a strong national agriculture and energy policy helped boost revenue and margins. elsewhere in the world, our global rendering business, particularly in Brazil, Canada and Europe demonstrated stronger year-over-year performance. Export protein demand is showing signs of recovery with slightly firmer pricing trends emerging. Tariff implications, primarily China and APAC countries clearly have impacted our value-added poultry protein products, which serve to meet the needs of global pet food and aquaculture customers. Turning to our Food segment. Performance remained steady quarter-over-quarter sales dipped slightly in the quarter as customers responded to ongoing tariff volatility, but we offset that with strong raw material sourcing and disciplined margin management. We continue to see repeat orders for our next Nextida Glucose Control product and early studies on new formulations look promising. We're on track to launch our new next Nextida product in the back half of 2026. In our fuel segment, the renewables market continues to face headwinds. This quarter, we saw higher feedstock costs, lower RINs and LCFS pricing, which ultimately impacted margins. A scheduled turnaround of DGD3 led to reduced volumes of renewable diesel and sustainable aviation fuel and DGD1 remains idled until margins improve. We believe these pressures are temporary. As mentioned earlier, we're approaching the rollout of thoughtful public policy aimed at strengthening American agriculture and energy leadership, a shift that we believe will significantly enhance DGD's earnings potential. Now with that, I'd like to hand the call over to Bob to take us through some financials, and I'll come back at the end and give you my thoughts for the balance of 2025. Bob? Robert Day: Thank you, Randy. Good morning, everyone. As Randy mentioned, core business results for third quarter improved as expected, while DGD faced some challenges that we'll explain later in the call. Specifically, third quarter combined adjusted EBITDA was $245 million versus $237 million in third quarter 2024 and $250 million last quarter. Adjusting for DGD, the quarter was very solid at $248 million versus $198 million in 2024 and $207 million last quarter. Total net sales in the quarter were $1.6 billion versus $1.4 billion while raw material volume remains steady at 3.8 million metric tons and gross margins improved to 24.7% for the quarter compared to 22.1% last year. Looking at the Feed segment for the quarter, EBITDA improved to $174 million from $132 million a year ago. Total sales were $1 billion versus $928 million, Feed raw material volumes were approximately 3.2 million tons compared to 3.1 million tons and gross margins relative to sales improved nicely to 24.3% versus 21.5%. In the Food segment, total sales for the quarter were $381 million, higher than third quarter 2024 at $357 million while gross margins for the segment were 27.5% of sales compared to 23.9% a year ago, and raw material volumes increased to 314,000 metric tons versus 306,000. EBITDA for third quarter 2025 was up significantly compared to 2024 at $72 million versus $57 million. Moving to the Fuel segment, specifically Diamond Green Diesel. Darling's share of DGD EBITDA was negative $3 million for the quarter versus positive $39 million in the third quarter of 2024. While the environment for renewable fuels has been challenging, results were further impacted by 2 items. First, a catalyst turnaround at DGD3, Port Arthur, which included a pause in operations for approximately 30 days, limited staff production and the higher average margins associated with that product. And second, end of quarter market dynamics led to negative impacts on earnings from both LIFO and LCM which, in most cases, would move in the opposite direction and have an offsetting impact. Regarding LIFO, rising feedstock prices throughout the quarter and higher quarter ending values resulted in a negative impact to EBITDA, while LCM was impacted by lower heating oil and RIN values in the days after quarter end, resulting in an LCM loss of around $38 million at the entity level. After 3 quarters, the combination of LIFO and LCM has resulted in a wider than normal loss that should reverse course over time. In addition to those 2 items, the biofuel market in the U.S. has been challenged by policy delays, specifically delays in RVO enforcement dates for 2024 obligations, clarity around small refinery exemptions, SREs, SRE reallocations and the final RVO ruling for '26 and '27. However, the EPA made a supplemental proposal on September 18, that would be very constructive. In the first page of the appendix in the shareholder deck that we provided, we've shown a picture of the 2025 RIN supply versus demand, showing how these policy issues have led to an oversupply for 2025 and also showing what the balance looks like considering the EPA's proposal comparing 50% SRE reallocations and 100% reallocations for '26 and '27. In either case, a significant amount of additional U.S. biofuels would be needed to satisfy that RVO, suggesting higher prices for feedstocks, farm products and wider margins for biofuels. With lower biofuel margins and late in the year timing related to receiving production tax credit PTC payments, we contributed $200 million to DGD during the quarter. a total of $245 million year-to-date, which includes a $5 million contribution subsequent to quarter close. These contributions are offset by the $130 million dividend received in first quarter 2025 and payments from expected sales of around $250 million of PTCs that we expect to receive in the fourth quarter. To further clarify regarding PTCs, we expect to generate a total of around $300 million in 2025. During the third quarter, we agreed to the sale of $125 million. We anticipate an additional $125 million to $170 million of sales in the fourth quarter and we estimate receiving payment for around $200 million of the total $300 million we will expect to generate by year-end 2025, the balance of which we expect to monetize in early 2026. Overall, we are very pleased with how the market has developed for production tax credits. Demand is robust as potential buyers have become more familiar with the details surrounding the credit. Other fuel segment sales, not including DGD, were $154 million for the quarter versus $137 million in 2024 despite lower volumes of 351,000 metric tons versus 391,000 metric tons which were affected by animal disease in Europe. Combined adjusted EBITDA for the fuel segment was $22 million in the quarter versus $60 million in the third quarter of 2024. The difference was primarily due to lower earnings at DGD. As of September 27, 2025, total debt net of cash was $4.01 billion versus $3.97 billion ending December 28, 2024. The increase from year-end is minimal despite contributions made to DGD and a $53 million earn-out payment related to the FASA acquisition from 2022. Capital expenditures totaled $90 million in the third quarter and $224 million for the first 9 months of 2025. We expect total debt to decrease by year-end as we generate cash from the core business and receive payments from selling PTC credits. Our bank covenant preliminary ratio at the end of third quarter was 3.65x versus 3.93x at year-end 2024. In addition, we ended quarter 3, 2025, with approximately $1.7 billion available on our revolving credit facility. The company recorded an income tax benefit of $1.2 million for the 3 months ended September 27, 2025, yielding an effective tax rate of minus 6.3%, which differs from the federal statutory rate of 21% due primarily to recognition of revenue from the production tax credits. The company paid $19 million of income taxes in the third quarter and $52 million year-to-date and expects to pay approximately $20 million more in the fourth quarter. Overall, net income was $19.4 million for the quarter or $0.12 per diluted share compared to net income of $16.9 million or $0.11 per diluted share for the third quarter of 2024. Now I will turn the call back over to Randy. Randall Stuewe: Thanks, Bob. I couldn't be more excited about what's ahead for Darling Ingredients. And our conversations with the Trump administration, they followed through on everything they've committed to. The renewable volume obligation they've drafted is thoughtful and designed to support American agriculture and energy leadership. And we believe it will be a major catalyst for Diamond Green Diesel. The pieces are in place, and we believe it's only a matter of time before Darling's unmatched position in the industry becomes even more clear. As we look ahead, we remain focused on what we can control, given the current uncertainty around public policy and its impact on the fuel segment, we'll now provide financial guidance exclusively for our core ingredients business. For the full year 2025, we expect the core ingredients business EBITDA, excluding DGD to be in the range of $875 million to $900 million. With that, let's go ahead and open it up to questions. Operator: [Operator Instructions] The first question comes from the line of Thomas Palmer with JPMorgan. Thomas Palmer: Maybe just to start out, you gave some helpful scenario analysis for RIN balances and how that might proceed over the next couple of years in the earnings presentation. I wondered about what you think the most likely time line is that we might start to get clarity on some of these outstanding regulatory items, the RVO, the exemptions and then the reallocation. Robert Day: Thanks, Tom. This is Bob. Obviously, a difficult question to answer. As everyone is aware, the government has shut down. At the same time, we've heard that the RVO is considered an essential process. We have people there at the EPA that are working on this. So we're optimistic based on that view and the things that we're hearing, we expect sometime in the month of December to have the comment period closed or the EPA to submit to the Office of Management and Budget their proposal and to have something approved by the end of the year. But like I said, that's amid a lot of things going on, but that's our view. Thomas Palmer: Okay. I know it's a unique situation. And then I just wanted to clarify on the Feed outlook for the fourth quarter. The midpoint of the core ingredients EBITDA guidance implies for the kind of 3 combined segments that 4Q is comparable to what we saw in 3Q. At the same time, it does look like the price of waste fats and oils have dipped a bit in September. So do we need prices to rebound in order for 4Q to look similar to 3Q? Or are there other things we should be considering as we move from 3Q to 4Q? Randall Stuewe: Yes. I mean, Tom, this is Randy. I mean the $875 million to $900 million, the reason we put the range on there was exactly as you laid out. We have seen, given the uncertainty on policy waste fat prices come down a little bit here most of our material in North America is going to DGD. But remember, there's still Brazil and Canada and prices remain strong there. So ultimately, it's kind of -- it's a fairly narrow range for the business. As I look around the horn on DGD, I expect the Food segment to be stronger a little bit in Q4, maybe a little consistent, maybe a little on the Feed segment. But I think we'll come in close to that range. And hopefully, we can surprise you 1 day and be above it. Operator: The next question comes from the line of Conor Fitzpatrick with Bank of America. Conor Fitzpatrick: It looks like your RIN supply and demand table in the slides calls for significant biomass-based diesel feed imports through 2027. As a coastal operator, DGD may import feed and receive the RINs penalty on those gallons but could you maybe walk through the benefits to RINs policy protectionism on the feed side and maybe explain how that nets out within your U.S. fuel and feed businesses? Robert Day: Yes. Thanks, Conor. This is Bob. If I don't answer your question directly, let me know. I think the first thing I would say is, it's still not totally clear how the EPA is going to treat foreign feedstocks. That's a part of this process. As to whether foreign feedstocks are needed to meet the production and the obligations. It's going to depend on a lot of things. We do have a lot of crop -- crops and crop oils in the United States and overall North America that could be used as feedstock for biofuels. So until some of the rules around what -- if there are penalties for foreign feedstocks and how some of the crop oils are going to be treated, it's really hard to answer that question. I will say that I think when you look at overall supply and demand for fats and oils in North America and you include biofuels and food and this picture and this proposed RVO from the than probably some foreign feedstocks will be required to meet that mandate. And we're just not clear yet on how that will be accommodated. Operator: The next question comes from the line of Dushyant Ailani with Jefferies. Dushyant Ailani: Congrats on the quarter. I also wanted to note that we really appreciate the change in guidance approach that does help us. My first question was on the 3Q DGD margins. The capture was significantly better than expected. What are some of the drivers there? Robert Day: The third quarter capture was better? Is that what you said? Dushyant Ailani: Yes. Yes. For the DGD margins, it just came in better than expected. Was it like staff production or any export ARP that we can think of? Robert Day: Yes. I think the -- so I'm not sure I fully understand the question because the DGD result was maybe not as good as we hoped... Randall Stuewe: I'll help Bob here a little bit. I think, Dushyant, you're referring to the capture that Valero reports. And keep in mind here, this is a bit awkward in that they met their LCM against their other segments. So they had the same LCM we have. They just didn't put it against the renewables or DGD segment. So that's what makes the capture rate look better. Dushyant Ailani: Got it. Okay. That's helpful. And then maybe just staying on topic for the 4Q DGD margins. But we understand the nuance on removing the DGD guidance. It seems like fundamentals are still improving nicely. Indicator margins are up, again, Valero's indicator margins seem to be up $0.36 quarter-over-quarter. What are you seeing in 4Q? And how do you kind of think about that? What are some of the puts and takes, if you can share? Randall Stuewe: Yes. I mean this is kind of the challenge that's out there. I mean clearly, the 2 big units in Port Arthur and Norco are going to be operating at capacity. SAF is going to be at capacity yes, the capture indicator is stronger right now. The challenge for us is we thought by this time, we would have RIN values kind of starting to reflect the restarting of the industry and they really have it yet. So it's kind of hard. I mean we're the low-cost operator. We have enough feedstock to run our units. Our SAS margins are better than classic renewable diesel. And what else you want to add Bob? Robert Day: Well, I think we have seen an improvement in margins so far in the quarter. The question is just -- or the point here is until we get clarity on the final ruling on the RVO for '26 and '27, it's hard to it's hard to say with certainty that those margins are going to continue. But thus far in the quarter, yes, we've seen some improvement. That's for sure. Operator: The next question comes from the line of Manav Gupta with UBS. Manav Gupta: My first question is we saw a good improvement in your Feed segment margins. I think Randy, over the years, you had indicated that eventually those acquisitions coming in you would be able to drive improvement in those fronts. So help us understand some of the factors that drift help you drive a movement in the Feed segment margin? And also to an earlier question, yes, imported feedstocks might be needed, but domestic feedstocks will price at a higher premium because they'll get 100% win. So what would be the outlook for the Feed segment going into 2026. If you could talk a little bit about that? Randall Stuewe: Yes. I mean, clearly, as we've talked in Q1 and Q2, we've used the word building momentum. We were seeing feedstock prices come up what we've seen mostly is feedstock prices are flowing through now, although they've come off a little bit for Q4, but we're seeing protein prices improve around the world. It's -- I call it there's a tariff on 1 day, a tariff off 1 day. China needs to buy poultry proteins to feed aquaculture and whether it's China or Vietnam when the window opens, they trade. And so we've seen a pretty nice improvement. You can look sequentially, you can look year-over-year in the appendix of the supplier or the shareholders' debt there. and ultimately see the pricing movement. Clearly, fat prices were up sharply. The products we use at DGD and -- but protein prices were up 10%. So I think we're going to carry into Q4, remember, we're always about 60 days sold ahead. And so we'll carry some pretty strong prices into Q4. And I'm hoping that as we move into next year, we'll have kind of the same momentum. There's always a little bit of seasonality here, but really, that's kind of what I'm expecting as I look out there. Manav Gupta: Perfect. My quick question on the table that you have created. It's very helpful. But help me understand, here you're assuming a flattish capacity. We know there are facilities which are heavily dependent on foreign feedstocks at this point of time, and they are still struggling I think they will struggle even more next year if you decide to give only 50% RIN to imported feedstocks. So is there a possibility this RIN balance would look even more attractive if some of those facilities that are heavily dependent on imported feedstock actually decided to call it a day and shut down. Randall Stuewe: Yes. I think Bob and I will tag team this. My answer is we went into 2025 with the belief that the DGD margins would be no lower than they were in 2024. And we were wrong. And where were we wrong? Well, we didn't understand that the big oil guys would actually run at such significant losses to produce their own RINs. We believe that's changing as we come into 2026 and 2027. The losses at those plants are substantial. I mean it clearly shows how efficient and operationally effective DGD is. The RIN balance that Bob will talk about here in a minute, yes, it actually gets even more constructive if people behave rationally. Robert Day: Yes. And I'll just add, I think all of that is true. In addition, the proposed RVO for '26 and '27 is substantially larger than 2025. So even if we had similar production, as you noticed from the grid that we provided, then we will ultimately have a deficit in '26 and '27. And what this is intending to show is specifically that. And then beg the question, how much do margins need to improve in order for production to increase so that we can satisfy the mandate '26 and '27. You add a layer of complexity when you -- with the imported feedstock and if imported feedstock only generates half a RIN. I think that some of that is going to depend on what is the origin tariff placed on that feedstock -- if a feedstock, if a foreign feedstock only is penalized by getting half a RIN and then not being eligible for the PTC, then it's reasonable to expect a decent amount of foreign feedstocks to competitively come into the United States. It would just come in at a discount to the U.S. feedstock prices which, again, is constructive to the feed business and our core rendering business in the United States, but it would allow for satisfying the mandate for the RVO but it would -- again, it suggests that margins need to go up quite a bit in renewable diesel in order for that to happen. Operator: The next question comes from the line of Pooran Sharma with Stephens Inc. Pooran Sharma: I just wanted to maybe just peel into to that last answer you gave there, Bob. I know in the past, you have kind of walked through different RIN pricing scenarios and there are a little moving pieces here just with how foreign feedstocks will get counted. But just as it stands now, no PTC, half a rent for the foreign need stocks, are you able to quantify like what range RINs should be at in order for the industry to run, to meet the mandate in 2026? Robert Day: So this is going to be somewhat of a swag here because like you said, there are a lot of moving pieces. And if we assume that there's -- we have access to our origin feedstocks that don't face a significant tariff. And the primary source of the penalty is the half rent and lack of access to a PTC. Then we probably need RINs to go up $0.40 or so in order to incentivize enough production to satisfy the mandate for '26. If the SRE reallocation is only 50%. Pooran Sharma: Great. Great. Appreciate that. My follow-up, I just kind of wanted to focus on the balance sheet more specifically your debt and leverage. I wanted to revisit what your plans are to pay off debt. And I also wanted to ask, what are your restrictions? Like what leverage ratios do your debt restrictions, the covenants start kicking in at? Robert Day: We're nowhere near breaking any covenants. I think we've said before, we're committed to paying down debt. We've got a lot of headroom in our revolver due to circumstances around receiving cash payments from selling production tax credits we will be receiving more cash in the fourth quarter, and we didn't receive any cash from production tax credits in the third quarter. And so by the end of the year, we expect our debt coverage ratio as it's viewed by the banks, to be right around 3x. So that's really -- that's our position on that. Randall Stuewe: And long term, Pooran, we've got a financial policy agreed in the board room to go down to 2.5x. It doesn't take much for the restart of DGD to start to do that. We've not been in a capital deprivation or starvation mode of any of the factories globally. So we're in good shape here to continue to build this thing out and grow and delever at the same time. Operator: The next question comes from the line of Ryan Todd with Piper Sandler. Ryan Todd: Sorry, I know you talked a lot about this, but maybe one more follow-up on some of the regulatory uncertainty. I mean the -- as we wait for the final RVO, I mean, you've talked about the uncertainty around reallocation and a couple of other things. What are some of the other topics that you think are still being kicked around. Is there a possibility of any change in the approach to import of foreign biofuels? Are they still -- is there still a consideration in terms of the treatment of domestic feedstocks in terms of carbon intensity, like land use penalties and stuff like that? And what are some of the potential risks or positive things you think could come out of the final ruling there outside of just kind of the high-level RVO and the reallocation? Randall Stuewe: Well, I think, Ryan, this is Randy and Bob and I'll kind of tag it again here if I leave anything out. I mean, clearly, American agriculture is at the forefront of the discussions in D.C. right now. Clearly, when you lose your largest customer for soybeans, when you get beef prices as high as they are, you've got a lot of people in the room that have ideas on how to fix the situation. And so what we've been part of, as many of these discussions is, what's the easy button. The easy button here is a large SPO for RVO with a 100% reallocation. Now if you go back and you look, really, the ETA gave you a multiple choice test. It's at either 50% or 100%, but if you're really inclined, you can talk about something else you'd like. And so they've set the table there. Clearly, the PTC out there is -- doesn't encourage foreign feedstocks. So I mean that's a block in itself with a tariff on top of that even makes it more difficult. We've had discussions in D.C. and we said, well, the easy button is that, just remember, if you don't allow foreign feedstocks in here because they can't generate a credit then, oh, by the way, where are those feedstocks going to go and the room goes silent. They finally got it. They realize those stocks are going to go back to other processors, you can probably name who they are around the world in Singapore and Rotterdam and Porvoo, Finland. And then they're going to move finished RD on top of us and that's disruptive to what they're trying to accomplish. So they're trying to figure out right now how to manage that under the tariff code. So you've got the U.S. trade along with the EPA collaborating, trying to figure out how to put this together to accomplish the needs that are going to produce energy and be constructive to the U.S. farm community. Robert Day: Yes. And I'll just add that as we sit here today, the EPA has already proposed a 50% RIN generated for foreign biofuel, no access to PTC. So -- that in and of itself makes it more difficult. But as Randy said, there's a lot of momentum to preventing foreign biofuels to come in and participate in U.S. support programs. So we're pretty confident that, that's going to work out well as it relates to feedstocks, that is another thing that we're waiting for clarity on and whether they're going to enforce the 50% RIN concept or if we're -- foreign feedstocks are simply going to be limited by origin tariffs. Ryan Todd: Okay. And then maybe just -- I mean you talked about -- you provided a little bit of clarity around PTC monetization. You've had a couple -- you're a couple of quarters into the experience of a few quarters in the experienced production under the PTC regime, you're getting more consistency. Can you talk about how the monetization market seems to be working there? Have the discounts been fairly stable? And how should we think about the general ratability of the process at this point? Is the $125 million this quarter, $150 million at the midpoint next quarter? Is that like a -- are you in a fairly ratable place now in terms of monetizing the majority of your production? Robert Day: Yes, I think so. I think the context here is that there were 2 things that made it difficult earlier in the year to sell production tax credits. One is that not many counterparties were familiar with the credit itself. So there was lots of questions. The value of the credit is determined in part by carbon intensity. So you can just imagine for industries looking to buy tax credits that aren't familiar with our biofuel industry trying to understand all that is not an easy thing. And then the other is that most companies had -- it was pretty cloudy what their tax liabilities were going to look like at the end of '25 because of the Big Beautiful Bill and a lot of things that went on around that. So early in the year, it was difficult to get a lot of traction. That's obviously changed significantly. Both of those pictures are a lot more clear. And so yes, I think that for us, we're confident in our ability to sell a majority of the credits that we'll generate in 2025 and then it should be a pretty ratable process through 2026. Randall Stuewe: Yes. I think just one last piece to that is I would characterize the environment is there is more interested parties now. than there were earlier in the year. So it's now getting a chance to define terms, refine terms and pick the counterparty that we want to deal with, with timing respective to when to receive the cash. So it's a very constructive environment now. Operator: The next question comes from the line of Derrick Whitfield with Texas Capital. Derrick Whitfield: Regarding guidance, I appreciate the position you guys are taking with the more volatile DGD business segment. With that said, we are seeing better stop margins in 4Q for most feedstocks and specifically for tallow and yellow grease. Would it be fair to highlight that DGD could post the best quarter in 2025 at current margins which, again, will be a positive development as you enter 2026? Robert Day: Yes. Thanks, Derrick. I think that would be fair. I think one of the things we're sensitive to is just how uncertain policy has been and the impact that, that's had on margins. I mean, look, we're very optimistic about improvement in the fourth quarter and the outlook for next year. But we realized that the market at large really wants to see proof of that before estimates believing a lot of what estimates are out there. So I think that we are encouraged by what we've seen so far in the quarter, and we think the outlook is good, but we're just hesitant to define that with a lot of precision, just given the lack of clarity around policy that we're still facing. Randall Stuewe: Bob, can you comment on what it takes to trigger RIN and obligations and when that would happen? Robert Day: So with the enforcement dates and -- yes. I mean, I think one thing that has caused a real delay in the reaction of the RIN, has been the movement of the 2024 enforcement date from March 31 to December 1. Until we get the final ruling on the '26 and '27 RVO and clarification as to when the 2025 enforcement date is going to be. It's difficult for obligated parties to feel that they're incentivized to go and buy all their RINs, especially when so many small refinery exemptions were granted for the small refineries out there that are wondering whether they should buy RINs they have an incentive to wait when the obligation date is set at a later time in the event that they get an exemption. And so what Randy is alluding to is until some of those things are clarified, which we do think is going to happen around the end of the year. But until those things are clarified, the incentive to buy RINs and tighten up the RIN S&D doesn't exist the way that it's intended. And so it's just -- it gets a little bit difficult to forecast. But we -- to your point, Derrick, we have seen an improvement in margins so far in the quarter. The outlook is better, and we're very optimistic about 2026. Derrick Whitfield: Great. Understood. And as my follow-up, we've seen the RD market in Europe strengthen in recent months. If you guys work through the complex math of spreads, shipping and tariffs, to what extent could you access this market if it remains robust? Robert Day: We can access that market, but we pay a duty to access that market. So -- and that duty can fluctuate a bit, but it's typically over $1 a gallon. So we are selling consistently to that market. Our Diamond Green is. But it's just -- it's -- we're looking at it as a net of duties and comparing that to other markets we have available. Operator: The next question comes from the line of Matthew Blair with TPH. Matthew Blair: I was hoping you could talk a little bit about the feedstock mix at DGD. And I know that you're always looking to optimize and some of this is commercially sensitive. But just on a big picture basis, it looks like some of the indicator margins for RD made from vegetable oil are trending a little bit better than RD made from low CIP. So -- just overall, has DGD shifted to more of a veg oil mix? Or is it still pretty much all low CIPs? Robert Day: Yes. Thanks, Matthew. This is Bob. So I wouldn't -- DGD hasn't materially shifted its mix as I think you're aware, DGD1 is still down if DGD1 were to go back up and run, then that mix would shift more towards soybean oil. But as we sit here today, the mix hasn't changed a lot. Our best margins are on UCO and yellow grease and animal fats. And so we're going to maximize the opportunity we have to use those products. Randall Stuewe: Yes. The only thing that I would add, Matthew, is that clearly, in Q1 and Q2 as we were trying to figure out the rules around the PTC and 45Z redomesticating our supply chain was a pretty significant challenge. DGD is heavily reliant now on Darling's UCO and Darling's yellow grease and animal fat supply. And so we've got that up and running full speed now, and it's really visible now that you can see it in the earnings of our core ingredients business. And ultimately, it will translate into a better sales value within DGD. Matthew Blair: That's helpful. And then apologies if I missed this, but the contributions that Darling is making to DGD is that to help fund the DGD3 turnaround? Or why is Darling sending money back to DGD? Robert Day: Yes. And it's hard. So the answer to that question, some of that's timing, some of that is turnaround. Some of that is just the margin structure. So remember, that the PTC revenue that we will get as Darling, that flows directly to the partners. So that money doesn't stay inside of Diamond Green Diesel. That's number one. The other is, as you pointed out, in 2025, we've completed 3 catalyst turnarounds. And so our maintenance CapEx is higher in 2025 than normal. So it's really the timing of all those things that's led to the contributions that we've made. Operator: The next question comes from the line of Jason Gabelman with TD Securities. Jason Gabelman: I wanted to go back to something else that Bob had mentioned just around companies complying with their RIN obligations and that perhaps catalyzing stronger RIN prices. Can you talk about, I guess, more specifically the time line around that I think 2024 RINs are due December 1. And then at that time, the balances for 2025 should become more visible to the market. So do you expect that December 1st deadline to hold? And do you think that could be an initial catalyst to move RIN prices higher before we get the final RVO for '26 and '27? Robert Day: Yes. Thanks, Jason. So I do think that, that deadline will hold. I don't know that it will have much of an impact on RIN prices because all the RINs that have been procured so far in 2025 can ultimately be used to satisfy the obligation for 2024. And that's quite a long time and a lot of RINs. There may be some refiners who are waiting until the last moment to buy their RINs. But because we've had so much time in 2025 to do that, we're not expecting that, that's going to result in a significant lift to RIN prices at that time. If we have clarity around enforcement dates for 2025, going back to the March 31, 2026, as they normally would be. That would be a time when we would expect RIN values to probably see a lift. Jason Gabelman: Got it. That's helpful. And then my second one is hopefully a simple question. Just given on the screen, DGD margins have improved. It seems like it could be the margin signal could be there to restart DGD1, so wondering what exactly you need to see to have confidence to restart DGD1? Robert Day: So we've talked about this before. DGD1 went down for a catalyst turn around early in 2025. Given the changes in the PTC and the origin tariffs on so many of the feedstocks, our view is that DGD1 only makes sense to restart at least in the current environment with the current RVO under the current rules when soybean oil can be profitable, and profitable means a margin that's good enough for a long enough outlook that justifies burning up a catalyst. And so I think, certainly, we're a lot closer to that than we have been. We may get there, but it definitely looks a lot better than it did a few months ago. Operator: The next question comes from the line of Andrew Strelzik with BMO. Unknown Analyst: This is Ben on for Andrew. My first question is around the Food segment. And just a commentary there that when it's maybe some weakness exiting third quarter and into fourth quarter. So I was just hoping you could just walk us through your outlook for the next few months in the food segment. Randall Stuewe: Yes, I think what we were trying to put in the narrative is clearly tariff on, tariff off, up to 50, [ fentanyl ] tariffs, trying to figure out the supply chain was very confusing for our customers in Q3 and so the choice was to pull down domestic inventories. So remember, most of our Brazilian production comes into the U.S. that's in the hydrolyzed collagen peptide form, very successful product for us. . And so we had some delays in orders there. We think it will pick up and be a stronger Q4. That's about all the color that I can give you today on it. And what we've seen is a continued rebound of the hydrolyzed collagen business. And while our new Nextida products are making a foothold in the industry, they're still relatively minor in the contribution of that segment. But they are as we quoted in there, we're getting repeat orders, which is a great thing. By next summer, we're going to launch what I think will be called Nextida Brain, and that will be a brain health product and it's got a really great outlook, too. Unknown Analyst: Well, that's great to hear. And then on my next question, something that kind of, I think gets lost in the weeds sometimes or at least lately, California LCFS credit value, they've been generally stable at weak levels. Can you remind us of the expected time line of triggers that should propel these values higher eventually? Robert Day: Thanks, Andrew, this is Bob. I think as we know, there was quite a bit of a delay in the implementation of their step down to increase the greenhouse gas obligation, reduction obligation in California. And so -- as a result of that, that bank got built up so large that most of the obligated parties from our perspective had a sufficient number of credits where they -- even with the change in the ruling they didn't need to go out and immediately buy credits. Our view is that they are working their way through those credits and that sometime in 2026, we'll start to see that S&D come more into balance and steady increases in the LCFS credit premium. But it's hard to -- I think we believe it will be more steady than sort of a step-up in value. Operator: The next question comes from the line of Heather Jones with Heather Jones Research. Heather Jones: I had a question on your Feed segment and just thinking about the protein pricing. I know in the past that you have put in place and some of your fat pricing contracts, you had like minimum levels and if it went below that, what Darling received, it wouldn't go below that? And I was just wondering if you all had put any of those kind of things in place for your protein business in the U.S.? Robert Day: Heather, This is Bob. So all of our every contract is somewhat unique, and it really has to do with our approach towards accommodating our suppliers and trying to work with them on terms that make sense for their business as you're -- I think what you're pointing out is that we do have some contracts where Darling collects a minimum processing fee. And if prices get above a certain threshold, then we participate in some of the value of those prices. There are certain instances where protein prices are part of that as fat prices are. I think generally speaking, though, we see -- as you're well aware, we see a lot more volatility in fat prices and a lot more upside from time to time in fat prices. And so we tend to focus more on that than we do on the volatility in the protein markets. Randall Stuewe: Yes, I think to argument, what Bob said, is the thing that happened is the United States was heavily reliant on shipping low-ash poultry meal into the Asia countries for dominantly China for aquaculture. The offset was a strong domestic pet food demand in the U.S. And what we've seen twofold is, one, with the tariffs on, tariffs off with China and Vietnam, they're unable to take the risk, if you will, to buy that product. So it has to find as all commodities do the next best market. What you're seeing in the pet food business is post COVID, you've seen fluffy back to the shelter. And then you're not seeing a growth that's very significant right now on the pet food side. And then you're seeing that the consumer -- the CPG companies took prices up pretty drastically making those bags of brand name products with meat in them, really, really pricey and you're watching strong growth now in the green-based alternatives, namely old Roy. So it's essentially a disruption scenario right now, Heather, and we're off from where traditionally poultry high-end, low-ash poultry products have traded, although they're coming back. The second that Trump relieved the tariff on Vietnam for 30 days or whatever, big shipments and sales went out of here. That's our Eastern Seaboard plant that are heavily reliant on those products. So I think we've got a pretty good outlook. They've come back now and have improved quarter-over-quarter. And I think we're cautious on next year, but we think it's -- we think everything looks much better. Heather Jones: Okay. And then my follow-up is on Europe. So recently, they extended the tariffs on RD imports and biodiesel imports extended to staff. So as we're thinking about Q4, you'll have a full quarter of SAP production and SAP pricing in Europe is really strong. So will having a full quarter production more than offset the impact of them now imposing these tariffs on U.S. staff? Just wondering how to think about those moving pieces. Robert Day: Yes. Thanks, Heather. I think the way to look -- think about that is it will have if it's going to have an impact, the impact is going to be felt a bit later on. SAF is not -- we aren't selling market. The SAF that we're producing today was sold a while ago, and most of the SAF that we will produce in 2026 is already sold. So the tariff impacts will affect new contracts as they come about. We'll just have to see what those markets look like and supply and demand. But we still have access to voluntary markets in the United States. So we're optimistic about where we stand with SAF and SAF sales. Operator: The question comes from the line of Betty Zhang with Scotiabank. Y. Zhang: For my first question, I wanted to ask about broadly the core EBITDA guidance. It's been updated to that $875 million to $900 million range, and that's a bit lower versus the first number that you gave out at the beginning of the year, so I'm wondering if you could reflect on how the year played out and where it didn't quite meet your earlier expectations. And looking forward to 2026, do you think that this year's 12% to 13% growth is somewhat comparable to what you're seeing for next year? Randall Stuewe: Yes, Betty, this is Randy. I mean the $875 million to $900 million is the amalgamation of all 3 segments, net of DGD. Clearly, we're 2/3 of the way through October, we don't know really where October is going to finish. We don't have that type of visibility on a day-to-day basis here. So it's just -- this business when prices are steady, and volumes are steady around the world, you can give some guidance there. What we have tried to do is it's just too difficult to put a number out on DGD either for Q4 or next year. The core ingredients right now looks similar to stronger in 2026. But we won't know that and be able to give guidance on that until around -- till an RVO is published and then when we do our -- probably our February earnings call. Y. Zhang: Okay. Fair enough. And my follow-up question, I want to ask about the Fuel Ingredients business, the portion, excluding DGD. The margin there looked a bit the gross margin looked a bit higher quarter-over-quarter and also the segment earnings came in higher versus what we saw in the first half. Could you please share maybe some of the drivers there? Randall Stuewe: Yes, that business is made up, while Bob described it in his comments, a disease, it's really mortality destruction predominantly in Europe today. And then that's our green gas business, remind people that the green gas or green certification business in Europe, we're the one of the largest in all of Europe today producing gas over there. And then those are our digester businesses, and we added a small one in Poland now. So ultimately, that business ebbs and flows with what we call the Rendac business predominantly, and that's the 7 rendering plants in Europe that are geared towards mortality destruction. Anything you want to add there, Bob? Robert Day: I mean I think it's -- what you're alluding to is just sometimes the inputs, the price, the cost will change for the inputs energy prices that we're selling there remains strong. And so that's what you're seeing with these gross margins. Operator: There are no additional questions left at this time. I will hand it back to the management team for any further or closing remarks. Randall Stuewe: Thank you again for all the questions, today. As always, if you have additional questions, feel free to reach out to Suann. Stay safe. Have a great holiday season, and we look forward to talking to you after the first of the year. Operator: That concludes today's conference call. Thank you. You may now disconnect your lines.
Leszek Iwaszko: Good morning. Thank you for standing by and let me welcome you to Orange Polska Q3 2025 Results Conference Call. My name is Leszek Iwaszko, and I'm in charge of Investor Relations. The format of the call will be a presentation by the management team followed by a Q&A session. Unfortunately, our CEO, Liudmila Climoc, couldn't join us today due to urgent private matters. So, the sole speaker will be Jacek Kunicki, CFO. So, I'm passing now the floor to Jacek. Jacek Kunicki: Good morning. I'm pleased to say that the third quarter was very successful for Orange Polska. The success is rooted in our strong operating performance. We've achieved very good commercial growth, especially on the consumer market, where both the customer bases and the ARPOs have increased at a healthy pace. Our wholesale line of business has delivered more revenues and more margins. This comes as a result of new business, that is, monetizing our fiber infrastructure. It will generate more value over the course of the next few years, allowing us to compensate some large wholesale contracts that are due to end in 2026. This should remind us that wholesale is our strategic asset, complementing our retail operations and reducing our risk profile. Successful commercial activity is the anchor of the Lead the Future strategy and our value creation. After 9 months of 2025, we are pleased with the developments in this area as they lay a solid foundation for the strategy going forward. This performance has translated into strong financial results, and let's take a look at that -- these on the next slide. I'm pleased with the financial results of Q3. We have increased revenues, profit and cash generation. Revenues were up by a steep 9.3% year-over-year, including a spike in IT&IS sales and also a strong consistent contribution from the core telecom services business. This solid expansion of the core business, combined with cost discipline, drove the Q3 EBITDA almost 3% up year-over-year despite a demanding comparable base. We're really happy with this result. Our eCapEx has amounted to just over PLN 1.1 billion year-to-date. It is at a comparable level to the same period of last year, and it is in line with our full year plans. This quarterly evolution reflects different timing of CapEx between the 2 years. Following a stronger Q3, the year-to-date level of organic cash flows is also stable year-over-year. This reflects higher cash from operating activities, driven by the EBITDA expansion, which compensated for less proceeds from real estate disposal. My takeaway from this is that robust Q3 results give solid support to our full year prospects. After 9 months of the year, we're confident to deliver on our 2025 objectives and to create further value for shareholders. Let's now look -- take a look at the commercial activity in more detail on the next slide. It came very solid across all core telecom services. What particularly stands out this quarter is Mobile. The net customer additions have exceeded 100,000 and were at the highest in more than 4 years. As you may recall, our B2C strategy is focused on reaching new households not yet using Orange Polska services, in order to unlock the growth potential for the future. We're pleased that it is bearing fruit, and we are enlarging our customer footprint. The robust growth of the customer base was coupled with an increase of the Mobile ARPO, a slight improvement versus the trend observed a quarter ago. This comes due to a strong ARPO development in the main consumer brand, partly diluted by an increasing share of the B-brand customers in the overall customer base. Growth in convergence and fiber was solid, consistent with previous quarters and in line with our strategy. It was a combination of 5% and 13% growth of the respective customer bases and a solid 3% to 4% uplift of the average revenue per offer. In spite of fierce competition in fiber, we are successfully competing in the local battles and growing well by addressing our customers' need for higher speeds and for more content. Commercial growth is essential for future value creation, and these results demonstrate that we have the right commercial strategy to prevail in the core telecom offering. Let's now take a look at how these translated into revenues. Our Q3 top line dynamic was exceptional, above 9% growth year-over-year. It reflects 3 main developments: first, an exceptional hike of the IT&IS sales; second, a consistent growth of the core telecom services revenues. And 3 -- third, the accelerated dynamics of wholesale. Let's now review them one by one in a little bit more detail. The IT&IS revenues went up by an extraordinary 47% in quarter 3. The key driver of this performance was resale of software licenses. It is a tool to create future upsell potential. Hence, despite the large top line, its immediate contribution to profits was negligible. Nonetheless, looking at this development and also at other wins in our pipeline, we are now more optimistic about the future prospects for the growth in IT&IS revenues and profits. What is most important in our top line performance this quarter is that revenues from core telecom services grew by 6.5% year-over-year, repeating their strong and consistent dynamics. You've seen the drivers of this growth: robust increase of our customer bases and solid ARPO development. Finally, the third factor, wholesale. Its growth has accelerated on the back of fast revenues coming from the new fiber optics backhaul business that I mentioned earlier on. It is a multiyear business development, and it gives us a solid baseline also for 2026 and beyond. We anticipate to further grow the value of our wholesale line of business activity in the future. To sum up on revenues, after 9 months of the year, the top line growth exceeds 4%. Revenues from core telecom services are delivering a rock-solid performance this year, supported by robust net customer additions and ARPOs. And three, the new business in wholesale significantly boosts its future prospects, once again demonstrating the value-add of this activity to Orange Polska. Obviously, the profitable revenue growth is the main driver of the higher EBITDA. Let's look at the latter on Slide 7. EBITDA for Q3 has increased by almost 3% year-over-year. It benefited both from growth of the direct margin and from less indirect costs. Direct margin grew by PLN 21 million year-over-year and its underlying increase was even greater. Please note that last year's results included a positive one-off related to capitalization of PLN 53 million customer connectivity costs. Obviously, excluding this one-off, our direct margin for Q3 would have grown by 4% year-over-year. This outstanding growth was driven by high margin from core telecom services and by an increased contribution from wholesale. Indirect costs were PLN 4 million lower versus the third quarter of last year. We benefited from increased efficiency of network operations, including savings in field maintenance. The transformation of the network activity is an important part of our strategy, and we're pleased that we can already report its first tangible results. Q3 indirect costs have also reflected lower growth of labor costs and less advertising expenses versus the previous quarters. To sum up on EBITDA, we are very happy with its growth in quarter 3. It stems from a healthy combination of high margin from core business and cost discipline. And obviously, this is our main recipe to deliver consistent and sustainable EBITDA growth throughout the Lead the Future strategy period. With 3.4% growth for the 9 months of this year, for the year-to-date, we are obviously well on track to deliver on the full year objective in this area. Let's now turn to cash flow on Slide 8. Year-to-date, we generated nearly PLN 670 million of organic cash flow. This is almost exactly the same level as last year, helped by a very solid quarter 3. The OCF benefited primarily from a very healthy growth of cash from operating activity. It increased by almost PLN 200 million year-over-year due to a higher EBITDA and also due to less -- lower working capital requirement. It was offset by higher cash CapEx and also by PLN 80 million less proceeds from real estate disposal than in the comparable period of last year. We're satisfied with cash generation so far and with robust sources of growth coming from the operating activity. We plan for a peak of property sales in Q4, and we anticipate a solid organic cash flow in the last quarter of the year. Our leverage has increased very slightly following the acquisition of the 5G spectrum license and a payment of the dividend in July. However, our balance sheet structure remains very sound. Let's now summarize Q3 on the next slide. So, for us, the underlying message is our commercial and financial results in Q3 were very solid. We're pleased with the performance to date and in particular, with the commercial developments. We have a well-performing core telecom services business. The prospects for wholesale operations have improved substantially, and we see initial signs of recovery on the business market. These demonstrate our strong fundamentals. We're confident to achieve our 2025 objectives and also to create further shareholder value by implementing the Lead the Future strategy in subsequent years. That's all for me and we are now ready for your questions. Leszek Iwaszko: [Operator Instructions] First question is coming from the line of Marcin Nowak. Marcin Nowak: Three questions on -- rather, issues for me. The first one, regarding this new wholesale deal, could you provide more details regarding how much it contributed in the first quarter to both the top line and EBITDA, for how many years this contract is signed, and if you believe that there are similar deals possible in the future with other parties? The second issue, could you provide maybe an update on those provisions for significant risk that Orange has created last quarter? And the third issue, could you provide more detailed plans about the marketing spending and how -- by how it has been lower than in previous quarters? And what are the plans for the following quarters, especially with this lower spending, the commercial performance has been quite good. Jacek Kunicki: Thank you very much, Marcin. I guess I will start with your last question. For the marketing or for the advertising and promotion spend that we were mentioning. When I look at quarter 3, the spending was roughly PLN 8 million lower than in the quarter 3 of the – of last year. And that is -- well, it is much different if we compare to the second quarter where advertising and promotional expenses have actually grown by PLN 12 million year-over-year. So, the difference to the Q1 was not that great. But obviously, quarter 3 was with a different timing of advertising campaigns and spendings versus last year. So that is regarding the costs. On the efficiency of those marketing spendings, I think it's fair to say we're very happy with those. Looking at the level of our net additions, both in postpaid and prepaid as well as in the convergence and fiber, we are very happy with the direction of the -- both advertising and overall the efficiency of the commercial period that we had for the back-to-school activity. And that is -- that has really delivered on our plans. So, we're now focusing definitely on the peak commercial season of Q4 and especially the second part of November and December to make sure that we are able to replicate a successful commercial activity. Then regarding your second question, well, I will not be able to help you much. We have created a provision for risks, claims and litigations of PLN 45 million in the second quarter of this year. And obviously, we've described as much as we can in the notes to the financial statements, but we are unable to provide you with the exact detail as this is commercially sensitive. We do not want to prejudice the outcome of any activities that are covered by the provision. And then regarding wholesale, well, it is a multiyear deal. Again, I will not be mentioning the specific commercial conditions because that is commercially sensitive. But definitely, we did see a much greater contribution of wholesale to the margin creation this quarter versus what we've seen in the previous quarters. I would say it's fair to say some of it was already -- so that was more than PLN 20 million better than in the previous quarters. Some of it was helped by the particular development that I have mentioned, and part was simply due to other business reasons because we do need to remind ourselves that wholesale is an important part of our activity, and it's not driven just by this one deal. And this is something that -- well, we've tried flagging for quite a long time. It enables us to monetize our infrastructure by selling data transmission, by selling FTTH access, by being an active player on all the interconnect market in Poland. It also enables us to decrease the risk profile of our retail activities because we are able to grasp some of the profits on the wholesale market. Getting back to this particular business development, it's obviously a long-term business development that we have, such as they usually are in wholesale. I would guess that the peak of the value will be the next 4 years. And I think we will see a more visible contribution of wholesale or of this business development already in quarter 4. And what I mentioned is when we take a look at 2026, we were aware, and we are aware that some important wholesale contracts are coming to an end and this particular business development should help us to offset the impact of those contracts ending. So, we're back to the state where we expect the contribution of wholesale towards our [ EBIT ] to actually be able to grow year after year. I think that is what I would mention regarding this particular activity. Thanks. Leszek Iwaszko: Our next question is coming from the line of Nora Nagy from Erste Bank. Nora Nagy: Two questions from my side, please. Firstly, could you give us, please, more update on the B2B segment? And what is your outlook for the coming period? And secondly, approximately when shall we expect the next Social Plan to be released? Jacek Kunicki: Thank you very much, Nora. Very relevant questions. So, on the B2B line of business, I think it's fair to say that while this line of business has been extremely successful for us in the past, and the success of the previous strategy was -- B2B was a significant contributor towards that success, we did see the B2B under a greater pressure this year, both from the connectivity business and also from the slowdown on the IT&IS market. Some of it results from a very high comparable base of last year, where we benefited from some specific activity on the wholesale SMSs. Some of it results basically from a slower -- a softer IT market. I think it's fair to say that while we are not back to robust growth yet, so, the B2B trends, I would say, remain relatively fragile. If I'm comparing what we're seeing right now in terms of the amount of deals that we are able to win and the profit margins on the deals that we're able to win, we're getting, I would say, the first signals that could lead us to believe that we could be going back to growth in the next 2 or 3 quarters. That would be my outlook for the B2B. And that is something that we really need. You know that the Lead the Future strategy and generally, the value creation in Orange Polska, it starts with the top line and with a profitable top line, so with a direct margin. And we need the 3 engines of commercial activity to be delivering results. We see the B2C engine really going ahead full steam. We do see an acceleration in wholesale and improved prospects versus the ending contracts of 2026. So, between the last quarter and this quarter, we are more confident about the level of wholesale activity next year. And then I think the next step is we need B2B to get back to solid, consistent growth as it used to deliver in the past. And this is when we will be really happy with our ability to grow the EBITDA, to grow the cash flows on the back of a profitable expansion in the commercial activity. And then getting to your second question, before the year-end I would expect we will close the discussions with the social partners for the next round of Social Plan, which I anticipate it will cover 2026, 2027, and we should come back to you before the year-end with a current report whenever we do finalize it. And then probably this current report will also include some early estimate of the provisions that you would see in the income statement for the fourth quarter. Obviously, the final ones might be -- will be reported when we will report the quarter 4, but stay tuned for the next few months, and I'm sure that we will get back to you with the news on the Social Plan before the year-end. Leszek Iwaszko: Thank you. We have no more voice questions. Two questions that came online. First question, they cover topics we've already discussed, but maybe in a slightly different angle. So, a question from Pawel Puchalski from Santander. Wholesale segment, are you pleased with Q3 2025 Wholesale segment growth pace? And should we expect its further acceleration in coming quarters, years? What are wholesale margins? What is wholesale’s cash conversion? May we consider Q3 '25 wholesale pickup to represent likely driver of 2026 DPS increase? Jacek Kunicki: So, thank you, Pawel, for your questions. And you've rightly spotted wholesale as a point of focus. I think it's very relevant. Yes, we are pleased with the wholesale acceleration in Q3, definitely pleased. I do expect that we will have good value contribution from wholesale also in quarter 4. So that is something that will help us before the year-end, and it makes us even more confident in our ability to post a nice EBITDA growth this year. I think that is definitely a big help. When it comes to the next years, well, you are aware that we were previously anticipating that due to some contracts ending in 2026, wholesale might be under pressure in that year. I think that situation is much easier now, and we would be looking at ourselves actually getting a positive contribution from wholesale year-over-year because of this new business development. So that is definitely improving the prospects for wholesale going forward. And then in terms of margin and cash conversion, what I would say, it really depends on the level -- the margins really depend on the level of -- on the revenue line of wholesale because if you take some interconnect, the margin might be thin when we are looking at the interconnect coming in and going out, like some transit activities. But overall, the relation of revenues to margin is extremely high on those services where we are monetizing the existing infrastructure. And likewise, when we look at the cash conversion ratio, because we are treating wholesale as a way to monetize mostly existing infrastructure, then yes, the conversion of revenues to cash is extremely high, much, much higher than on the retail activity. It is because we are using and monetizing whatever infrastructure already exists. So obviously, wholesale has its limit when it comes to the size because by nature, it is filling up the needs of our competitors in this area. But the -- our ability to extract margin and cash from whatever revenues we get is extremely high. And that's why wholesale is a very important contributor to our results. On the DPS, I think it's -- stay tuned and we will talk about that in February because that is the moment that we make the decisions, and we are in a position to make some recommendations. What I keep on repeating throughout this year is that our primary focus with all the months except February, is to create conditions to allow us to be generating more profits and to be in a position to share more value creation with our stockholders, shareholders. And so, I do believe that the growth of profit and cash generation in quarter 3 is an important step in the direction of further value creation for the shareholders of Orange Polska. Leszek Iwaszko: We have another voice question coming from the line of Dawid Górzynski from PKO BP. Dawid Gorzynski: I have 2 questions actually. First on net customer additions in Mobile segment. It was particularly strong in the third quarter. And I wonder if there were some particular large clients that entered the base this quarter or it was like just a successful marketing activity from your side? So, this is the first question. And the second question is about organic cash flow outlook. Right now, we are flat after 9 months of the year, we are flattish, like organic cash flow is flat year-on-year. Last year was particularly strong. And I think that the expectation was that this year, CapEx -- sorry, organic cash flow should be lower. I wonder if you still think this is the true or maybe you see some upside potential? And you think that like exceeding PLN 1.1 billion of organic cash flow this year is at hand? Jacek Kunicki: Thank you very much for your questions. I think starting from the net additions, yes, we did have a support of 2 large accounts in the Q3 numbers. And so, this was -- this is something that we are quite happy about. You could have read in the press that we took over 15,000 sim cards from the Polish Post. But this -- even if you were to take out those larger deals, it's still the best quarterly result in the last 3 years. So, I think -- I'm looking at the data right now for B2B, for B2C, for all the brands of both B2B and B2C, and it's -- across the board, we are very, very happy with all the results. If I take a look at the main Orange brands, the best results in a few years, new brands, new mobile, very good results, flex brands, very good results. It's across the board, good performance. And I would say both in postpaid and prepaid. So, this is particularly strengthening. And it reflects a good offering that we've had. It was supported by the family offer that we launched. It was supported by, I think, quite good advertising and a straightforward messaging for this commercial period. So, I know that my colleagues in marketing were happy with the results. And also, throughout this year, we do see simultaneously a good increase of the prepaid base. And when we take a look at, again, at the actions of this, it's about the quality of the promotions and the advertising. It is about us strengthening the position in some of the key distribution channels that we have had. And it enabled us to have a volume growth despite the fact that we've significantly increased the ARPO in prepaid and that we've gained a substantial amount of revenues and margin from prepaid as a result of that. So generally, mobile activity, very good in quarter 3, and I would not say it's a one-off driven activity. Obviously, everyone is now focused on the key period of November, December, where we need to be smart about the level of retentions that we make. But equally, we want to get as much as we can from the market when the availability comes in. So that is on the net additions. For the organic cash flow, I believe the PLN 1.1 billion that you mentioned was 2023. And last year was PLN 980-something million. I do agree this was quite a strong comparable base, which is something that we had mentioned. We are stable after 3 quarters. We are heading into quarter 3 with quite good operating performance dynamics, quite good from the perspective of the EBITDA and the ability to convert the EBITDA on to operating cash flow. So that is definitely supporting quarter 4. I think the main unknown today is how much real estate will we sell in Q4. Obviously, we're planning for a peak of real estate sales. That is directly helping our cash position. And so that remains, I think, the main uncertainty. But we are relatively confident about posting a good result, both in Q4 and for the full year. Leszek Iwaszko: And we have one more text question from Piotr Raciborski from Wood & Co. Congratulations on strong Q3 2024 results. Could you please again comment on strong ICT sales growth? Do you expect similar growth trends in the upcoming quarters? Do you see an increased demand on IT services from public institutions? Jacek Kunicki: Okay. Thanks a lot. Well, we don't expect that 47% year-over-year in quarter 4. It was quite an exceptional event. And I did mention it's -- it was driven by resale of licenses with a small margin. But it is important that we conduct these deals for the sake of the future upsell that we are able to do on the back of these deals. So, I would really not disregard the resale of licenses and our ability to then monetize on them over the next 4, 5 or 6 quarters. That is definitely worth doing, and we will continue doing that. Then regarding the future prospects, I think for us, it's not only a matter of Q4, but it's a matter of getting the right momentum to grow the revenues and margins from IT&IS or from ICT over the next years. I think when we take a look at the long-term potential, we are very optimistic. There is growth that is there to be had over the next years, both for revenues and for margin creation. And that is definitely the case. When it comes to IT, yes, it includes IT. I think that the IT market, while it was relatively soft this year, I do believe that it has still a lot of growth potential. And so, we definitely count on ICT revenues and margin growth in the next periods to come to help us to increase the EBITDA, increase cash generation and deliver value for shareholders. Leszek Iwaszko: Thank you. It appears we have no further questions. Thank you very much for participation. Please let us know if you'd like to meet us and then talk to you in February. Thank you. Jacek Kunicki: Thank you very much. Bye-bye.
Alexander Bergendorf: Good morning, everyone. This is Alexander Bergendorf, Head of Investor Relations at Axfood, and welcome to the Axfood Third Quarter 2025 Telephone Conference. So with me today, I have Simone Margulies, President and CEO; and Anders Lexmon, CFO. In the Investors section of our website, you will find the presentation materials for today's call, and we encourage you to have that presentation at hand as you listen to our prepared commentary. After the presentation, we will be taking questions. And a recording of this call will be made available after the end on our website. So with that, I will now hand over the words to Simone. So please go to Page #2. Simone Margulies: Thank you, Alex, and good morning, everyone. Axfood summarizes another strong quarter with high customer traffic, volume growth and increased market share. With increased loyalty and growth in our store chains as well as improved efficiency and solid cost control, earnings increased in all operating segments. In addition, we continue to invest in strategically important areas to become even more efficient and further improve our competitiveness. In recent year, our logistics structure has been developed to enable continued profitable growth. And during the quarter, we announced plans to establish a new highly automated logistics center in Kungsbacka in Southern Sweden. In sustainability, we presented the Food 2030 report, our proposal for a more sustainable food strategy for Sweden. We also continued to phase out fossil fuels in all our transports, had our new solar park in full operations and launched innovative new products focused on sustainability and health. Following that introduction, let us now turn to Page 3 and the agenda for today's presentation. I will start with a brief market overview, and then I will give you a review of our third quarter performance and some of our strategic priorities. Following that, Anders will take you through the financials. And lastly, the outlook for the full year and a brief summary to conclude for me before we open up for questions. Turning to Page 4, but let's go straight to Page 5 and take a look at the quarterly development. As in previous quarters, market conditions in Swedish food retail during the third quarter continued to be characterized by intense competition and high price awareness among consumers. Overall market growth amounted to 5.4% and Statistics Sweden reported that the annualized rate for food price inflation was 4.4%. This was somewhat lower than in the second quarter this year. However, in absolute terms, compared to the second quarter, the price development was relatively stable. Axfood is successfully navigating a changing end market dynamic by leveraging the strength of our business model of strong and distinctive concepts working in collaboration. Thanks to affordable and attractive offerings, more and more consumers are choosing to shop with us. Having maintained our momentum, we delivered a strong performance in the quarter. Growth in our retail sales amounted to almost 20%. Excluding City Gross, which was acquired in November last year, growth amounted to just over 6%. As such, our growth again was above the market rate, both including and excluding City Gross. Volume growth from increased loyalty, customer traffic and new store establishment was the main driver behind this development. In e-commerce, we grew 11%, which compared to the market growth of 8%. Excluding City Gross and the discontinued business Middagsfrid, sales were up 6%. Turning to Page 6. Consolidated net sales for Axfood grew almost 7% in the quarter, driven by continued strong momentum in Willys, Hemköp and Snabbgross. We also saw a positive trend for City Gross. In all, City Gross net sales amounted to just over SEK 2 billion. However, on a group net sales basis, the contribution from City Gross was SEK 345 million due to internal eliminations in Dagab. Please go to the next page, #7. Group operating profit increased to just over SEK 1 billion, and the operating margin was stable at 4.8%. Operating profit included items affecting comparability of minus SEK 39 million related to City Gross. Adjusted operating profit, which excludes these items, also increased to SEK 1.1 billion, and adjusted operating margin was higher at 4.9%. In all, the absolute growth in group operating profit was driven by Willys and Dagab. However, Hemköp and Snabbgross also reported increased profits year-on-year with strong growth in percentage terms. So the earnings performance was once again very well balanced this quarter across our operating segments. City Gross had a negative impact on the group's profit development, however, to a less extent than in the previous quarters. Let's now go deeper into the development in each operating segment, starting with Willys on Page 8. Willys continued to outperform the market in the third quarter with a growth of 6%. Growth primarily came from higher volumes as a result of an increased number of customer visits and new store establishments. A higher average ticket value also had a positive impact on the sales development. Willys is Sweden's most recommended food retail chain and has a unique position on the market. The rate of increase of new members in the Willys Plus loyalty program continued to be on a high level. And in addition, loyalty among existing members remained strong. Earnings grew and amounted to SEK 587 million, which corresponds to a stable operating margin of 4.9%. The increase in operating profit was primarily driven by the increased sales volumes, a stable gross margin development and good cost control. Leveraging its position as Sweden's leading discount grocery chain as well as its liking among households, Willys is continuing to develop its offering. Among many initiatives, stores are continuously being upgraded to a new Willys 5.0 store concept. Willys 5.0 entails a significant improvement to the customer experience through a substantial upgrade of store layout and design. The assortment is key, and here, the focus is really on enhancing the offering of fresh products. Willys 5.0 is a scalable concept, which gives flexibility and opportunities to establish more stores. Because establishing new stores, this is exactly what Willys wants to do as the store chain is currently accelerating its expansion pace to reach even more consumers. In October, Willys reached a significant milestone when it opened store number 250 in RosengÃ¥ard in Malmö. Over the past 10 years, Willys had expanded store base with more than 50 stores on a net basis. And now the aim is to open at least 10 new stores each year in the coming years. Moving on to Hemköp and Page 10. Hemköp's retail sales growth of 6% in the quarter exceeded that of the market and like-for-like growth was also strong at almost 5%. Hemköp demonstrated volume growth driven by customer traffic, a higher average ticket value also impacted the sales development positively. Total net sales for Hemköp increased 7%. Operating profit was higher at SEK 103 million and operating margin was 5.1%. The increase in operating profit was mainly driven by the increased sales, a stable gross margin and good cost control. Turning to Page 11. I just talked about Willys modernizing its store base, and Hemköp is also modernizing stores at a rapid rate in order to enhance the customer meeting. In addition, its offering is continuously being developed with a focus on price value, fresh products and meal solutions. Hemköp's performance in the third quarter was strong, representing a continuation of its momentum for some time now. This development is despite them operating in traditional grocery, which is a segment that while being the largest on the market, has seen its share of the market decline in recent years. It's important to take this into account when analyzing Hemköp. And it is quite clear when you look at the customer data such as development in penetration, in loyalty and purchases, that Hemköp is clearly outperforming their main peers. We are now on Page 12. We acquired City Gross nearly a year ago to create new growth opportunities for our group. The organization is working according to a clear plan and has a comprehensive development agenda in place to reverse the chain's weak performance in recent years. This year is a transitional year, and we are today reiterating that we expect to reach profitability at some point in the second half of 2026. While total growth for City Gross in the third quarter was impacted by store closures, like-for-like growth amounted to slightly more than 3%. City Gross reported on an operating loss on an adjusted basis of minus SEK 4 million. The loss was less negative than in previous quarters with positive effects from like-for-like growth. In addition, structural measures and efforts to streamline operations also contributed to the development. On a reported basis, operating profit amounted to minus SEK 43 million, which corresponds to an operating margin of minus 2%. This included items affecting comparability of minus SEK 39 million pertaining to structural measures, including discontinuation costs for the store in Kungens Kurva in Stockholm, organizational changes and sales currents within the nonfood assortment. In August, the new communication concept and the improved more affordable customer offering was further developed. Also, the City Gross store in Borlänge was closed ahead of concept change to Willys. Turning to Page 13. The 3% growth in like-for-like sales for City Gross represent a positive trend. The chart on this slide shows comparable sales on a rolling 12-month basis, each quarter from the third quarter 2022. As you can see in the chart, after a couple of years with declining sales, City Gross is now back to growth, which, of course, is encouraging. That said, we are still in early days on our journey with City Gross and maintain a high activity level to enable the chain to become a competitive player on the market once again. City Gross has excellent potential as a pure-play hypermarket operator, an attractive segment that is continuing to account for a growing share of the market. With a long-term perspective, we are leveraging our knowledge and experience to develop and strengthen the chain for the future. Moving to Slide 14. Our restaurant wholesaler, Snabbgross, delivered growth of 6% in the quarter on both a total and like-for-like basis. Higher volumes through increased customer traffic had a positive impact on sales in addition to a higher average ticket value. Operating profit was higher than in the prior year and amounted to SEK 101 million, corresponding to a higher operating margin of 6.3%. The increase was mainly driven by higher sales, a stable gross margin and good cost control. Next Page #15 and Dagab. Dagab's quarterly net sales increased by 5%, driven by sales to Willys, Hemköp and Snabbgross. Operating profit increased to SEK 341 million, and the operating margin was higher at 1.7%. The performance was primarily due to the sales growth and a lower cost level with increased productivity in logistics. Operating profit was, however, negatively impacted by a lower gross margin. Dagab is continuing its effort to optimize the flow of goods and streamline the group's new logistics structure. The logistics center in BÃ¥lsta, the fruit and vegetable warehouse in Landskrona and the recently expanded and automated highway warehouse in Backa, Gothenburg are all contributing to the group's capacity and efficiency. In addition, and we are now on Page 16, work on establishing a new highly automated logistics center for Southern Sweden has been initiated to ensure increased capacity and efficiency. As previously communicated during the third quarter, letters of intent were signed with our automation partner, Witron and with Kungsbacka Municipality. The logistics center, which will span approximately 90,000 square meters and be environmentally certified, will handle picking and deliveries of goods in all temperature zones to grocery stores. Total capacity is expected to increase at least 20% compared to current volumes in the Southern Sweden. The facility is expected to be put into operation starting in 2030. Turning to Page 17. Now it's time for Anders to take you through the financials. So please go to the next page, Page #18. And Anders, please go ahead. Anders Lexmon: Thank you, Simone. During the first 9 months, net sales for the group increased by 6.6% to approximately SEK 66 billion. Including City Gross, retail sales increased by 19.3% and excluding City Gross, the increase was 6%, which was more than the food retail market in total, where growth amounted to 4.5%. Operating profit, excluding items affecting comparability, increased 5.8% to just over SEK 2.8 billion. The operating margin, excluding items affecting comparability, slightly decreased from 4.3% to 4.2%, where the City Gross acquisition impacted the margin with minus 0.3 percentage points. Next, Page #19. During the third quarter, the cash flow was minus SEK 40 million, which was SEK 380 million higher compared to last year. We saw a strong underlying operating cash flow, both for the third quarter and the 9-month period, mainly due to a less negative contribution from net working capital compared to last year. The negative calendar effect was higher last year. The negative cash flow from investment activities of SEK 421 million in Q3 was somewhat higher compared to last year, but in line with previous quarters. We have a higher pace in our investments in our retail operations and a lower pace in automation investments compared to last year since we now are through with our investment in the fulfillment center in BÃ¥lsta. By the end of the third quarter, Axfood utilized approximately SEK 3.1 billion of the group's credit facilities compared to SEK 2.5 billion by the end of Q2 and SEK 3.2 billion at the end of Q1. The increased utilization compared to Q2 was due to the dividend paid out in September. And then please turn to Page #20. Net debt has increased since the acquisition of City Gross in Q4 last year. In addition to the loans raised for the acquisition, net debt also has increased with the City Gross leasehold debt of approximately SEK 2 billion. As we communicated in the Q2 report, Axfood has successfully refinanced the existing revolving credit facility in the beginning of Q3. The new RCF amounts to SEK 4 billion, where SEK 1 billion have a tenure of 3 years and SEK 3 billion have a tenure of 5 years. And the conditions in the new agreement are in all essentials unchanged compared with the old facility. The equity ratio amounted to 20.4%, which was lower than December 2024, but above the actual year-end target of 20%. The lower equity ratio compared to Q3 last year was also a result of the City Gross acquisition. Total investments, excluding leasehold and acquisitions for the first 9 months amounted to SEK 1.3 billion. Year-to-date, we have established 7 new group-owned stores, the same number as in the prior year. We have, however, increased our store modernization rate compared to last year. And then please turn to Page #21. When we look at the capital efficiency, we have a negative development of our rolling 12-month net working capital as a percentage of sales. As I have mentioned before, the impact of City Gross acquisition is expected to increase this KPI with approximately 0.3 percentage points on a rolling 12 months' basis. Capital employed has increased over the last years, mainly due to both the acquisition of Bergendahls Food and City Gross as well as the investments in BÃ¥lsta. The level of capital employed increased slightly during the first 9 months, mainly as a result of increased leasehold debt and utilization of credit facility. Due to the increase in capital employed, return on capital employed decreased somewhat compared to last year to 16.4%. And thereby, I have come to the end of my presentation, and I hand over to you again, Simone. Simone Margulies: Thank you, Anders. We are now on Page 22, but let's go straight to Page 23. While we maintain our full year outlook for capital expenditures, our store expansion plan is slightly revised. Due to a slight delay, the number of new group-owned stores opened during the year will amount to 9. In addition, the store network is expanded with 3 retailer-owned stores joining the network from competing retail chains. As for items affecting comparability, structural costs in City Gross are now estimated to amount to SEK 150 million. As a reminder, the outlook for next year 2026 will be presented in conjunction with the release of our year-end report. Please now turn to Page 24. So let me summarize. We are summarizing a strong third quarter with higher growth than the market and improved earnings in all operating segments. Just over a month ago, we held a Capital Markets Day at which we discussed how our business model and structure create opportunities. We also laid out our main competitive advantages, and I would like to mention them here again. First, with our brands, both in-store concepts and private labels and a high-quality affordable assortment, we are well positioned to meet consumers' diverse and evolving needs. Second, we have attractive store locations and a significant potential to expand. Third, our integrated value chain provides the right conditions to quickly adapt when customer behaviors or market conditions change, and it also gives us efficiency. Fourth, to us, the key to drive long-term growth and profitability is based on customer traffic, loyalty and volume growth. We have seen a strong development in all these areas over a long period. And with our scale, we can further strengthen our competitiveness. Our performance in the third quarter really shows how we drive growth in all segments on the market, both organically and through expansion and how our integrated value chain gives us efficiency. The strength of our business idea enable us to continue to challenge and grow. We are maintaining a high rate of development, and I am convinced that we are poised to strengthen our market position in the years ahead. That was all for today. Now please turn to Page 25, and I hand over to the operator to open up the line for questions. Thank you. Operator: [Operator Instructions] The next question comes from Fredrik Ivarsson from ABG. Fredrik Ivarsson: I have 2 questions. First, if we could dig into the margin profile in Willys a little bit. So I guess Q3 tends to be quite a bit stronger than the other quarters, especially Q1 and Q2, but now it's been almost in line with the previous 2 quarters for 2 consecutive years. And I know you took some price investments last year. But in addition to that, I guess, has the market been -- has it been even more campaign-driven during the summer months? Or do you see anything else that sort of explains why the normal margin uptick that we usually see in Q3 didn't really materialize this year? Simone Margulies: Yes. Thank you for your question. As you said, there are some seasonal effects and also the mix effect also have an impact on the margin on Willys. But I would say, to start with Willys had a stable margin development, even though there's a really high competition in the market. And we have a customer that is pretty much in the same behavior as we've seen in the last year with a strong focus on price and with a high price activity level in the market. So by that, we still have -- we continue to have a stable margin development in Willys, which we are really happy to see. And one thing that is also affecting a little bit on the bottom line for Willys is that we have a high expansion rate in Willys. This year until September, we have opened up 7 new stores for Willys compared to 4 last year. And by that, we see some -- the margin gets some -- it dilutes in the margin because we get higher personnel costs when we open stores. And then it usually evens out after a couple of months. But when we open many stores, we have some more personnel costs -- staff cost for staff during the first -- until you get up in a growth rate in the stores. Fredrik Ivarsson: Okay. That makes sense. And second one on City Gross. You have been talking about your earnings getting back to black figures during the second half of 2026, and now you sort of reiterated that statement. But you were almost there already in Q3 this year, although on an adjusted basis. Has the progression in City Gross been stronger than you expected before? Or was this more or less according to plan, so to say? Simone Margulies: I would say we are working according a comprehensive plan to turn around City Gross, both to create growth since it all starts with a growth in like-for-like sales. So I would say we're pretty much following our agenda for City Gross. There are some seasonal effects also in the hypermarket segments during Q3. So I would say, since we are -- this is a journey, and we see something, it will go up and it will go down. We are here in the long run to create a really strong format in the hypermarket segment. So I would say we are not ahead of our plan. We are following our plan. So we reiterate our guidance for the second half of 2026. However, we are really happy to see these positive signs, primarily on the like-for-like sales, I would say, because that's where it all starts. And then, of course, that we see the result of the initiatives that were made to decrease the cost level. It's -- of course, we're really happy to see that we see these positive signs. But we are according to plan, I would say. Fredrik Ivarsson: Okay. And maybe a short follow-up on the like-for-like growth in City Gross. I recall you did some price value investments. Would you care to give sort of a ballpark figure on the volume growth in the quarter? Simone Margulies: I would say we have a comprehensive agenda regarding the growth, and it's all about developing the offering, both the assortment, but as you said, also to strengthen the price position. It's also about how we do the marketing, the campaigns, it's about operations in store. And I would say that it's a mix of growth and price. But as you said, we are strengthening the price position in City Gross. And by that, the majority is driven by volume. Operator: The next question comes from Gustav Hagéus from SEB. Gustav Sandström: I'll take over from that last statement of yours that you had primarily volume growth in City Gross in the quarter. And if I read correctly, that was the case also for Willys and Hemköp, which is a bit contradictory to the market growth, which appears to have been 4 out of 5 percentage points in the quarter and the market was inflation. And you say that you've primarily driven your growth through volume, given that you're 25% or so of the market then, it appears then that you've price invested compared to the market quite a bit here in Q3? Or are we talking different numbers that don't really add up here? Simone Margulies: Yes. I understand it's difficult for you to see because what you can see is the SCB figures on inflation, and that consists of a basket that is set once a year and it's not -- I would say it's not changes over the year. So they set the basket once a year and then they could, I would say, differentiate the volumes. However, when we look in the price factor internal figures, it's a gap between those figures. And I will not be able to say our figures, but there -- and that has been the issue for all times that we don't really see the same internal figures on pricing than SCB's reporting. Gustav Sandström: Okay. But then on a general topic question then, given that the margin seems a bit under pressure and also your comments on much price action in the market and price competition, is your view that you've lowered prices in the quarter and more so than competitors regardless of what the SCB figure is? Simone Margulies: No, I would say -- I mean, I normally don't go into details about our price strategy. But for us, it's always about securing our price positions in the market where Willys, of course, is the cheapest on the market. And also Hemköp, it's important to be really price attractive, and we see really good, how you say, development in the -- that's what I wanted to show you also, the customer figures about Hemköp really taking notice of the price position that they have changed during the years. So the only way, of course, it's about for us always to be competitive in the market, but within City Gross, we made the price investment that we talked about, both in August and in April. So for the other formats, it's all about always to be competitive in the market. So I would say the margin for both Hemköp and Willys has been stable during this year. Gustav Sandström: Sure. But turning then to Dagab, just help us understand what the underlying development is here. If I recall correctly, you called out SEK 11 million extraordinary costs for Middagsfrid and another SEK 20 million or so for ramp-up costs of the new facility last Q3. Just to understand, when looking at Dagab's development here, EBIT year-over-year, if you were to add back those figures to the comparable, EBIT is flat or actually a little bit down year-over-year. And you have called or guided the market for up to SEK 300 million in savings on a yearly basis once fully ramped up in Dagab. I understand you're not there, but it would be very helpful if you can help us understand, first of all, if that base is correct, so that operating earnings are basically flat to slightly down for Dagab? And secondly, if you have, how far you've come on that journey towards SEK 200 million to SEK 300 million savings on an annual basis for Dagab and where that money went. We note that margins in City Gross, for instance, are quite much better than consensus here today. Simone Margulies: Yes. Thank you. For Dagab, we are realizing the efficiency gains, both in BÃ¥lsta and also in Landskrona, our fruit and vegetable warehouse. So we see that the productivity is increasing, and we are realizing the efficiency gains. So we early communicated the spend from SEK 200 million to SEK 300 million on a yearly basis, and we are in the lower spend, i.e., SEK 200 million. However, we both have a negative margin development in Dagab due to mix effects, the gross margin, I mean, gross margin development in Dagab due to mix effects. And that is because Dagab is supporting the chains in the role in the market. And also, we have some product mix that is affecting the gross margin negatively for Dagab. So we see the positive effect in Dagab in realizing the efficiency gains and the productivity, and then we have a negative effect on the gross margin. Gustav Sandström: But is the mix effect explaining then the SEK 50 million negative underlying development for Dagab? You have volume growth, right? So it should be some type of uplift? Or is that going into some of the other retail concepts like City Gross? It would be, I think, very helpful since you have that breakeven target on City Gross, I think it would be helpful to understand how much of that is actually just transferral from Dagab and how much is sort of underlying improvement for City Gross? Simone Margulies: So the gross margin development in Dagab consists of different part, as I explained. First, the mix effect, which is a negative because we had deflation in fruit and vegetable that is affecting the gross margin in Dagab negatively. Dagab is also supporting the chains, and that is what we see on the negative side. We're realizing the efficiency gains in Dagab, both in BÃ¥lsta and the fruit and vegetable warehousing up till now. Gustav Sandström: Okay. So last one, sorry to dwell on this, but I think it's quite important since you have the target to go breakeven in City Gross and you have guided for up to SEK 300 million savings in Dagab. Do you expect Dagab to showcase any of those savings into Q4 next year? Or is that going to go into the other concepts? And how do you distribute them then between you think Dagab and City Gross and Willys, just to get a feel of what's going on underlying. Simone Margulies: For us, it's about leveraging our business model, and that's about growing as a group in a whole. And we do that by having strong store concepts, growing like-for-like and total sales. That gives us volume in the behind and then we become more efficient. So for us, it's really important to do the long-term investments we do in our logistics structure so we can be competitive over time. The efficiency gains, you don't -- maybe we don't see them in Dagab as well. You have to look at us as a group and a whole. So for us, it's really important to grow like-for-like sales in City Gross and then to have growth in all our segments. And this quarter, we show growth in all segments. We show increased operating margin in all our segments, which is really positive, and that make us summarize a really strong quarter. So for us, it's about leveraging our business model and also playing the game where our competitive edge is. And that I think that this quarter shows really that we're doing. Operator: The next question comes from Magnus RÃ¥man from SB1 Markets. Magnus Råman: I'd just like to ask on the price and inflation topic again because now you state that you see a bit different numbers internally. But if we just relate to the SCB stats, we had a food price inflation that rose in the early spring this year, an index level that came up and thereby also year-on-year inflation. However, this index level and the inflation rate has come down sequentially in the recent 2 months. And if we look ahead and if we just assume an unchanged index level, we will, of course, then come to very low inflation rates entering next year, and then we have the halving of the VAT in April. But from this perspective of food prices, I'd like to ask, firstly, if you see -- I mean, those price changes can be driven both from changes in your procurement cost and also from competitive pressure. Do you view that the decrease in prices that we've seen in recent months have been driven by reduced sourcing costs? Or is it an increased price pressure that you see in the market? Simone Margulies: I would say that the inflation -- even though we don't see the same figures at SCB, we see the same trends within our internal figures. I'd just like to clarify that. But the trends that we see is driven by the, how to say, the sourcing, the price fluctuations that we see in our sourcing. So as you said, we have a shortage in the market on red meat, also in dairy, and that increased the prices in the beginning of the year and continue during the year. And then we have deflation in fruit and vegetable that has come down because of the sourcing prices. And I would say that it's pretty much what you see in the market changes in the pricing. And then if you look into the VAT, as you asked, of course, we see positive on the VAT because we have a consumer that has been under pressure for many years. So by reducing the VAT in Sweden, we create a consumption spend for the consumer. And of course, that will be positive. How that will affect us volume-wise, it's really, really difficult to make any forecast on. So we better come back to that when we implement the new VAT level in April next year. Magnus Råman: Right. But there was a question also previously about underlying volume. And I guess that maybe it's good to clarify that underlying volume growth could not only be driven by sort of an increase in the number of units, it could be a mix shift when people trade up if they buy more meat sort of more -- yes, higher quality type of meat, then you get an implied volume growth, but it could mean that it's not more calories consumed, it's a higher sort of -- it's a shift up in mix towards the premium end. And I mean, with the halving of the VAT, I guess it's fair to assume that we would see some type of mix shift that could contribute to your end margin and profitability. Yes. Simone Margulies: It's difficult to make forecast about that. But I would just say that when we talk volume, we talk volume and when we talk mix or price, it's a different thing. So when I say volume, I don't talk about mix. I would just clarify that. But of course, we're hoping, as we see that the volume goes up within fruit and vegetables when the prices comes down, we are hoping to see a little bit more -- I would say, the share of the more sustainable food to increase, we hope for that, but it's very difficult to make any forecast about it. It's really positive for the consumers to have a larger consumption share. Magnus Råman: Right. But so to conclude, the overall gross margin improvement that we see clearly on the group level, both in year-on-year terms in Q3 and in year-on-year terms on the 9-month rolling or 9 months-to-date basis is, in your opinion, predominantly driven by a relief in the sourcing costs rather than a relief in the price pressure in the market. Simone Margulies: Now you said the development of the margin, that was not -- you asked about the price. So to start with the -- Anders, sorry. Anders Lexmon: Yes, sorry. Magnus, the gross margin that you see in our report is not the same as the gross margin that we see in our chains and in our stores because it's how to -- we disclose and report the COGS. It's a different way. Yes, I know that we have to wait for the annual report to get the product margin. But yes, what I'm trying to get at is that there should be -- if you look at the overall sourcing costs from an [ SAO ] index perspective, for example, we see that we should not expect an increasing pressure, rather a relief in the sort of pressure. And with the items that you mentioned that goes into the gross margin, for example, diesel prices and for transportation and so on, that is also points to a relief rather than an increased pressure. Magnus Råman: But this leasing pressure also obviously affects the prices in the stores. I mean they follow the way out in the stores. Anders Lexmon: Yes, exactly. And I mean the indexation of rent should be flat, if anything, entering '26, I guess, with the inflation rates we have now. Magnus Råman: Yes. What happens in '26, we have to come back to... Anders Lexmon: Right. Okay. I'm happy with that. Operator: [Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Simone Margulies: So I would like to thank you all for joining us today, and I hope to see you in next quarter.
Stacy Pollard: Good morning, everyone. I'm Stacy Pollard. I'm here with Dassault Systèmes' CEO, Pascal Daloz; and the CFO, Rouven Bergmann. Unfortunately, our Head of Investor Relations, Beatrix Martinez, could not be with us today. She's out for a couple of weeks. So I have the pleasure of being in this room again. It's been a few years since I sat in the chairs beside you guys. So it's very interesting to be a different perspective on this side of the podium. Now let me move on and formally welcome you to Dassault Systèmes' third quarter webcast presentation. At the end of the presentation, we will take questions from participants in the room and online. Later today, we'll also hold a conference call. Dassault Systèmes' results are prepared in accordance with IFRS. Most of the financial figures in this conference call are presented on a non-IFRS basis, with revenue growth rates in constant currencies unless otherwise noted. For an understanding of the differences between IFRS and non-IFRS, please see the reconciliation tables included in our press release. Some of the comments we will make during today's presentations will contain forward-looking statements, which could differ materially from actual results. Please refer to our risk factors in our 2024 universal registration document published on the 18th of March. I will now hand over to Pascal Daloz. Pascal Daloz: Thank you, Stacy. Good morning to all of you. It's always a pleasure to be here in London and to have a chance also to interact directly with you. So we're going to review the Dassault Systèmes performance for Q3. Let me give you some -- at least my reading of the numbers. I think this quarter is a solid quarter with healthy margin, and I think Rouven will come back on this. And we -- with a strong EPS growth, and we continue to grow the recurring revenue part, which is, I think, the important thing because this is reflecting the strength and the resilience of our business model. Now if you look at the numbers, the revenue grew 5%, thanks to a strong demand across our core industries. Our subscriptions business is up 16%, accounting for almost half of the recurrent part of the revenue. If you remember, a few years ago, it was only 1/3. So this is growing extremely well. We hit a 30.1% operating margin, which I think is reflecting our focus on running profitable and efficient business. And finally, the earnings per share came at EUR 0.29 and growing at 10%. So behind this number, I think there are certain things I would like to highlight and which are our strengths. The first one is Industrial Innovations, especially Transportation & Mobility, we continue to expand our footprint. And despite the ongoing challenges in this sector, we have also a strong momentum behind 3DEXPERIENCE and SOLIDWORKS this quarter. The second thing is, I think our focus on accelerating SaaS adoption is starting to pay off this quarter, you will see. This is driving the revenue growth and the strong market traction. And to further support this momentum, we have established a new leadership at Centric to fast track the adoption of the SaaS business model. Lastly, in the field of artificial intelligence, I think we are shaping the future with a powerful combination between the industry most comprehensive data sets, the scientific rigor, the advanced modeling and simulations being combined with the real-world evidence, we call it the real-world validations. And AI for us is really not an add-on. It's embedded in the core of the 3DEXPERIENCE platform for a long time because you remember the 3DEXPERIENCE platform, this is really how we are managing the knowledge and the know-how for many of our customers. This quarter, we are coming with new category of solutions. And you remember the Virtual Twin as a Service, the generative experience and the virtual companions, and we will say more about this. And they are really transforming the way our industry, our customers, they are designing, producing and operating the life cycle. Now for the full year, we are confident enough at least to reaffirm the earnings guidance, and we expect the EPS to grow between 7% to 10%, with the total revenue rising 4% to 6% on an adjusted basis, and it's mainly due to 3 factors. The first one is the lower growth from MEDIDATA, which is in line with Q3, in fact, the impact of the SaaS acceleration for Centric and the volatility impacting some of the timing to close. Now let's dig into some details behind those results. Let's zoom first on the manufacturing sectors. As I was telling you, Transportation & Mobility has once again proven its resiliency. And to give you the numbers, this quarter, we are growing at 18%, one-eight. Why so? Because it's usually when it's a difficult time for our customers that they have to take radical decisions. And this quarter, we have some -- Ford took the decisions to go with us to expand outside of the engineering borders, and we have signed a contract with them for the next 5 years to use the platform across all the different programs. I will tell you more on this probably next quarter. But there is also another very important flagship customer we signed this quarter with Stellantis. And I know some of you were expecting us to move along this way, and I will come back on this. Why those companies are basically adopting widely the 3DEXPERIENCE platform, is because they are using our solution first to speed up innovation. And speed is becoming really one of the key topic. You remember a few years ago to develop the car, it was almost 48 months. Now we are talking about 16 months. So it's a little bit like fast-moving goods. And to master the complexity, you need a different approach, and this is where I think we are making a difference. Sustainability is also a topic. The electrification is driving the cycle. You know it. And more and more with the SDV, we are creating a personalized experience for the customers. And this is really the combo, if you want, of what we can provide with our solutions. We are also seeing a strong growth in defense. It's growing double digit this quarter, where programs are becoming more complex and collaborative. And I think our 3DEXPERIENCE platform, combined with what we call the model-based system engineering, MBSE, which is now a standard in the industry is more and more widely adopted, and this is really opening a new opportunity for us, not only in Europe, but also in the rest of the world. Life Sciences, the market remains unstable and challenging. I think Rouven will say more about this. We still see the new clinical trial start being contracted. Nevertheless, we landed with some big contract this quarter. And more importantly, I think we're also being encouraged by some large win backs. AbbVie is one of them. And you remember, it was one of the flagship customer of Viva a few years ago. They signed with us a contract for the next 5 years. And I think this is the proof that what we do is extremely critical. And I think also this is a proof that what we have built as a foundations is critical for them also for the AI-based programs, and I will come back on this. In Infrastructure & Cities, the demands keep growing, in fact, for autonomous and sovereign infrastructure, you remember, especially in the energy space. But we are more and more seeing new use cases or new opportunity emerging. One of them is the nuclear decommissioning. As you know, it's a big topic because you have many reactors around the world aging. And we are using our solution to do virtual twin as a service to manage the safety and the efficiency of this process and to manage the end of life of those nuclear reactors. So this space is really, again, a way for us to establish leadership in a domain where we are the challenger because in this space, I think we do not have the same footprint than the others. Now let me show you some key wins. Stellantis, for you know the company, I mean -- and you remember, we had a significant footprint with PSA, but the rest of Stellantis was much more in the hands of our competition. So what do -- they took the decisions to -- I mean, to standardize on 3DEXPERIENCE platform on the cloud, which is, I think, important for their system engineering backbone. And this is extremely important because, as you know, the system engineering is the foundation to do the SDV. And all the car players are moving along this way, and they are using our system approach, system-to-system approach as a way to standardize across all the domains to unify the bill of materials, but more importantly, against, they are building the foundation for their AI initiatives because one way to reduce the cycle of time to develop the car is to be much more generative and you need an infrastructure to do this. And that's what the 3DEXPERIENCE platform is ready for. So we are extremely proud to support this transformation. And it's a significant one because it's a ramp-up at the end with more than 20,000 users we need to equip with the systems. Moving to Life Sciences. I already say a few words. So AbbVie, it's a global biopharma. It's one of the top 10 global pharma. And it's a win back. And it's a win back of a win back, let's say this way, because again, a few years ago, they took the decisions to open some clinical trials with Viva. And now they are back with us. And there are a few reasons for that. One of them is the time. They were sharing with us that we are 10x faster in the way to run the processes and the clinical operations. It's also a big cost saving, which is an interesting takeaway because you remember one of the arguments which was used was this EDC is becoming a commodity and it's price sensitive. And the reality is the price is one thing, the savings and the efficiency is another one. And it's -- here, you have the proof. And the last argument, all the pharma sector, a little bit like the auto sectors, they are building their AI programs in order to automate, in order to use in a better way the data set they have. And they have seen through our platform, the ability to develop their own program on top of what we do. So those are the reasons, if you want, behind these win backs. Finally, from a customer standpoint, this is an interesting case also. Korea Hydro & Nuclear Power is the largest energy public enterprise in Korea, and they have launched the digital transformation to manage, I was telling you, the decommissioning of 26 reactors. So the reactors is first generation. They are progressively replacing it with a new generation. And to do this, it's a complex process. They have to decommission this large installed base. They showcased this example, this case in Koreans 3DEXPERIENCE forum a few weeks ago, and I was having the chance to participate to this. And frankly speaking, you should really look at it. It's amazing what they have been able to do because it's a very complex process. Safety is at stake. Compliancy is at stake. It's a very, very sensitive process because you have to manipulate the reactor when the reactor is still working. At the same time, you need to do it in a very precise manner. And to manage this complexity, to predict the complexity of the process to prevent the risk, to keep track of everything because you have to be compliant. They are using the platform and they are using the virtual twin in order to make this. So why I pick those examples? Because behind all of them, there is a clear pattern. We are not only the partner for them. I think in many cases, we are the game changer for them. We are the one allowing them to accelerate their industrial transformation, whatever it's in the mobility, life sciences and the energy sector. Now let's speak about 3D UNIV+RSES. So you remember, we announced it in Feb this year, and I was making this statement, 3D UNIV+RSES is not an extension of what we do. It's really a leap forward. And there are a few things I want you to keep in mind. What are our differentiations? The first one is we are building our AI engine on the large and the most structured industry corpuses. And it's the result of 40 years, having 400,000, almost 400,000 customers worldwide in a very different sectors, building the virtual twin of all the objects you can see on the slides. And this is a unique purpose to train our systems. So -- and remember, AI without having high-quality data is just only a noise. But if you have the right data, it's becoming game changer. The second takeaway is the data set is not enough for what we do. You need to build AI on science. And this is extremely important because if you are only relying on patterns matching and recognitions, it's not enough for what we do. The AI needs to be built on physics, biology, material sciences, engineering principles. And why so? Because when life are at stake, whatever it's -- when you develop a drug, when you fly in objects, when you have driving an autonomous car, you cannot take risk. The system should not guess, should not hallucinate. You need to understand how the parts fit together, how the materials behaves. And this is really what we have been able to build, which is an AI which is rooted in sciences. The third element is we are coming today, I mean, today, a few weeks ago on the market with the new category of solutions. So you remember, we presented it during the Capital Market Day. And now I'm really pleased to introduce you to our virtual companions. And in fact, it's a family of 3 for the time being. You have AURORA which is our business strategies, focusing on the outcome and efficiency. You have Léo for engineering experts, and Léo is really diving deep into design and simulations. And you have MARii is our scientific authorities handling the -- probably the most advanced questions on research. The interesting things, if you ask the same questions to all of them, you have different answer. So more than a long explanation, let's look at the video. [Presentation] Pascal Daloz: So as you can see, it's not just about AI. It's about having an AI, which is behaving like your team because you need -- when you do engineering activities, you need to assemble different domain expertise at the same time. And if you try to converge too rapidly to the solutions, at the end, you are letting some open opportunities untapped. And this is basically what we are doing with the virtual companions, which are a way to complement and to enrich the roles we have developed. Now this is also an interesting thing because you can use AI as a way to take smarter decisions and faster. And here is, again, a concrete example. It's AURORA. And AURORA is widely used by many industries for currently to deal with the tariff, with the trade policies, the supply chain issues. because this is changing so much that you need almost every day to reactualize your what if scenario. So AURORA, in this case, is not only anticipating but reacting. She anticipates the turnaround, the uncertainty. She try to manage with data-driven insights, the consequences. And this is important because for many industries, the margin is at stake. So to keep it you ahead, the system, if you want, is helping you to collaborate, is bringing you the right expertise, is telling you what are the different avenue you have in front of you in order to fix the problems at the right times. Now let's speak about SOLIDWORKS. This is an interesting -- this is a very important year for us. It's a milestone because we are celebrating the 30 years anniversary of SOLIDWORKS. And why this is important? Because if we step back, after 30 years, I think no one will debate that SOLIDWORKS is the undisputed leader in the 3D CAD. And I put some numbers on the slide just to give you the proof, 8 million users. It's by far the largest design community around the world, 1.5 million commercial license, which is truly addressing the large company, but also the start-ups and all the shakers. It's almost 300,000 clients worldwide and again, covering the large spectrums of all different industry we serve. So it's a lot of legacy of innovations that we are keep pushing from a product development forward. And I think now with SOLIDWORKS, we are also introducing the artificial intelligence to build the next phase to make it faster, smarter, easier to use, in fact. And the topic for us is not only to automate tasks, but more importantly, to give more time for the creativity. And we have some features we are introducing and some functionalities. The first one is obviously the generative design. Second one is what we call assistive features. which is an intelligent and pattern of recognition when you do, for example, an assembly. And all those kind of things are really helping the users to work smarter, but not harder. Behind this, I think if there is one message I want you to keep in mind is this AI approach is a way to do the docking bridge with the 3DEXPERIENCE platform. As you know, this topic is at stake for several years. And I think now I believe we have find the routes to connect the SOLIDWORKS' large installed base we have with the 3DEXPERIENCE platform. It's a way if you want to turn the SOLIDWORKS users into the lifelong experience partner. So I think -- and Rouven will come back on this, but you will see the performance of SOLIDWORKS this quarter is really extremely good. It's growing at double digits. Now to conclude, I think why everything I share with you matters. There are a few things. I'm sorry, I should not anticipate your presentation Rouven. The first one is 3D UNIV+RSES is giving a few and large advantages. The first one is, you remember, we are helping our customer not only to manage the full life cycle of their products but more and more to manage the life cycle of the intellectual property. And you should remember what I'm telling you. In this AI periods, the most important is assets is intellectual property because everything you built is leveraging the intellectual property. And if you do not have a way to manage it safely to take it as a real asset to manage your life cycle the same way you manage the life cycle of the products, you take the risk to be out of the game. And this is what we are bringing to our -- to mix the different knowledge coming from different sources, but at the end, still tracking will belong to what to. The second thing is, in many domains, we are turning compliance into a competitive advantage. If you take aerospace, if you take health care, if you take energy, those are extremely heavily regulated industry. And one of the answer to the tariff war is to put more regulations. That's the way to protect, if you want certain markets. The flip side of this, if you are an industrial company, you have to manage with this complexity. And AI is a fantastic tool to read millions of documents to extract 1,000 rules and us, what do we do with those rules? We do design -- we do compliance by design, if you want. The system is checking automatically that everything you do, every design you do, every decision you do are compliance by design. The third element, I think generative AI is really a game changer as soon as you can trust it. And your AI in many industry we serve needs to be certifiable. If you cannot certify the output of what you have produced with AI is useless. And the way to do it, if you remember, we are training our AI on very comprehensive data sets, which is pretty unique. And those are very high quality of data sets. And it's validated by the science, which is even more important. And we are deploying those artificial intelligence capabilities into a secure and sovereign environment, which is what we do with 3DS OUTSCALE. So this combination is pretty unique on the market. It's very differentiate -- it's a huge differentiations compared to many of our peers. And this is, in my view, a game changer in many, many customer engagements we have right now. The last but not least, I think we are coming on the market with a new category of solutions. You have seen this morning the virtual companions, AURORA, Léo and MARii, but you will see more and more the generative experience, the virtual twin as a services. We have a road map for this -- for '26, '27, and this will accelerate the contribution of AI in our revenue streams. So with this, I think it's time for me to hand over to you, Rouven to give more flavor on the numbers and probably the outlook for the rest of the year. The floor is yours. Rouven Bergmann: Thank you, Pascal, and also welcome from my side to our call today. Thank you for joining us online and here in the room in London. Let me start with 3 key messages. First, top line growth and margin expansion are our top priority. Second message, the 3DEXPERIENCE platform is driving our business model shift to subscription and recurring revenue growth. This engine is working well with 16% growth of subscription this quarter. The third message is we are mission-critical, as you saw in the examples to our clients. In fact, in 2025, we are winning significant contracts with many of the top industrial companies across the world, and this is laying the foundation to long-term value creation with cloud and AI. It is these powerful long-term partnerships that give us confidence in our long-term targets. Now before I dive into the specifics of the quarter, a few more things to summarize briefly for you. Our financial results for the quarter were solid with 5% revenue growth and an expanding operating margin, which is up 100 basis points and 10% growth in EPS. Industrial innovation is driving the growth of 9% in the quarter and 8% year-to-date, while MEDIDATA and Centric were softer than expected. As discussed previously, the repositioning of MEDIDATA is ongoing. The change of the model to reduce the dependency on clinical trial activity will take time as we are doubling down on the enterprise and the PLM opportunity in Life Sciences. And for Centric, we're accelerating the SaaS transition. And to this effect, we have promoted a new leadership team, as you heard from Pascal. Now looking at the full year, we adjust our revenue outlook to 4% to 6% ex-FX, in line with our current trajectory of 5% top line growth year-to-date. At the same time, we maintain our EPS growth target of 7% to 10% ex-FX. This is thanks to the strengthening of the operating margin driven by additional efficiencies we are generating in the business. With this in mind, let me take you through the details. In Q3 and year-to-date, total revenue software were both up 5% ex-FX. Recurring revenue was strong, up 9% in the quarter, and it highlights a very solid acceleration when compared with 7% year-to-date. Subscription revenue growth was 16%, and it was driven by new deals signed in the quarter and the increasing visibility from large contracts that are ramping. As a result, subscription revenue now represents almost half of the recurring revenue base. It's up 3 points from last year. And starting in 2026, subscription revenue will surpass maintenance revenue in absolute terms. 3DEXPERIENCE was the growth engine behind that, up 16% in Q3, and the signings of Ford and Apple contributed to the strength in subscription growth. Upfront license revenue declined 13% as our clients continue to adopt the subscription model at an increasing rate. The best proof of this is that recurring revenue now accounts for 84% of the total software revenue year-to-date. The operating margin improved 100 basis points for the quarter and is driving strong EPS growth of 10%, thanks to the productivity gains and cost discipline. In fact, OpEx was up 3.1% in the quarter, and we continue to rebalance resources to support our growth strategy. Now turning to the growth drivers. In Q3, we saw very good 3DEXPERIENCE revenue, and it's now representing 40% of software revenue year-to-date. The growth was broad-based, up 16%. Cloud revenue was 8% in Q3, 7% year-to-date. 3DEXPERIENCE cloud revenue grew 36% in the quarter and 29% year-to-date. The key wins for 3DEXPERIENCE cloud, such as Ford, [indiscernible], Dallara Automobili and Stellantis demonstrate the value of the platform for our clients where transformation is critical as is the need to leverage AI. Now let me review the Q3 actuals versus our objectives briefly. Total revenue came in at EUR 1.461 billion in the quarter, mainly affected by currency headwinds. Excluding currency, growth was 5% at the low end. Operating margin was 30.1% and above the objective to 60 basis points from performance and a negative currency effect of 20 basis points. EPS was EUR 0.29, driven by better operating performance against a small currency headwind. Now looking at the geographies and product lines. The Americas rose 7% in Q3 with good performance in Transportation & Mobility, High Tech and Aerospace & Defense during the quarter. Europe was a bit softer at 4% in Q3 with double-digit growth in Southern Europe, solid performance in France and also Germany. This was supported by subscription momentum, especially in Aerospace & Defense. Asia was up 4%. India had an outstanding quarter. Korea was up double digit. Here again, strong performance of Transportation & Mobility as well as Aerospace & Defense. China experienced softness in Q3, but also on a tough comparison base when looking at last year's number. Now let me review the performance of our product lines. As mentioned previously, Industrial Innovation delivered excellent results in 2025 across key domains led by CATIA, ENOVIA and DELMIA as well as SIMULIA, highlighting the value of the 3DEXPERIENCE platform is delivering to our clients. So it's broad-based across domains. We are mission-critical to the transformation of our clients with superior capabilities to generate virtual twins. Life Sciences growth was lower than expected. It was down minus 3% in the third quarter with MEDIDATA impacted by continued study start declines, but importantly, continuing to gain market share. Overall, from an industry standpoint, the volume business continues to face pressure. When we entered 2025, we had assumed that volumes would stabilize, helping to support our forecasted growth in the second half. Conversely, we observed a decline in high single digits in Phase III studies and mid-single-digit decline across Phase I and Phase II since the beginning of this year. While we are expanding our market share, the impact of the decline in study starts is not yet compensated by the growth from the expansion with our enterprise and mid-market clients who proved resilient. As you heard from Pascal, we had a major MEDIDATA platform win back, the top 25 pharma, AbbVie, after a brief period with a competitor, AbbVie decided to return to MEDIDATA for all clinical trials, leveraging AI everywhere. This validates the trust clients place in us and the value of the MEDIDATA platform. Additionally, in Q3, we expanded partnerships with Sanofi. You see the press release this morning and also expanding our business with IQVIA, including Patient Cloud. Looking at Life Sciences outside of MEDIDATA is the opportunity to win with PLM is our clear priority. For the first 9 months, growth is up double digit, highlighting the strong potential of our portfolio to address the challenges of this industry. Now moving to mainstream innovation. Growth in this segment was mainly driven by SOLIDWORKS, as you heard. The shift to subscription is well underway at SOLIDWORKS. Centric growth was slower than expected in the quarter due to some shifted renewals, and we saw an acceleration in the share of clients adopting the SaaS model. Now turning to cash and the balance sheet IFRS items. Cash and cash equivalents totaled EUR 3.910 billion as of Q3 compared to EUR 3.953 billion at the end of 2024. This decrease of EUR 43 million on a euro basis was driven by a negative currency impact of EUR 269 million. At the end of the quarter, our net cash position totaled EUR 1.321 billion, a decrease of EUR 138 million versus a net cash position of EUR 1.459 billion at the end of last year. Now let's take a look at what drove our cash position at the end of the third quarter year-to-date. We generated EUR 1.334 billion in operating cash flow for the first 9 months versus EUR 1.348 billion last year. The cash conversion from non-IFRS operating income was 97% for the first 9 months. Cash conversion is a top priority, and we expect the conversion to improve going forward. And starting Q1 2026, we expect working capital to support cash conversion reaching the 2024 levels with the potential to improve further. As discussed previously, 2025 operating cash flow is impacted by significant contracts that we signed in the quarter as well as higher payments related to tax and social charges as well as negative FX. For the full year, we now expect operating cash conversion -- for the full year 2025, we now expect operating cash conversion to be in the range of 78% to 80%. To sum up, operating cash flow year-to-date was mainly used for the -- for investments, EUR 581 million, of which EUR 240 million was for acquisitions, EUR 216 million for the purchase of the Centric noncontrolling interest with the remainder of CapEx of EUR 123 million to support our cloud growth. We paid EUR 343 million in dividends and made a net repurchase of treasury shares of EUR 186 million. For any additional information, you will find the operating cash flow reconciliation in our presentation that we published this morning. Now let's transition to our financial objectives for 2025. Net-net, our year-to-date revenue is up 5%. For the full year, we now adjust our revenue outlook to reflect this trajectory and expect growth of 4% to 6% ex-FX for both the total revenue and software revenue versus 6% to 8% previously. In absolute terms, we are adjusting the full year revenue outlook by approximately EUR 140 million to the midpoint. This reflects an impact of EUR 30 million from Q3 and an FX impact of about EUR 20 million. The remaining delta can be explained by 3 factors: a, the lower growth from MEDIDATA in line with the Q3 performance; b, the impact of the SaaS acceleration at Centric; and last but not least, we also factor in an increasing macro volatility with the potential to impact the timing to close large transactions. Please also remember that we had a high comparison base in Q4 of 2024. Now looking forward, the change of model for Centric is on -- sorry, the change of model for MEDIDATA is ongoing. And we are confident as well into the accelerated SaaS transition of Centric given its strong positioning in a very large market and clients are endorsing it. For Industrial Innovation, we have built a very strong foundation in 2025, where we signed significant contracts, and we expect in 2026 to expand on these partnerships, transforming with virtual twins and generative experiences. And last but not least, the SOLIDWORKS momentum is strong. Recurring revenue outlook remains stable. It's at 7% to 8% growth. And underscoring what I said at the beginning, we are implementing a sustainable recurring growth model with increasing visibility. Above all, I mentioned the strength of our operating model, highlighted by the margin improvement. As such, we are maintaining our EPS growth expectation of 7% to 10% growth or EUR 1.31 to EUR 1.35. To achieve this, we expect Q4 OpEx to continue to trend in the same range of Q3, delivering margin expansion of about 100 basis points, which is driven by ongoing productivity initiatives, having the right people at the right place to make it simple. So this is all based on FX assumptions for an average rate for the year of euro to dollar at $1.13 and euro to yen at JPY 166.7. Now briefly on Q4. As you can see, the revenue range of 1% to 8% is fairly large. This is predicated on potential uncertainties in the timing of deal closing, mainly for the upfront license business, while subscription growth of 8% to 12% is solid on a high comparison base. Operating margin is expected in the range of 37.2% to 38% and EPS growth of 7% to 17% ex-FX to hit EUR 0.41 to EUR 0.45 EPS for the quarter, reflecting the ongoing operating leverage. Now as I reflect on the performance so far this year, I want to highlight that our operating model is resilient, and we apply strict financial discipline to support our long-term growth. We occupy a unique leading market position in which that makes us mission-critical today and tomorrow for our clients. Profitable growth and improving cash conversion, as mentioned, is a top priority with clear objectives to show results starting 2026. AI and cloud are 2 main growth drivers. We are confident we will deliver on their ambitious growth targets. We are committed to continue to invest right for innovation, for clients and for shareholder value. Now Pascal and I look forward to take your questions. Operator: [Operator Instructions] We pause for a brief moment and take questions from participants in the room first. Adam Wood: It's Adam Wood from Morgan Stanley. Maybe just to start off, you finished off even identifying that it is a reasonably large range for the fourth quarter in terms of revenue growth. Could you maybe just talk a little bit about what is in there at the bottom and top end of those ranges in terms of pipeline conversion assumptions on big deal closings? I mean, at the bottom end, are we assuming that none of the big deals close? Just to give us a little bit of a feeling for what's in there and how conservative that bottom end is? And then maybe just secondly, Pascal, you talked about the huge breadth of customer data that you have that you can train models on and use for AI. First of all, could you just talk about how challenged that is where customers are still on-premise? And then how much does that force them and accelerate the shift to cloud with the impact that has on the revenue transition? Rouven Bergmann: Thank you, Adam. I'll take the first question. The -- can you hear me well? Just working with microphone. Yes, there's a wide range on license. The recurring subscription part is fairly consistent compared to our performance year-to-date. I think that's important to note. On the range, the low end of the range is derisked with large transactions. We have a long list of large deals that we have all validated extremely detailed to see where they can fall and the size of those transactions in different scenarios. What I said, given that increasing macro volatility and the timing that -- and the impact on timing of closing this could create, we were prudent to reflect at the low end, a more conservative and prudent perspective of large deal contribution. So the midrange -- the midpoint requires some of those large deals, but we have the potential to do better because our pipeline is strong, but it's depending on the timing of closing of those large deals and the size of those large deals. Pascal Daloz: Coming back to your question about the transition from the on-prem to the cloud and how it is linked with AI. Definitively, AI is accelerating the trend, right? And there are a few reasons for that. One is because no need to wait to have transition everything before to start AI. And the way we do it, we do what we call supplemental. So when you have a large installed base or large deployments of the 3DEXPERIENCE platform on-prem, we come with an instance on the cloud in order to basically enable all this AI new category of services we are developing. And this is really accelerating the trend. And you have seen in the number, it's 36% growth this quarter, the cloud related to 3DEXPERIENCE platform. It's 30% since the beginning of the year. And it's extremely correlated also with the subscriptions acceleration with 16% this quarter. So in a way, this is helping the transition. And if you remember a few years ago, we were convinced the collaboration will be the catalyst for the people to move to the cloud. I think AI is the way to go. Mohammed Moawalla: Rouven, Pascal. Mo from GS. Firstly, just it's encouraging to see on the industrial business, there is pretty good momentum, particularly with Stellantis, Ford. As you look kind of into next year, as we think of some of the headwinds and the tailwinds, how should we think about the kind of growth across the different sort of segments of the business? Because obviously, in mainstream Centric has a transition still to navigate. On the Life Science side, it sounds like kind of visibility is still reasonably low, but the industrial business is ramping. So how should we think about the sort of puts and takes for growth next year? And then secondly, as we think about the Life Science business, have you sort of -- clearly, it's sort of behind plan. How do you think about the kind of strategic sort of view of this business over the medium term? You're willing to kind of write it out? Or is it something that perhaps maybe you need to kind of change the scope of to try to extract more of the growth areas that are probably better positioned? Pascal Daloz: Do you take the first one, Rouven? I'll take the second one. Rouven Bergmann: Okay. In terms of the building blocks more, when we look at the trend of 2025, Industrial Innovation up 8% year-to-date, 9% for the quarter, very much supported by the strong growth in 3DEXPERIENCE adoption. That's a very healthy and sustainable trend. That was always our objective to convert that growth into recurring revenue and subscription growth. As I mentioned that in year-to-date, there is -- and in Q3, there is always good contribution from new deals that we are signing, but also contribution from deals that we have signed in previous quarters that are ramping and are contributing to growth in the current quarter. With many of the significant deals we signed in 2025, this will be the case in 2026. So from an industrial standpoint, manufacturing industries, including for SOLIDWORKS because in SOLIDWORKS momentum is also favoring. I think we are fairly confident in our ability to continue to transform these huge industries. And in a way, many of the deals that we signed are a starting point for what's expected in 2026 and beyond. So without giving you guidance for 2026, but I think from that perspective, the 2025 trends are healthy and stable and sustainable. Related to MEDIDATA, the growth profile, yes, is very much affected by the volume business as we are changing the model to become more enterprise and more sticky by really looking at an enterprise solution to transform life sciences with the objective to generate evidence and outcomes faster for patients. And that's not just in the clinical trial, it's in research, in biology, but also in manufacturing and quality management and the whole life cycle of real-world evidence and trials and patients. So the opportunity is large, and we are making the changes to be in a better position in 2026 now. Now for 2026, I think we want to be cautious on the growth contribution from that part. We're not expecting a decline in 2026 from Life Sciences. I think we are in a better position in 2026 than 2025. That's our starting point. And for Centric, the situation is difficult in 2025, but it will improve in 2026. The SaaS acceleration is imminent. It's already happening as we are speaking, because customers are transitioning faster to the SaaS and cloud solutions than to the on-premise. And we expect around mid-teens growth for this business next year. And if you add all of that, I think we are -- we should enter 2026 with confidence. Of course, the macro standpoint is going to weigh, and we have to assess that. But the building blocks are in place and are shaping. That's the message to you. Pascal Daloz: The second part of your question, Mo, is if we do -- if we consider Life Sciences still being strategic for Dassault Systèmes, right? Ultimately, this is the question you ask. And the answer is yes. And there are a few reasons for this. One, if you look at who are the industry spending the most in research and development, Life Sciences and High-Tech are the 2. In the previous century, it was the auto and aerospace. In this century, they are the 2 spending the most. And if you remember, the core market we serve is really the innovation space, and we are obviously serving the one spending the most in innovation. So from market attractiveness, there is no doubt. The second reason is because we did not diversify in the life sciences only for the purpose to expand or to diversify the market. It was also a way for us to learn new scientific -- at least to develop new scientific foundation. Let me tell you why. If we want to address the sustainability challenge, we need to understand how life is generating life, right? This is -- it seems maybe a little bit far from the day-to-day numbers. But from a scientific standpoint, this is extremely important for us to crack how life is designing things. And my bet is the next generation of generative design will -- from a scientific standpoint, will come from this space. So this is the second reason why this is so important to continue to invest and to crack this sector in a good way. Now the question, what are we doing to change the game? Rouven already answered partially to these questions. The first one is we need to minimize the dependency on the volume of clinical trial. That's obvious because right now, the model is extremely sensitive to this. So when the market is booming, we are getting the full benefit of it. You have seen it during the COVID time and just after the acquisition of MEDIDATA. But when the market is shrinking, basically, you are penalized. And I know every quarter, I'm repeating this, the worst of the worst is, in fact, we are gaining market share. But you have hard time to figure out because you see the number decreasing. In a way, we are reinforcing our position into this space. So the way to do it, there are 2 different axes. One is to be more sticky and less dependent on the number of clinical trials, which is the enterprise approach, which is nothing more than the PLM approach we are applying to the sector. And we see a lot of traction downstream. All the topics which are related to the manufacturing, to the supply chain management, how to accelerate the transfer from the lab to the production system are extremely critical. Why -- the reason why we signed with Sanofi, the extension was they have 12 molecules in their pipelines. They need to basically put on the market in the next 3 years. They want to speed up the ramp-up for the production and to gain almost a year compared to what they used to. And the way to do that is very simple. You do most of the ramp-up production when the molecule is still at the lab level in terms of development. So you do what we do in other industries, except we do it specifically for the life sciences. So this is one axis to be enterprise-wide and to focus on the downstream and basically climb up, if you want, the value chain. The second one is MEDIDATA is a medical platform. The 3DEXPERIENCE platform is an enterprise platform, but MEDIDATA is a medical platform. And if you look at what kind of information we have into the systems, those are the medical insights for right now only the clinical trial and the intent is to expand the usage of this medical platform when the patient, they are under treatment. So this is what we call the patient centricity because there is no reason we cannot follow the patient when the patient is taking the drugs. And we can follow this, we can follow the adverse effect, we can follow -- we can make prescriptions, how to do -- to take the drugs, when it is the appropriate time, right? There are many, many services we could imagine around this way. And this is the strategy we are building around myMedidata. Those are the 2 axes we are using as a way to, if you want, be more sticky and less dependent on the volume of things. Now this is requesting to change the offer, right? And this is what we are doing. In the way we report the number, there is a little bit something which is hidden. In fact, you do not see the traction of the rest of what we do in Life Sciences because in the Life Sciences and Healthcare line, we are only reporting basically MEDIDATA and BIOVIA. But we are selling more and more DELMIA, ENOVIA, SIMULIA and also CATIA and SOLIDWORKS in the med device, and this is reported into the Industrial Innovations. So if you combine all those things, the picture is, in fact, better. Balajee Tirupati: I'll repeat my question. The first question is on MEDIDATA. How are you seeing the dynamics in the U.S. evolving? It would appear that some of the overhangs, regulatory overhangs have been reducing of late. And separately, we have also seen some of the CROs in IQVIA, ICON reporting decent booking numbers of late. So where are you seeing incremental growth headwinds for MEDIDATA coming from? And as we go in 2026, are you seeing a better visibility or some improvement in the decline in starts that we have seen in 2025? Rouven Bergmann: Yes, Balajee, thank you. I think the IQVIA and ICON outlooks were mixed, to be fair. So I don't think that anyone is saying we are yet through the decline in clinical trial activity. For sure, when we just look at clinical trial starts, Balajee, and the public available number that where all pharma companies are reporting their clinical trials that are starting, the numbers are down. And as I mentioned before, for Phase III, they are down significantly, and this is where the lion's share of value is concentrated for a software vendor as well, also for CROs because this is where there's the largest operation and there's -- most of the people are involved, and it is where the lion's share of the value is created. This is what's affecting us. And we have yet, to Pascal's point, to show that we can rebalance that headwind that we are facing from the volume decline with growth by creating a more sticky offering, connecting the dots across the life sciences enterprise to have that growth outweighing the decline just from the volume in terms of number of trials started. This is the challenge that we are facing. This is what we're seeing right now in our numbers reflected of minus 3%. At the same time, when I look just at the segment level from enterprise and mid-market, both parts are growing. But also for those 2 parts, they have less clinical trials in their portfolio than what they were doing in 2019, even before COVID. So we are already rebalancing, right, with our offering and improving our -- increasing our footprint with more value that we are creating for clients for which we are -- that we are able to monetize. But when you then include the pure volume part, still it overweighs and it reduces the growth in this quarter to minus 3%. I think regarding the U.S. regulation, right now, biotech funding is still not great, right? And that's also a reason why there's less trials started in the U.S. and in Europe. But we see an increasing trial activity, for example, in Asia, specifically in China. And that's a market opportunity that we are also addressing, but it's a different market with different economics. And now looking into 2026, it's difficult to predict what trial starts will be in 2026. I think what we should assume at this point is that our mix in 2026 is improving versus 2025 to be in a better position to offset that volatility. And offerings like clinical data studio are an enterprise offering. They are not clinical trial related. And this offering is going very, very well, and we are leading with this offer in the industry. One important part of the AbbVie announcement is the AI everywhere part. So when you are making decisions today as a company to go -- to think 5 years out, AI is at the center. And our AI strategy is resonating very well. And this is a catalyst for 2026. So I'm a bit -- you hear, I'm a bit more optimistic than what we're seeing in 2025, but it's too early to declare victory. Balajee Tirupati: Thanks for very comprehensive answer. If I can have a follow-up question. So following up on the AI debate that we have right now, and I appreciate it is a bit different for vertical software companies. But are you seeing your clients taking a pause in decision-making also on account of trying to understand what -- where the debate moves of software versus foundation model and also as your own 3D UNIV+RSES offering matures. So are customers also weighing decision and taking a pause in decision-making? Pascal Daloz: So it's a very good question. In fact, for many of our large customers, they started the AI initiative 2 years ago, in fact, by doing a lot of by themselves or sometimes partnering with start-ups. After 2 years, they are coming to the conclusion, it's promising, but you need to integrate this foundational model in the way you operate the company. And we are at this point. Let me give you an anecdote. I was with Ford a few weeks ago. And the CIO was telling me he stopped almost all the AI initiatives because now he wants to rationalize. But he want to rationalize in the productive way. He say, obviously, it's a lever for us. We have investigated many use cases. Now we need to focus on the one being more promising. And usually, the way to do this is very simple. You look at the moonshot, the one really changing the game. If you focus AI on the things which are making some improvement in what you do, you will never have your payback because AI is costly. However, if you focus on things you cannot do or you can do with a very different level of efficiency, the payback is there. And we are really at this stage. So for us, I will say it's driving against the adoption of the platform as the data lake. They are building more and more on the foundation because there is no need to redo the job. We have already done it. And more importantly, it's already integrating in everything they do. Because at the end, if you want to design the car, you still need CATIA. The fact that CATIA is driven by an AI engine is one thing, but you still need CATIA to produce the model, to produce the geometry, to produce basically the instruction for the shop floor. This is really where we are game changer. And this is extremely difficult to do without having our foundation, in fact. So to come back to your questions, I think, yes, there is a pause in a way people are doing less experiment -- but now they are taking the decision to focus on the core use cases, which are really productive and making the moonshot, I call it the moonshot, I mean, having a significant lever on the efficiency or opening new avenue. For example, this is what we are seeing in the material science. There are certain things you cannot do if you do not have an AI engine to do that. We are at this crossroad, but we are much more benefiting from this than something else. Charles Brennan: It's Charlie Brennan here from Jefferies. Apologies, 3 questions for me. Firstly, I'm struggling to match the narrative on to the actual numbers. You're attributing the weakness in the quarter to MEDIDATA and Centric, but MEDIDATA is a recurring revenue business and recurring revenues actually beat expectations. Centric is partially a license business, but it doesn't feel big enough to account for the size of the license decline. Is there anything else going on there, maybe a change in revenue allocation between the 2 lines? Or what else went wrong in the quarter to justify the shape of the numbers? Secondly, I'm hearing accelerating subscription as one of the themes coming across -- is that just Centric? Or is it more broad than that? And traditionally, it's tough to accelerate growth when you're moving to subscription. Do we need to think about a phase in '26 and '27 with accelerating license declines? And do we have to think about that in the shape of growth going forward? And then thirdly, I should probably sneak one in on cash flow. 84% conversion in 2026 is a surprisingly precise guide given the recent track record on cash flow. Are you confident that, that takes account of all of the working capital terms on deals that you're going to sign in 2026? Or is there scope for payment terms on deals in '26 to disrupt that 84% cash conversion? Rouven Bergmann: Okay. Thanks, Charlie, for the questions. Let's start -- go through this one by one. On the quarter, there's nothing else than what I outlined. I don't know where the disconnect is, but maybe I just reiterate it in simple form. Yes, MEDIDATA is a recurring business, but it also has a volume aspect of clinical trials that are starting and ending in a way they are not recurring, right? I think we were always clear about that. There's a subscription part where we contract over a period of time. And then there are studies that are starting and ending, and there is volatility to that. Charles Brennan: [indiscernible] Rouven Bergmann: Of course. But when studies are ending, they stop recognizing revenue. So there's a lot of studies ending. There's new studies are starting. If you're down minus 3% in a quarter on EUR 250 million, you can do the math in terms of how many this is, but there's a number of trials. We are running thousands of trials, Charlie. So in a market, as Pascal said, where the volume is stable, right, where we can gain growth through market share expansions, it's a solid generator of growth. And this has been the model of MEDIDATA for a long time. Now today, the volume part or the consumption business, you might say, represents about 30% of the overall business. And that business is down high single digits. And that's impacting the quarter, high single digit to low double digit for that volume business. Now it's offset by the increase in subscription contracts from deals that we are expanding and winning in the market. So that's to the MEDIDATA part. There is no magic to that other than this. On the subscription acceleration, as I said in my remarks, it's twofold. It's deals that we are signing in the quarter and ramps that are contributing to the growth from deals that we have signed in previous quarters. We are transitioning our installed base to cloud. But in many cases, it's not a 100% transition. In the case that Pascal mentioned in his -- in the presentation, the company, Stellantis, that's 100% for that part, right? It's not contributing to subscription this quarter. It will contribute over the period of time. But we have other deals where we have on-prem and cloud hybrid deals where there is a portion in the license subscription and a portion in the cloud subscription. And that has a higher impact on the in-quarter revenue in the subscription line. But it's still recurring and it's building over time. And this high structure of deals helps us to get away from the subscription license where the upfront portion is most significant and helps us to spread revenue more equally over time to create a more recurring base. And of course, when you look at our subscription on a quarter-to-quarter basis, it's -- I know where you're coming from, it's not sequentially up every quarter because of the on-premise part of subscription, which we well understand that depending on the start time of renewal or renewal dates, there is a fluctuation from quarter-to-quarter on our subscription business. You can go back years and you can see that. So rounding up the point, there is a contribution from deal signing in the quarter that are hybrid, where we have on-premise and cloud portion, where the cloud is over time and on-premise has more of a point-in-time impact. And then we are seeing ramping deals from deals that we have signed before. So also here, there's no impact from -- for the Centric part -- for the multiyear deals of Centric that we have recognized over the last quarters and last year specifically and before, that revenue is part of upfront license because it's a license subscription where you upfront revenue and it impacts the license part. So that's not driving the subscription business, Charlie. But going forward, as we are transitioning this business more to an ARR model to a SaaS model, it will support the subscription growth. And that's the whole point of what we are doing. From a cash flow perspective, Well, I think 2024 is an outlier in terms of several effects that we are facing related to tax impacts, social charges that are higher compared to 2024. That is all going to be in our base in 2025 compared to 2026. So we don't have those onetime effects any longer. At least they are not foreseeable at this point in time. And as it relates to the ramping deals that I talked about on the subscription line, they will generate significant higher cash in 2026 than in 2025. I have that level of visibility. Now that's the baseline for the assumption to be back at the 2024 levels. Now is there a possible variability? Yes. But the baseline assumption is the 2024 performance. Pascal Daloz: Maybe one additional comment I should make. Charlie, there is no trick. I think my commitment is very simple. I want to continue to gain market share in all the industry we serve. And I think quarter after quarter, I can -- I hope I'm proving to you that this is what we do, including in sector where it's extremely competitive. And the second thing is we are accelerating the transition to subscription and to the cloud. That's what we do. So my view, we are doing the right things. It's the appropriate time. Against, we were pushing this for a few years ago, but the market was not ready in our space for the cloud. Now it is, they are. And if you remember, the subscription used to be 1/3 of the recurring revenue 3, 4 years ago. Now it's 50%. And we are on a path in the next 3 years to be almost 2/3 of the recurrent part of the revenue. So I think we are walking the talk. That's what the commitment to do. This is what we are doing. We are redirecting the deal. And I think at the end, the numbers are reflecting this extremely, I mean, transparently, Charlie. Operator: We have an online question coming from the line of Laurent Daure at Kepler Cheuvreux. Laurent Daure: Yes. I have 3 quick questions. The first, if you could elaborate a little bit giving us an update on your pipeline of large deals by maybe verticals and your discussions with those clients, the long sales cycle, is it just the macro? Or is there anything else on the discussion you have with them? My second question is if you could give us a bit more color on the change in management at Centric and also on the 15% growth you're expecting for next year, the visibility you have on that, given that you will continue to move subscription? And my final question is, when you refer to a couple of years to rebalance the Life Science business, do you see a risk that maybe for 2 or 3 years that this business end up being kind of flattish? Pascal Daloz: Okay. So Laurent, I will take it, and Rouven, feel free to add whatever you want at the end. So the pipeline coverage is 2x, which is good. For Q4, usually, this is where we are. So -- and it's relatively balanced between the large deals and, let's say, the midsized deals, which is also important because when you have too much on the large deals, this is sometimes difficult to manage. In terms of industry contribution, it is relatively consistent with Q3. So you still have a fraction which is transportation and mobility centric. We have a large part also coming from aerospace and defense. And we also have a good visibility on industrial equipment. So that's for the core industry. And again, we -- the pipeline coverage is definitively not the topic. What we observe, and we have been explicit about this, sometimes 1 or 2 big transactions can shift from one quarter to another one, independently of us. And that's what Rouven is mentioning when he says the volatile geopolitic is basically putting some volatility on the time to close. But it's only a question of time to close. It's not a question related to the pipeline. Coming back to the Centric management change. In fact, it's very simple. You know Chris is turning 70. Chris, the founder of Centric, turning 70. For a few years, he was preparing Fabrice Canonge to be -- to take the positions. So we say it's the right time. We completed the acquisition of the remaining piece of Centric. So from basically a timing standpoint, it was appropriate to make the changes right now. And as part of the new setup, the new leadership, we have put this transition to the cloud as one of the objectives for the team and the EUR 1 billion threshold, which is the size of this business we want to achieve in the coming years, also one of the objectives for this new team. The last thing is related to Centric performance for next year. Rouven Bergmann: Life Sciences, the next 2 to 3 years. What is our expectations, the rebalancing of Life Science. Pascal Daloz: The rebalancing is already happening again. So except -- and this is what I was telling you, we are reporting in a line which is not making it visible for you. So probably something we need to change for you to have a visibility to understand how the momentum is going in order to basically balance between the volume-based business versus the enterprise-based business in Life Sciences. Now if we step back a little bit, I think the booking growth is good for Centric -- for MEDIDATA. So the topic is not the booking, it has to accelerate, obviously. But it's against this termination of studies and not having a new one starting again, which is the topic. I do expect we are reaching the bottom, frankly speaking. I told you this last year, I remember. And again, it was not -- it was based on facts because we were tracking all the pipelines. The way we do this, we look at how many Phase I, how many Phase IIs. We make some assumption about the move from one to another one. And this is how we are computing, if you want, the potential new studies starting every year. Now there is a big change, and you highlight it. We see Asia contributing to the trend, especially China, right, which was not the case in the past. And we were relatively dependent, as you say, on the U.S. dynamic for the creation or at least the most promising molecules coming on the market for the Phase III. Now we see basically this being much more balanced between the different continents. And this is also giving hope for me because we see -- and if you track it, we are seeing a lot of investment in the biotech in China, but also in Korea as well, Japan as well. So I do believe if we combine the 2 together, we will be in a much better situation. And Centric because that was also the question. Again, we have this massive renewal last year. That's the reason why we have the base effect this year. And if you combine this with the fact that we want to accelerate, I want to accelerate the transition to the cloud and the SaaS business model, this is creating the gap. But this basically, in 2026, we will be in a much better situation because we will not have the base coming from the big renewal. Anyway, the trend and the acceleration of the cloud is already happening. So that's the confidence I can share with you. Operator: Our next question comes from Frederic Boulan at Bank of America. Frederic Boulan: I've got 2 and a short clarification. Firstly, around AI, if you can spend a minute on your commercial model of the offering you've presented, any kind of attach rate you foresee on a midterm view? Second, coming back on the free cash flow side and your 84% conversion from next year. Any specific moving parts or action plans you want to call out to underpin your confidence in free cash flow acceleration? And then short clarification on MEDIDATA, can you confirm the comment you made on expect similar growth or similar revenue decline? Is this a comment about Q4 versus Q3 level of minus 3%? Pascal Daloz: So Rouven, I take the first one. For the cash flow. So the way it works for the AI new category of solutions is very simple. You remember the portfolio is structured around role, processes and solutions. So in front of the role, we have the virtual companions and the virtual companions are there to advance the role and to extend the roles. The generative experiences are there to basically automate the processes. And the solutions ultimately is what we want to do with the virtual twin as a service. So keep this in mind for the purpose of the clarity. Now how do we price each of them? The virtual companion is priced on a fraction of the cost of the people we are either augmenting it or basically substituting sometimes. That's how we price. For the generative processes, the generative experiences, it's a usage-based model. So it's a token base like many companies do. And why so? Because I really want to ease the adoption and to accelerate the adoption with this consumption model. And it's something we master relatively well because it's almost the same approach we have for simulation for a long time, right? And for the virtual twin as a services, it's an outcome-based model because at the end, you are not selling any more the tools, you are selling basically the end result of what the tool is producing. So it will be an outcome-based model. Now from an attach rate standpoint, it's still a little bit early because we came on the market with this. But we could expect that for many roles you have in the market being used right now, you will have an extension with the virtual companions for sure. You could expect that for processes, which are the most complex one, the generative experiences will be a way to accelerate significantly the time to market and the efficiency. This is true for the design. This is true for the manufacturing. This is also true for the compliance, as I was highlighting it. And virtual twin as a service, it's something we do specifically in the new industry because they are not equipped. Usually, they do not have all the skills, and we are gaining a lot of time by doing so. One example of what I'm saying -- in the Life Sciences, when we are speaking about the manufacturing systems and the production systems, more and more, we go straight with the virtual twin as a service, which is an easy way for us to deploy our solutions and to reduce the time for the adoption. That's how we are basically pricing and how we are planning. And you remember what Rouven say, say the contribution of those new category of solutions, we are expecting EUR 0.5 billion in the coming plan, which is ending in 2029. Rouven Bergmann: Okay. Thank you, Frederic. I'll go through the cash flow question. Regarding the 84%, what are the kind of puts and takes and level of visibility and action items that we have underway. I think first, important to mention is we have a certain level of visibility from large contracts that we have signed where there are clear payment terms that are going to drive cash in 2026, early 2026. So that gives us a clear perspective on the puts and takes between '25 and '26, which I call the timing effect that we had. So that's one part. We also have some other nonrecurring payments in 2025 that will not recur in 2026. We also have visibility to this. Now above that, -- when I look at our DSO and the impact of the DSO in context what we just discussed on Centric. Centric has been a big driver of the increase in DSO or has contributed to the increase in DSO, I should better say. And now as we are moving to a recurring model, we will see the benefit of that also in terms of better aligning revenue and cash. So the conversion from that perspective should also will benefit from this change that we have decided. And then the last point is we are applying strict discipline on cash management, and that will have an impact also in 2026, and I already see that happening in 2025. The last point regarding the MEDIDATA comment, yes, this was related to Q4. So the trend of Q3 to be expected similar in Q4 2025. Pascal Daloz: So this is concluding this morning's session. So thank you very much for the one being there with us in London and for the people being connected. Look forward to seeing you on the road, either Rouven or myself, we will do some roadshow in the coming weeks. And see you no later than early next year. Thank you very much.
Operator: Good morning. Welcome to Sonic Automotive Third Quarter 2025 Earnings Conference Call. This conference call is being recorded today, Thursday, October 23, 2025. Presentation materials, which accompany management's discussion on the conference call can be accessed on the company's website at ir.sonicautomotive.com. At this time, I would like to refer to the safe harbor statement under the Private Securities Litigation Reform Act of 1995. During this conference call, management may discuss financial projections, information or expectations about the company's products or market or otherwise make statements about the future. Such statements are forward-looking and are subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These risks and uncertainties are detailed in the company's filings with the Securities and Exchange Commission. In addition, management may discuss certain non-GAAP financial measures as defined by the Securities and Exchange Commission. Please refer to the non-GAAP reconciliation tables in the company's current report on Form 8-K filed with the Securities and Exchange Commission earlier today. I would now like to introduce Mr. David Smith, Chairman and Chief Executive Officer of Sonic Automotive. Mr. Smith, you may begin your conference. David Smith: Thank you very much, and good morning, everyone. As she said, welcome to the Sonic Automotive Third Quarter 2025 Earnings Call. Again, I'm David Smith, the company's Chairman and CEO. Joining me on today's call is our President, Jeff Dyke; our CFO, Heath Byrd; our EchoPark Chief Operating Officer, Tim Keen; and our Vice President of Investor Relations, Danny Wieland. I would like to open the call by sincerely thanking our amazing teammates for continuing to deliver a world-class guest experience for our customers. We believe our strong relationships with our teammates, guests and manufacturer and lending partners are key to future success. And as always, I would like to thank them all for their continued support and loyalty to the Sonic Automotive team. Turning now to our third quarter results. Reported GAAP EPS was $1.33 per share. Excluding the effect of certain items as detailed in our press release this morning, adjusted EPS for the third quarter was $1.41 per share, a 12% increase year-over-year. Consolidated total revenues were an all-time quarterly record of $4 billion, up 14% year-over-year, all-time record quarterly consolidated gross profit grew 13% and consolidated adjusted EBITDA increased 11%. Our third quarter earnings were negatively affected by a significant increase in medical expenses and a higher-than-expected effective income tax rate, which partially offset the strength of our operating performance. Moving now to our Franchised Dealerships segment results. We generated all-time record quarterly franchise revenues of $3.4 billion, up 17% year-over-year and up 11% on a same-store basis. This revenue growth was driven by a 7% increase in same-store new retail volume, a 3% increase in same-store used retail volume and a 6% increase in same-store fixed operations revenues. Third quarter new vehicle volume benefited from an increase in consumer demand for electric vehicles ahead of the expiration of the federal tax credit, which increased our retail sales volume and average selling price, but pressured new vehicle and F&I gross profit per unit. Our fixed operations gross profit and F&I gross profit set all-time quarterly records, up 8% and 13% year-over-year, respectively, on a same-store basis. These 2 high-margin business lines continue to increase their share of our total gross profit pool, eclipsing 75% of total gross profit for the third quarter, mitigating the potential tariff impact on vehicle pricing and margin to our overall profitability, while also leveraging our SG&A expenses more efficiently than incremental vehicle-related gross profit. Same-store new vehicle GPU was $2,852, down 7% year-over-year and 16% sequentially due to a surge in pre-tariff consumer demand that drove an increase in GPU in the second quarter of 2025. Additionally, a higher mix of electric vehicle sales in the third quarter reduced our franchise average new vehicle GPUs by approximately $300 per unit. On the used vehicle side of the franchise business, same-store used volume increased 3% year-over-year and same-store used GPU increased 10% year-over-year and decreased 4% sequentially from the second quarter to $1,530 per unit. Our F&I performance continues to be a strength with third quarter record franchise F&I GPU of $2,597 per unit, up 11% year-over-year and down 5% sequentially due in part to the elevated electric vehicle sales mix in the third quarter, which reduced average F&I GPU by approximately $100 per unit. Absent the transitory third quarter EV headwinds, continued strength in F&I per unit supports our view that F&I will remain structurally higher than pre-pandemic levels even in a challenging consumer affordability environment as we continue to fine-tune our F&I product offerings and cost structure. Our parts and service or fixed operations business remains very strong with an 8% increase in same-store fixed operations gross profit in the third quarter. Same-store warranty gross profit continued to be a tailwind in the third quarter, up 13% year-over-year despite strong warranty performance in the prior year period, and same-store customer pay gross profit grew 6% year-over-year. We believe this continued strength in customer pay revenue is attributable to the increase in technician headcount we achieved in 2024 and our efforts to not only retain these technicians, but to continue to grow our technician capacity in 2025. Turning now to the EchoPark segment. Third quarter adjusted segment income was $2.7 million and adjusted EBITDA was $8.2 million, down 8% year-over-year. For the third quarter, we reported EchoPark revenues of $523 million, down 4% year-over-year and gross profit of $54 million, down 1% year-over-year. EchoPark segment retail unit sales volume for the quarter decreased 8% year-over-year, and EchoPark segment total GPU was a third quarter record of $3,359 per unit, up 8% per unit year-over-year, but down 10% sequentially from the second quarter. While we expected EchoPark used GPU pressure in the third quarter, our ability to acquire quality used vehicle inventory at attractive prices was challenged by unexpected off-rental supply headwinds, contributing to approximately 2,000 fewer retail unit sales than we forecast in our July guidance. While these headwinds persisted through September, we remain focused on increasing our mix of non-auction sourced inventory going forward to benefit consumer affordability and retail sales volume. When combined with the strategic adjustments we have made to our EchoPark business model, we believe we are well positioned to resume a disciplined store opening cadence for EchoPark in 2026, assuming the used vehicle market conditions sufficiently improve. Turning now to our Powersports segment. We generated all-time record quarterly revenues of $84 million, up 42% year-over-year and all-time record quarterly gross profit of $23 million, up 32% year-over-year. Powersports segment adjusted EBITDA was an all-time record -- quarterly record of $10.1 million, up 74% year-over-year, driven by record sales volume at this year's 85th Sturgis Motorcycle Rally. We are beginning to see the benefits of our investment in modernizing the Powersports business, and we remain focused on identifying operational synergies within our current network before deploying capital to further expand our Powersports footprint. Finally, turning to our balance sheet. We ended the quarter with $815 million in available liquidity, including $264 million in combined cash and floor plan deposits on hand. Our focus on maintaining a strong balance sheet and liquidity position allowed us to complete the acquisition of Jaguar Land Rover, Santa Monica in the third quarter, following our previously announced acquisition of 4 Jaguar Land Rover dealerships in California at the end of the second quarter, cementing Sonic Automotive as the largest Jaguar Land Rover retailer in the U.S. and further enhancing our luxury brand portfolio. Going forward, we remain focused on deploying capital by a diversified growth strategy across our Franchised Dealerships, EchoPark and Powersports segments to grow our revenue base and enhance shareholder returns. In addition, I'm pleased to report today that our Board of Directors approved a quarterly cash dividend of $0.38 per share payable on January 15, 2026, to all stockholders of record on December 15, 2025. We continue to work closely with our manufacturer partners to understand the potential impact of tariffs on manufacturer production and pricing decisions and the resulting impact tariffs may have on vehicle affordability and consumer demand going forward. To date, we have not seen a material impact on vehicle pricing as a result of tariffs, but our team remains focused on executing our strategy and adapting to ongoing changes in the automotive retail environment and macroeconomic backdrop, while making strategic decisions to maximize long-term returns. Furthermore, we remain confident that we have the right strategy and the right people and the right culture to continue to grow our business and create long-term value for our shareholders. This concludes our opening remarks, and we look forward to answering any questions you have. Operator: [Operator Instructions] Our first question is from Jeff Lick with Stephens. Jeffrey Lick: You guys have an interesting little used car market test tube in your business model with given the franchise business and EchoPark. It looks like you kind of outperformed your peers and did pretty well in the franchise and then EchoPark had some issues. Obviously, you mentioned the rental supply headwinds. I was just wondering if you could elaborate even more, just kind of what's this saying about where the used car market is in general? And any specifics you could give? Frank Dyke: This is Jeff. From a franchise perspective, obviously, we trade for a lot more cars on the franchise side because of the new car business. And so we have really focused on dropping our average cost of sales. So we're trading, we're being more aggressive on our trades. I think our average cost of sales moved from $37,000 over the last 4 or 5 months down into the $33,000 range, $34,000. That makes a big difference. We're focused on bringing it even down further. We'd like to get below $30,000. A little harder to do on the EchoPark side because we're acquiring most of those vehicles out of the auctions, although we've been focused on buying more cars off the street. And as you said, the rental car company issue, that David talked about in his opening comments, it dried up for us. That cost us about 2,000 units during the quarter. A little bit of a surprise to us. We're offsetting that, working with our new car franchises and our buying team, buying -- getting more aggressive on buying vehicles really for EchoPark under the $24,000 price target. And you'll see us improve that as we move through the fourth quarter. Heath R. Byrd: And this is Heath. I'll add one more thing. We started an initiative with the franchise of really focusing on a good process and putting in technology for buying off the service lane. So that's really helped that side of the business as well. Jeffrey Lick: And then just a quick follow-up. On the $31 million in incremental comp, which I think a good chunk of that was medical expenses. Could you just elaborate where does that stand going forward? Heath R. Byrd: Yes, sure. This is Heath. First of all, we're guiding, as you know, for the full year in the low 70s. If you look at medical, which was driving that, it was $0.05 worse sequentially from Q2 to Q3, $0.10 worse year-over-year. We expect medical to be flat from Q3 to Q4. So total SG&A for Q4 is expected to be the $72.8. But it is driven by the medical and that is utilization as well as increased cost. We are self-insured. And so obviously, everyone is getting an increase in medical premiums going forward. And so we're addressing it as every other company. We'll be increasing the premiums collected, which should handle that issue that we saw in Q3 and expect it to be similar in Q4. Operator: Our next question is from Michael Ward with Citi Research. Michael Ward: I wonder if you can provide any color on a walk in the franchise gross from Q3 to Q4 and then into 2026? Because it sounds like you had $100 impact from BEVs, and it sounds like there are some other unusual events. So how do we look out? It sounds like 4Q is higher and then maybe even relatively flat on a variable gross basis for over a year. Is that what we're looking at like kind of more consistency, ups and downs, but kind of moving to the same range? Frank Dyke: This is Jeff. I think with the increase in the BEV volume at the end of the quarter, that really drove -- I think it was $100 down in front PUR and $50 in back-end PUR sequentially. But I expect to return to normal margins and maybe even improving margins as we move into the fourth quarter. We're seeing that already because of the lack of BEVs. We really pressed hard to move all our BEVs out. We're about 4% of our total inventory today are BEV units. I think that's about 800 units on the ground. We have significantly reduced our exposure to that product, which has been obviously a drag for everybody from a front PUR perspective. So I would expect fourth quarter margins to improve sequentially. And I would expect them to continue to improve as we move into 2026 or at least be flat with where we are in Q4. So a little hit at the end of the third quarter, but smart because we reduced our exposure to all those BEV units that we had on the ground, and that was just the right thing to do from our perspective. Heath R. Byrd: And this is Heath. Just a little bit more color. If you look at -- in total, the EV, we make less gross by $3,275. And the mix in Q3 went from 8.3% in Q2 to 11.9% in Q3. So that's what created the $100 headwind in front and a $50 headwind in F&I. Danny Wieland: And just rounding that out, this is Danny. I mean that's a 54% volume increase from Q2 to Q3, which is in line with what the industry saw from an EV penetration. But as you think about that, we sold 3,600 EVs in the third quarter, and we would expect that volume to be much lower in the fourth quarter now that the federal tax credit is not available. So the normal seasonality we would expect from a volume perspective may not hold where we typically see a 10% uptick from 3Q to 4Q in new vehicle volume. Last year was even more of an anomaly, closer to 20% because of the BMW stop sale issue we saw in the third quarter of last year, where we pushed sales into 4Q. But as we think about it, it could be more of a mid-single-digit volume growth sequentially from 3Q to 4Q because of the lack of EV. That should obviously benefit GPU given what Heath said about the relatively lower margins. But from a total volume perspective, it's something to be mindful of. Michael Ward: And as you look at the JLR business, is it fair to say that, that had a bigger impact on parts and service than it did on the new vehicle side? Frank Dyke: Yes. This is Jeff. We had plenty of new vehicle inventory supply. That wasn't an issue at all. And it is a drag on the parts and service business. But that's slowly going to get corrected and come back and -- but definitely, the drags in parts and service, not on the volume side. David Smith: But I will say -- this is David. I will say that we've benefited from scale in our -- being the largest dealer now for JLR has been really fantastic. We've had inventory when others haven't. And I think going forward, I think that those acquisitions are going to prove to be some of our best because those are -- you mentioned your previous question, the GPU. Those are some of our greatest -- highest GPU stores in the company. Michael Ward: Makes sense. If I can sneak in one more, just on the Powersports side. You've had great performance there. And do you have any data that how big this industry is? And is there a better consolidation opportunity in Powersports than you would see in the new vehicle/used vehicle side? Frank Dyke: I don't know if there's better, but there is certainly a big opportunity. And we're learning how to operate the Powersports business. You can see we sold 1,105 million new and used motorcycles or Harley's during the rally. That beat the all-time record of 718 that was set years ago. And that's just training, technology, pricing, inventory management and bringing things in our skill sets that we have on the franchise side of the business and EchoPark of the business into Powersports. And as David said in his opening comments, we have great opportunity to continue to grow the footprint that we have, but there are certainly -- we're getting deals every day coming across our desk with great opportunities to buy. And as we get better and better at operating, I think you'll see us expand that footprint. Great money in it, great opportunity, great customer base. So bringing our technology and our processes is making a big difference. David Smith: And this is David. I'd just add that it's a real complement to our team that we're now the manufacturers are coming to us wanting us to buy more and coming to us with some opportunities. So that's -- and that's how we bought Sturgis, actually, those deals. And so it's great to see we're really proud of the progress our team has made. Heath R. Byrd: And just to see a little bit of color, we view it, it looks like 1990 retail automotive, very fragmented, not a lot of technology, not a lot of sophistication in marketing, understanding how you make money in used service. So we think there's a huge opportunity to create the same kind of formality in that industry as many have done in the automotive retail. Michael Ward: And as you pointed out, a lower multiple, right? Frank Dyke: Way lower. Yes. David Smith: We hear where you're going with that. Frank Dyke: You're right. David Smith: There's a great opportunity, which is why we got into it. And you got to remember the people who -- a lot of our customers are super passionate about the products that we sell. They'd rather have that than a car in many cases. So it's a great business to be in. Frank Dyke: There were over 800,000 guests at the Rally this year. So if you think about it, we sold 1,105, just think about the upside opportunity just at the Rally alone. That closing ratio is not where we want it to be. We can do a lot more. We need more motorcycles and more process and more technology, but we're slowly bringing that on, and it's starting to make a difference. And we've really increased the used vehicle -- the used side of the business, too. That business is up 70% or so for the year. And that's going to continue to grow. That's not something that, that industry has been focused on. Michael Ward: It sounds like a similar playbook. I really appreciate it. Operator: Our next question is from Rajat Gupta with JPMorgan Chase. Rajat Gupta: Great. Just had a couple of follow-ups on the GPU comments. I'm curious that in the third quarter, outside of the electric vehicle headwind to GPUs, was there anything that surprised you in the performance there, perhaps with respect to like how the OEMs are managing the dealer margin or the invoice margin? Automation talked about some different ways in which the OEM might tackle this, maybe in the form of lower back-end incentives or volume incentives, et cetera. Just curious if there was any change there that you observed? And if anything, was it onetime or would you expect that to continue? Relatedly, I was a little surprised by your comment that you would expect 2026 new vehicle GPUs to be similar to the fourth quarter. I mean our understanding is always that fourth quarter is seasonally higher due to the luxury mix. So are you taking into account like even a lower electric vehicle mix in 2026 versus the fourth quarter that's maybe driving that assumption? Just curious if you could tie those comments. Frank Dyke: Yes, that's exactly right. BEV is going to be way, way lower as a percentage of our overall volume than it has been over the last couple of years, which has driven the margin down. And then no real surprises, I don't think from ex BEV for the first 9 months of the year or for the quarter in terms of margin. I think that there are going to be some surprises as we move into the fourth quarter because there's been -- there's an inherent -- you look at October, October slowing, in particular, from a luxury perspective. And I think that the manufacturers are going to have to get super aggressive with incentives in order to move inventory. Our inventory is at the highest level from a new car perspective that it's been all year. And our competitors are the same as we watch it. And I think you're going to find that BMW, Mercedes, they're going to have to be super aggressive. Right now, we're seeing some double-digit decreases in those brands' volumes year-over-year. And we're not alone in that category. And so I do think you're going to start seeing some super aggressive pricing. It needs to come. Those brands need to step up and bring more incentives in order to engage the fourth quarter or it's going to be a more difficult fourth quarter from a luxury perspective than many are projecting. Rajat Gupta: Got it. Got it. Okay. That's helpful... Frank Dyke: That's something that I would encourage you to watch real closely is what's going on, on the luxury new vehicle side of the business. Exchanging a BMW for a Ford exchanges a lot of margin one way versus the other. And I think that's something that we all need to watch as the industry from a luxury perspective slows down in the fourth quarter. Usually, it speeds up. And so we're hopeful that the manufacturers will see that and bring -- start to get really aggressive on incentives. Rajat Gupta: Understood. Understood. We'll keep an eye on that. And a follow-up was on just the warranty penetration. It looks like it dropped from the second quarter by a couple of hundred basis points. I'm curious, was that just again like mix driven because of electric vehicles and those are leads? And your guide was like a further step down in fourth quarter. I'm just curious what's driving that? And what's like a normalized number we should assume when we head into '26? Frank Dyke: Yes, if it's BEV and ex that out, it would have been normal numbers. Danny Wieland: And to that point, that's with the sequential headwinds we saw in F&I, it's primarily the warranty penetration. You got a higher lease mix on BEV. And then again, as we go into the fourth quarter, typically, our fourth quarter F&I is actually a bit lower because of that higher luxury lease mix that we see in 4Q in normal years. But as we go forward, we talked about, I think it was the last call that 2,700 or so is an achievable, consistent run rate in a normalized powertrain mix and brand mix for us, particularly when you think about the benefits of the new JLR stores that we've added in their F&I performance. Operator: Our next question is from Bret Jordan with Jefferies. Patrick Buckley: This is Patrick Buckley on for Bret. Circling back on EchoPark, it sounds like there were some unique headwinds this quarter with the off-rental slowdown. Should we expect any of that to persist into next year? And I guess, should we still be thinking about an acceleration in EchoPark next year as well? Frank Dyke: I think it will -- no, I don't think it will persist into next year. And I think we'll find ways to overcome that by buying more cars off the street. And we're excited, as David talked about in his opening comments, we're going to start to grow EchoPark again next year. So how many stores we open, probably more tailored towards the end of the third and the fourth quarter next year. But with more off-lease vehicles coming back, inventory getting right, prices are going to continue to drop. That's going to be a big help. And so '26 should be a good year for EchoPark and then beyond. And we'll open a few stores next year, like I said, in the last 6 months and then really start growing in '27. David Smith: And this is David. I think it's really important to mention that we're building the EchoPark business just as we've built our core business, not quarter-to-quarter, but we are building it for the long haul. And so we're keeping that in mind, we're going to grow the EchoPark business just as soon as we can and grow it efficiently and smartly. Our team has gotten a lot better about where we build and how much we spend on building and our training processes and all of that. I'm just very excited about the future of EchoPark and what we can do once we really step on the gas of growth. So there's more to come in the future. Patrick Buckley: Got it. That's helpful. And then looking at the Q4 outlook for 10% to 11% growth in fixed operations gross profit. I guess, could you talk about the driver moving forward there, price versus volume? Is there any tariff inflation going on there? And maybe the warranty pipeline, how does that look from today? Frank Dyke: Warranty pipeline looks good. Lots going on. Look, what's driving this for us is our additional headcount and tech count. From March of '24, we really started focusing on growing our techs, training our techs, maturing our techs. That's making a big difference. We've got the stall count. We've got the headcount, and that's making a huge difference for us in delivering. And the thing is that the pipeline is long. There's just -- we see growth year after year after year. And I don't see it slowing down. I see it speeding up. And so we're very, very excited about the efforts we're putting in there to grow our share from a fixed operations perspective across all of our markets. David Smith: And I tell you -- this is David. I'd tell you that our team has just done an outstanding job retaining -- as I mentioned in my comments, retaining and growing those techs that we've really changed the game and changed the attitude of how we hire techs and retain them. Operator: Our next question is from Chris Pierce with Needham & Company. Christopher Pierce: On the franchise side of the business, I just want to make sure I'm following. Was there a demand pull forward in -- like maybe people switching powertrain choices in the third quarter, and that's leading to inventories being elevated in luxury in the fourth quarter? Or are those not related? And are we still expecting typical seasonality and we're expecting the OEMs to step up? Like how does that all sort of fit together if it fits together at all? Frank Dyke: It's definitely a pull forward from a BEV perspective because the incentives ended at least for most brands, and that definitely happened. And inventory is growing from a luxury perspective. We're at our highest inventory levels of the year. Incentives are going to have to grow in order to speed up the volume. And we are not seeing that in October. Like I said, BMW, Mercedes, those brands for us, and I was doing industry checks yesterday, we're talking 15%, 20% reduction so far in this calendar month. And I've seen that in some of our competitors as well. That's tough. The manufacturers need to step up or inventory is going to grow. I think you're going to see the same seasonality, but our growth is usually 10% third quarter to fourth quarter. This year, we're expecting that to be in the 5% range. And like Danny said earlier, last year, it was 20%. So you can do the math. The manufacturers are going to have to step up or inventories are going to grow and margins are going to start coming down. Not having BEVs is going to help margin, but inventory growth can pull margin back if they don't step up and put some incentives out there. And that's a real serious situation. I said it earlier, you got to watch that. Watch what happens in luxury during October, and then we'll see if that spills over into November and December. Christopher Pierce: And have we seen a situation like this where the OEMs wait and wait to pull the trigger on this? Or is it just the market is so kind of weird because of all the incentives that this is uncharted territory? Frank Dyke: Yes. I think the market is weird with the shutdown in -- of the government shutdown. There's some strange things going on here. The tariffs certainly are playing a role, but we -- it's a big -- pretty big dropoff in luxury volume in October year-over-year, in particular, around BMW and Mercedes. Land Rover is a little bit the same, too. Now our business is growing because we've got stores that we didn't have last year, but in our numbers. But -- the luxury business has slowed down in October. And the first 9 months of the year were weird, [ pillaheads, ] tariffs, all kinds of crazy news. This is just sort of a normal month, October and November. And we'll see what happens. Like I encouraged Rajat earlier, you need to watch that and watch what happens from a new car luxury perspective. That's an important mix changes bottom lines, right? And that's important to watch as we move through this quarter. Christopher Pierce: Okay. And then just one on EchoPark. Can you just sort of help me understand, is it typical industry seasonality that rental car companies bring cars to auction at a higher rate in the third quarter after summer travel and that sort of didn't happen this year? Or like is it something -- going back to industry weirdness, is it something that unexpected that happened? Or I just kind of want to flesh that out a little bit. Frank Dyke: Yes. Typically, they defleet. And so we pick up inventory. They did not do that this year. And I think it's just the unknown of the tariff and whether they were going to be able to buy new cars or not. And so we're seeing a little more inventory come in, but not at the levels that they normally do. We typically have 1,500, 1,000 vehicles in our mix from them. And I think I looked at the other day, we were down to 133 units on the ground. And so that's just not normal. And so we're having to replenish that. It did catch us a little off guard in the third quarter, but still nicely EBITDA positive, and we're very excited about the year for EchoPark. I mean it will be a great year in comparison to the last few, as you know, and then really excited about '26 and '27 and moving forward with our growth plans. Heath R. Byrd: Yes. I think to add to that, I think it is interesting that we can handle those kind of bumps now. We're built to be more efficient. So when you have something that comes like this, we've got the scale and we can handle it. When in the past, it was more difficult. Frank Dyke: It didn't blow up the P&L. Operator: [Operator Instructions] Our next question is from Mike Albanese with the Benchmark Company. Michael Albanese: I'm just going to squeeze in a quick one here as you think about, I guess, EchoPark, right? And this was built to kind of compete with the CarMax model. And coming out of the quarter, CarMax had hit a situation where depreciation essentially had picked up pretty significantly. I think kind of a follow of the pull forward in demand seen kind of in the first half of the year. And I'm just wondering if that heightened depreciation that I think hit over the course of like 6 to 8 weeks, it's like 2/3 of the typical annual depreciation curve. If that had an impact on your business, how you think about that and kind of what that impact was? David Smith: Yes. I think we felt the same thing. MMR increases in the second quarter, 106% to 107% drove our average cost of sale up. We tried to pivot to the rental sector. It wasn't available. And so we made the decision to cost us the 2,000 units in volume. So yes, we saw the same thing. Michael Albanese: Yes. Right. I guess the takeaway there being that generally, your sourcing mix being a little bit different kind of protects you against that situation a little bit. Does that make sense? Frank Dyke: Yes. Danny Wieland: And if you remember, Mike, we -- If you recall, we guided to back in July, we expected a little bit of front-end GPU compression, a couple of hundred dollars from 2Q to 3Q as a result of this kind of what we were seeing in the wholesale market and wholesale and retail pricing spreads. What really was the headwind for us that was unanticipated was the volume impact. We didn't have alternate sources, and that's what put pressure on the performance. If you think about those 2,000 units that are normal GPU, really, that's the shortfall in 3Q that caused us to pull down our full year EchoPark EBITDA guide. Frank Dyke: But smart not to go out and try to replenish that volume buying a bunch of cars at auction, they're going to bring the margin even down further. So good decisions made. We need to be more aggressive in buying cheaper cars off the street, and that's something we're focused on for the fourth quarter and moving forward. Operator: With no further questions, I would like to turn the conference back over to Mr. David Smith for some closing remarks. David Smith: Well, thank you very much. Thank you, everyone. We will speak to you next quarter. Have a great day. Operator: Thank you. This will conclude today's conference. You may disconnect at this time, and thank you again for your participation.
Operator: Thank you for attending the OceanFirst Financial Corp. Third Quarter 202 Earnings Call. My name is Brika and I will be your moderator for today. [Operator Instructions] I would now like to pass the conference over to your host, Alfred Goon, Investor Relations. Thank you. You may proceed, Alfred. Thank you all for attending the OceanFirst Financial Corp. Third Quarter 2025 Earnings Call. My name is Brika and I will be your operator for today. [Operator Instructions] [Technical Difficulty] We now have the speaker line reconnected. And I would like to thank you all for attending the OceanFirst Financial Corp. Third Quarter 2025 Earnings Call. My name is Brika and I will be your moderator for today. [Operator Instructions] I would now like to pass the conference over to your host, Alfred Goon, Investor Relations. So thank you. You may proceed, Alfred. Alfred Goon: Thank you, Brika. Good morning and welcome to the OceanFirst Third Quarter 2025 Earnings Call. I am Alfred Goon, SVP of Corporate Development and Investor Relations. Before we kick off the call, we'd like to remind everyone that our quarterly earnings release and related earnings supplement can be found on the company website, oceanfirst.com. Our remarks today may contain forward-looking statements and may refer to non-GAAP financial measures. All participants should refer to our SEC filings, including those found on Forms 8-K, 10-Q and 10-K for a complete discussion of forward-looking statements and any factors that could cause actual results to differ from those statements. Thank you. And now I will turn the call over to Christopher Maher, Chairman and CEO. Christopher Maher: Thank you, Alfred. Good morning and thank you to all who've been able to join our third quarter 2025 earnings conference call. This morning, I'm joined by our President, Joe Lebel; and our Chief Financial Officer, Pat Barrett. We appreciate your interest in our performance and this opportunity to discuss our results with you. This morning, we will provide brief remarks about the financial and operating performance for the quarter and some color regarding the outlook for our business. We may refer to the slides filed in connection with the earnings release throughout the call. After our discussion, we look forward to taking your questions. We reported our financial results for the third quarter, which included earnings per share of $0.30 on a fully diluted GAAP basis and $0.36 on a core basis. In terms of performance indicators, we are pleased to report a fourth consecutive quarter of growth of net interest income, which increased by $3 million as compared to the prior quarter and was fueled by an increase in average net loans of $242 million. Net interest margin of 2.91% remained stable compared to the second quarter. Total loans for the quarter increased to $373 million, representing a 14% annualized growth rate, driven by strong originations of $1 billion. Joe will have more to add regarding our growth strategy in a few minutes. Asset quality remained very strong as total loans classified as special mention and substandard decreased 15% to just $124 million or 1.2% of total loans. This places us among the top decile of our peer group. The quarterly provision was primarily driven by net loan growth and an increase in unfunded loan balances and commitments. Operating expenses for the quarter were $76 million, which includes $4 million of restructuring charges related to our strategic decision to outsource residential loan originations and underwriting functions. This initiative is expected to meaningfully improve operating leverage and earnings in 2026. Pat will provide a detailed update on our financial outlook in a moment. Lastly, capital levels remain robust with an estimated common equity Tier 1 capital ratio of 10.6% and tangible book value per share of $19.52. We did not repurchase any shares this quarter under the existing plan as our capital was deployed for loan growth. This week, our Board also approved the quarterly cash dividend of $0.20 per common share. This is the company's 115th consecutive quarterly cash dividend. At this point, I'll turn the call over to Joe for additional color on these businesses. Joseph Lebel: Thanks, Chris. I'll start with loan originations for the quarter, which totaled $1 billion and resulted in loan growth of $373 million. The value of our continued recruitment of talent, coupled with favorable conditions for many of our borrowers has resulted in momentum in commercial and industrial, which increased 12% for the quarter. Despite the large origination and loan growth for the quarter, the commercial pipeline continues to be strong at over $700 million, only 10% below the high from the linked quarter. Turning to our residential business. During the quarter, we made the decision to outsource this business line. As we wind down the existing pipeline, we expect to see some modest growth in the fourth quarter before the portfolio begins to run off. Total deposits in the third quarter increased $203 million, although organic growth was higher at $321 million before decreases in brokered CDs, which declined by $118 million. Growth was primarily driven by government banking and Premier banking. Premier bankers contributed $128 million of new deposits for the quarter. The Premier banking teams, all of which we onboarded in April, remain on track to achieve our 2025 target of $500 million by the end of the year. Deposit balances as of September 30 totaled $242 million across more than 1,100 accounts, representing nearly 300 new customer relationships to date. Approximately 20% of those balances are in noninterest-bearing DDA and the overall weighted average costs of those deposits was 2.6%. The percentage of DDA is increasing as these accounts become fully operational, which should continue to offset new customer acquisition costs. We remain pleased with their results thus far. Also of note is the Premier Bank's contribution to commercial lending. Premier clients represent $85 million of commercial originations this year and the Premier commercial pipeline totals $50 million. Lastly, noninterest income increased 5% to $12.3 million during the quarter, primarily driven by strong swap demand linked to our commercial growth. With the outsourcing of our residential and title platforms, we anticipate a reduction in fee and service income of approximately $2 million in the fourth quarter and a modest gain on sale of loans in the fourth quarter as we close out the remaining pipeline. With that, I'll turn the call over to Pat to review the remaining areas for the quarter. Patrick Barrett: Thanks, Joe. And we've got a lot of good stuff going on but a little noisy. So apologies in advance for taking a little bit longer with my prepared remarks. So as Chris noted, net interest income grew and margin remained stable this quarter. Furthermore, pretax pre-provision core earnings grew 15% or $4 million linked quarter with the addition of earning assets at the end of the second quarter and through the third quarter, improving earnings power. On the rate side, loan yields increased 8 basis points, while total deposit costs remained flat. While our core NIM remained flat, it was negatively impacted by lower loan fees and a full quarter of higher interest costs on our subordinated debt. Absent these 2 factors, our overall NIM would have improved to 2.95%. Borrowing costs increased 12 basis points, primarily due to the second quarter repricing of our subordinated debt. Average interest-earning assets increased during the quarter, reflecting increases in both the securities and loan portfolios. Chris and Joe have already spoken about the loan growth but I'll add that we took advantage of market conditions to essentially prefund next year's anticipated growth in the securities book with highly liquid, very low credit risk and capital-efficient securities that will be accretive to our ROA, all without meaningfully affecting our neutral interest rate positioning. Looking ahead, we expect positive expansion in net interest income in line with or higher than loan growth but modest short-term compression on margin in the fourth quarter due to seasonality and some residual repricing of a handful of large legacy deposit relationships. Asset quality remained strong with nonperforming loans to total loans at 0.39% and NPAs to total assets at 0.34%. Delinquency levels continued to remain at the low end of historical levels, while criticized and classified loans declined noticeably. Risk ratings across our commercial portfolio were stable, while net charge-offs of $617,000 were benign and represented only 2 basis points of total loans, bringing our year-to-date net charge-off run rate to only 5 basis points. Overall, credit quality continued to perform in line with our company's strong historical experience and remains among one of the best in our peer group. Our provision for credit losses in the quarter was driven by both on and off-balance sheet loan growth, partly offset by overall improvements in asset quality levels. Core noninterest expenses increased from $71.5 million to $72.4 million, driven by increased comp and occupancy expenses. This excludes the impact of noncore restructuring charges totaling $4.1 million in the third quarter. The increase in comp expenses and occupancy expenses were driven by recent commercial banking hires, combined with modest increased variable spend during the quarter. Looking ahead, we expect our fourth quarter core operating expense run rate to move downward slightly to the $70 million to $71 million range. Turning to the noncore charges. We do anticipate a final $8 million in nonrecurring restructuring charges in the fourth quarter related to our outsourcing initiatives. Note that the reduction in headcount associated with the residential outsourcing will not be completed until late in the year, pushing the operating expense benefit from that initiative into the beginning of 2026. To be clear, we expect the pretax improvement in annual operating results to be approximately $10 million. Capital levels remain robust with our CET1 ratio moving down to 10.6%, driven by loan growth during the quarter. While the CET1 ratio remains strong, we continue to evaluate opportunities to further optimize our capital in the near term as we wait for the earnings from newly added earning assets to increase internal capital generation rates. We continue to focus capital priorities on supporting loan growth in the near term and do not expect to prioritize share repurchases. Finally, we've resumed our annual guidance, as you can see in our supplemental earnings materials. At this time, for the full year 2026, we expect 7% to 9% annualized loan growth for the year, predominantly driven by growth in C&I, which will be partly offset by runoff in our residential portfolio. We expect deposits to grow in line with loans as we continue to maintain a loan-to-deposit ratio of approximately 100%. The continued growth in earning assets should drive steady net interest income growth in line with or exceeding high single-digit growth rate, while our modeled 3 rate cuts of 25 basis points each throughout the year could drive a NIM trajectory well above 3% by mid-2026. Other income is expected to be $25 million to $35 million, reflecting reduced gain on sale and title revenues resulting from our outsourcing initiatives. 2026 operating expenses should range between $275 million to $285 million, reflecting the impact of our focus on expense discipline to offset any inflationary pressures. Capital should remain strong with our CET1 ratio at or above 10.5% for the year. These firm-wide targets should result in an annualized return on average assets of 90-plus basis points by the fourth quarter of 2026, with a glide path to achieving a 1% return on assets in early 2027, continuing to improve thereafter. At this point, we'll begin the question-and-answer portion of the call. Operator: [Operator Instructions] The first question we have comes from Daniel Tamayo with Raymond James. Daniel Tamayo: Yes. Maybe we could just start on the net interest income guidance. Just to clarify because there's a few things happening. I think in the slide deck, there was a comment about reaching 3% by the end of -- or maybe it was a terminal 3% rate in 2026. And then, Pat, you just mentioned potentially reaching 3% by mid-2026. The 8%-ish guidance for NII growth in 2026 pretty much implies that, that would be more of an end of the year story. And then that also implies kind of a reduction in the balance sheet from the end of the year. So sorry to pile all that into one question but maybe you can just unpack the NII guidance from a balance sheet compared to a margin story for next year, would be helpful. Patrick Barrett: Sure. So I'll do my best. So hang with me on this. But the 3% terminal rate was referring to our assumption around Fed rate cuts, not our NIM margin. So that's assuming 2 more rate cuts during the rest of this year and 3 next year. So just to kind of take that off the table. We do expect that we will approach or breach a 3% NIM sometime in the first, second quarter of next year, so in the near -- very near term and continue to expand with a pretty modest but steady expansion as we move forward. We expect the balance sheet to continue to grow in the high single-digit levels, almost entirely from loan growth. And that should result -- look, this is all things being equal, so deposit costs, a big question mark, competition, yields and spreads, a big question mark. But our best estimate right now is that, that should result in steady revenue growth, at least commensurate with the loan growth, high single digits. So by revenue, I'm really talking about net interest income. So we see that growing at or better than the pace of loan growth, which is high single digit. Daniel Tamayo: Okay. I appreciate what you said on the terminal rate. First of all, that was obviously a mistake on my side. But -- so that -- I guess if the margin is up at that level, that would imply the balance sheet is going to come down, not down in the fourth quarter but down relative. There were some pretty significant growth on overall balances in assets in the third quarter. It sounds like you prefunded some growth with securities for next year. So there's some dynamic with the average earning assets coming down relative to the size of the overall balance sheet in the fourth quarter. Is that the way to think about it? Christopher Maher: Maybe. It's Chris. Maybe I'll just kind of try and draw a clear path. So to take the noise out of the third quarter, we did buy some securities and we don't anticipate doing that again. It was a pretty unique opportunity to prefund 2026. So the securities portfolio, you should consider being relatively stable as we go into '26 and throughout '26. On the loan side, though, we expect to continue to see growth. So very good quarter this quarter, $373 million. That was a particularly strong quarter. Maybe I would think closer to $250 million, plus or minus. Some quarters better, some quarters worse. But as Joe mentioned, his pipeline is very strong. We've got a lot of momentum. The new bankers are producing. So if you were to just use kind of back of the envelope and assume that over the course of '26, we're growing plus or minus $1 billion on the balance sheet, driven by loan growth, coupled with deposit growth. So that's the part of the balance sheet that would move. And then as we pointed out earlier, NIM crossing over that 3% in the first half of the year and you put those 2 things together and that's how you kind of get the glide path to the 90 basis point or better ROA by Q4. Daniel Tamayo: That's helpful. Okay. But ultimately, the NII numbers that you guys are talking about, just putting the guidance together, is my math correct here, it gets me to kind of the [ 3 80s ] range for 2026 for net interest income. Is that what we should be looking at? Patrick Barrett: Or better, maybe a little bit higher. Daniel Tamayo: Okay. Okay. So that -- the -- this 7% to 9% NII off of 2025 is kind of a floor. Is that the way, that or better? Patrick Barrett: Yes. Look, we haven't had annual guidance in a while, quite frankly, the uncertainty in the environment, the funding environment and the growth environment being a big part of that. So this is our best estimate now and we're trying to probably err on the conservative side. And I know it's frustrating for us to give ranges of things. But we know we'll probably be wrong in our estimates but this is our best estimate today. And so we're trying to be a bit on the conservative side from a growth perspective, given that this is our first quarter of really meaningful growth in 2 to 3 years. Operator: Your next question comes from Tim Switzer with KBW. Timothy Switzer: So the first question I have is around the Premier Bank. And sorry if you guys touched on this on the call but you doubled deposits this quarter. It looks like you got to double it again from a larger base for Q4. What's driving the acceleration there? And I'm sure you already have a good amount in the pipeline kind of embedded for you but just curious what's driving that? And is there any color you can provide on this trajectory as you try to get that $2 billion to $3 billion by the end of [ '27 ]? Joseph Lebel: So Tim, it's Joe. I'll answer the first part of the question relative to what's driving deposit growth. It's the teams we've hired and their acclimation not only to the bank but their customers' acclimation to the bank. I think we referenced the 1,100-plus new accounts that have been opened. A lot of those operational accounts are in the process of being converted to funding. So what we've seen early on is the excess cash come across paying a little bit higher rate for those dollars. And as the actual operational balances start to come, we'll start to see more of that transactional opportunity come across at lower dollar cost. So that's really the value short term. And then, of course, long term, clients come in pieces, right? They don't come altogether and they don't come all at once. So as these teams mature, they'll generate more and more activity from their former book, hence, the value of those deposits over the last couple of years -- over the next couple of years, getting to that $1.5 billion, $2 billion, $2.5 billion, $3 billion number. Timothy Switzer: I'm sorry, I was on mute. It was also great to see the $85 million of loan originations related to Premier Bank. That seems like that's a bit above kind of what you guys are expecting, at least in terms of like an LDR. But it's early -- it certainly can move around but can you maybe provide an update on your expectations there? Joseph Lebel: Yes. Actually, we've been really pleased with the activity of the Premier bankers so far. And Tim, I expect that we'll see more of that. I think it's a little too early to try to forecast what the percentage of loans versus their deposits will be. Obviously, historically, it's been a pretty low number. But we have some seasoned folks that have been around a long period of time and I think we're going to do pretty well in that space. And that sort of goes across some of the CRE space, some of the C&I space. So I think we'll be pleased with the outcomes as we go forward. Timothy Switzer: Okay. Great. And then I want to make sure I heard this correctly. I think you guys said the restructuring of the residential mortgage business will provide about a $10 million pretax benefit. So if that's a $14 million expense savings, that implies about a $4 million headwind to revenue. Are there other headwinds expected in noninterest income that gets you that $25 million to $35 million guide because that's obviously a bit below where you guys are trending for this year. Christopher Maher: Yes. Let me just -- Tim, I'll mention a couple of things on residential and then Pat will get to the noninterest income. Just on residential, this is a business that we were in since 1902. So restructuring it is something we're doing very carefully. We're making sure that we meet and support all of our customers in the transition. We've made sure that we have an ability to produce residential loans for those customers going forward. And then because of the size of the reduction in force, which is about 10% of our headcount, we have modification requirements at the state level. So that all kind of combines for a transition period that's going between [Technical Difficulty]. So you saw some of those onetime expenses for everything from severance to contract terminations and all that. That will all be wrapped up by December. So the benefit will really show beginning in January. We'll get that full benefit. And you're right about the $4 million headwind in residential. So all your numbers are right with that. And Pat, maybe you could talk about the noninterest income. Patrick Barrett: Yes. So the piece that's missing from what Chris just said, which is really focused on our operating residential origination and underwriting platform, the people, the severance associated with it, the costs of paying the people, et cetera, is what generates the $10 million net, $14 million of expense reduction, $4 million of kind of our current run rate of gain on sale per quarter of $1 million, times 4 quarters. So that's your $10 million. The piece that's missing from this that maybe hangs in your models a little bit awkwardly is our majority ownership in the title company that we had acquired about 3 years ago. That hasn't been material from a bottom line perspective. But it did contribute somewhere in the neighborhood of $10 million of consolidated expenses and about $10 million of consolidated title fee revenues annually in our run rates. It just didn't pop up from a discussion standpoint because it was essentially a conduit to facilitate origination business more than it was a profit earner. So that will bring down -- those are headwinds in the revenue side but also positive benefit in the expense side that will come out of it. Operator: Your next question comes from David Bishop with Hovde Group. David Bishop: Chris, Joe, appreciate the color on the NDFI exposure there. Obviously, that's been in the headlines a bit. Any color you can provide there in terms of the nature of that lending, how it sort of bifurcates with the sort of the regulatory guidelines? And then secondly, on the loan side, any update on [ gov con ] exposure with the shutdown, how that portfolio might be holding up on the -- on a credit perspective? Christopher Maher: Sure, Dave. Just on the NDFI, probably the most important distinction I'd make other than it's a very small piece of what we do is that we really aren't engaged in NDFIs that lend to the consumer. So we're -- these are more NDFIs that do commercial lending. So if you think about our Auxilior Capital, for example, which is an equipment finance business that we have an equity ownership in but we also use within the company and we provide some credit facilities to. So stuff that is very closely followed and where we've got our hands on things. So we're not concerned about any of those and those exposures, I think, are all in pretty good shape. Obviously, given the other experience this quarter, we went out and just brushed up and made sure there's nothing there to be concerned about. So does that answer that part of the question? David Bishop: Yes. Unknown Executive: All right. Christopher Maher: I'm sorry, the second -- that was. David Bishop: On the [ gov con ] exposure. Christopher Maher: [ Gov con ], not a big exposure for us today. Today, it's about $100 million worth of exposure and that is squarely focused on mission-critical contractors and decisions we've made over the course of the last year. So we were really thoughtful about entering those kind of relationships with folks that understand government shutdowns. They've been through this before. They've got plenty of liquidity. So we feel pretty comfortable about that. But we stay in close touch with that and Joe, anything you've heard from clients you might pass along? Joseph Lebel: No, I think you summarized it well, Chris. I'd just add the comment that we've been pretty close to it. We didn't have historical exposure and presence there. So a lot of our stuff, as Chris mentioned, has been in the last 12 to 14 months. So that's been a benefit to us because we don't have any legacy risk. David Bishop: Got it. And maybe, Pat, an update in terms of thoughts on the sub debt and that sort of reset. Any thoughts on sort of refi-ing or paying off? Patrick Barrett: Yes. We're not going to really go into the details of that on the call today but those details are available to anybody that's interested elsewhere. Operator: Your next question comes from Tyler Cacciatori with Stephens Inc. Tyler Cacciatori: This is Tyler on for Matt Breese. The cost of deposits were stable again quarter-over-quarter despite strong deposit growth, including demand deposits. And I know you talked about competition a little bit but when do you think we start seeing some of the benefits from the team in terms of lower all-in costs there? Christopher Maher: On the Premier side, you'll see that kind of go down gradually, as Joe said, as those noninterest accounts become activated and balances come in, the mix will shift a little bit but I would think a pretty gradual change there. And then in terms of the rest of the base, deposit betas and the Fed rate cut, there's a lag in the -- or kind of roll-through of deposit rates because we have some contractual agreements with various commercial accounts and things like that. So if you think about what happened last year, rates came down towards the end of the year. We didn't really see the benefit until the first quarter of '25. So sometimes there's about a 90-day lag and that contributes to Pat's guidance that NIM would be flattish, maybe even down a little bit in Q4. And we did have some contractual repricings of accounts that were pretty much at or near 0. So that kind of counterbalanced some of the positive movement elsewhere. So I think flattish, maybe down a little bit in -- for NIM in Q4 but then returning to expansion in Q1 and kind of sequentially thereafter. Patrick Barrett: Yes, that's a little -- this is Pat, Tyler. This is -- that's a little bit of the other side of the double-edged sword of growth, which we're very happy to deal with is that we need to raise deposit funding to fund loan growth. And so we're kind of a little bit bound by whatever the competition in the markets are today. We're seeing the same kind of lag though on deposit cost declines that we saw with increases when we were in the upgrade cycle. It was slow to get going and then it kind of picked up pace as the Fed continued to raise interest rates. We're expecting to see the same kind of behavior, slow, unfortunately, slower to come down initially and then picking up pace as we kind of move into the down rate cycle into next year. Christopher Maher: Also the CD book is pretty short duration. So it's under 6 months. So we'll see a lot of that repricing roll through the CD book in the coming months. Tyler Cacciatori: Great. And then my next question is about the ROA. When do you guys think you can hit a 1% ROA here? Christopher Maher: So I think to kind of knit together our comments earlier, we think we're better than 0.9% by the end of next year, fourth quarter '26, crossing over above 1% in the first quarter of '27 and then for the full year, continuing to grow throughout that year. So it's going to be at or around fourth quarter next year, first quarter '27. And as Pat said, there's a lot of unknowns out there about Fed policy and rates and all that but that's our best guess today. Tyler Cacciatori: Great. And then just my last question here. I think you said it in the prepared remarks, sorry if I missed it, about the deposit composition of the deposits the Premier team is bringing on and if the expectations of that 30% DDA target has changed at all? Unknown Executive: They're about 20% today and the expectations haven't changed. Operator: [Operator Instructions] And we now have a question from Christopher Marinac with Janney Montgomery Scott. Christopher Marinac: Just a quick one on the allowance. If you were to see an increase in criticized loans still not big in the scheme of things, would that drive a change in the reserve? Or does that sort of have tolerance? I mean it's been low on criticized for several quarters. I'm just curious if that were to go back up a little bit, that would be anything material to how you provision? Christopher Maher: Chris, you're right. The model is sensitive to the levels of criticized and classified. So if we saw a material movement in those numbers. We have a little bit of pressure on the ACL. In fact, if we had just taken the mechanics this past quarter, the decrease in criticized and classified would have caused a reserve release. We didn't think that was the right decision given the external environment and our shift over to C&I. So the model may say that on the way down or on the way up but we try and use our qualitative assessment and the exterior -- the indications of the economy that we get from, say, Moody's and others to drive our final decisions. So there's a little bit of sensitivity there but we've been trying to be thoughtful about the provision to reserve using our qualitative factors. Christopher Marinac: Perfect. No, that's great, Chris. And a separate follow-up question just is, if we see more changes among some of the regional bank competitors in your footprint, would that change the hiring? And I'm thinking above and beyond the Premier initiative. Or could -- would you just want to go after more business with the existing team? Christopher Maher: It's always a balance. We -- look, whenever we find great talent, we don't want to pass it up because that's what drives our business. On the other hand, we're very much focused on hitting the return hurdles that we've outlined today. So it's a trade-off. You've got to have -- if you find very good people, you don't want to pass them up. But we're very mindful that we need to get our return on tangible common equity into the double digits. We see doing that next year and we want to stay on course to do that. So we'll be balancing out the quality of opportunities to bring on bank [Technical Difficulty]. We love the bankers we brought on. We will probably always add bankers from time to time but the number of bankers will be determined by us continuing our steady march in improvements to profitability. Operator: [Operator Instructions] I can confirm that does conclude the question-and-answer session here. And I would like to hand it back to Chris Maher for some final closing comments. Christopher Maher: Thank you. We appreciate your time today and your continued support of OceanFirst Financial Corp. We look forward to speaking with you in January. And as we kind of head off into the holiday season, we wish you and your families all the best. Thank you. Operator: Thank you. That does conclude the OceanFirst Financial Corp.'s Third Quarter 2025 Earnings Call. Thank you all for your participation. You may now disconnect and please enjoy the rest of your day.
Operator: Good morning and welcome to the Ryder System third Quarter 2025 Earnings Release Conference Call. [Operator Instructions] Today's call is being recorded. If you have any objections, please disconnect at this time. I would now like to introduce Ms. Calene Candela, Vice President, Investor Relations for Ryder. Ms. Candela, you may begin. Calene Candela: Thank you. Good morning, and welcome to Ryder's Third Quarter 2025 Earnings Conference Call. I'd like to remind you that during this presentation, you'll hear some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to changes in economic, business, competitive, market, political and regulatory factors. More detailed information about these factors and a reconciliation of each non-GAAP financial measure to the nearest GAAP measure is contained in this morning's earnings release, earnings call presentation and in Ryder's filings with the Securities and Exchange Commission, which are available on Ryder's website. Presenting on today's call are Robert Sanchez, Chairman and Chief Executive Officer; John Diez, President and Chief Operating Officer; and Cristina Gallo-Aquino, Executive Vice President and Chief Financial Officer. Additionally, Tom Havens, President of Fleet Management Solutions; and Steve Sensing, President of Supply Chain Solutions and Dedicated Transportation Solutions, are on the call today and available for questions following the presentation. At this time, I'll turn the call over to Robert. Robert Sanchez: Good morning, everyone, and thanks for joining us. The Ryder team delivered our fourth consecutive quarter of earnings per share growth. The third quarter earnings were in line with our expectations as the operating performance of our resilient contractual businesses and the benefits from our strategic initiatives more than offset headwinds from freight market conditions. The business continues to outperform prior cycles, demonstrating the impact from actions that we've taken under our balanced growth strategy to derisk the business, increase the return profile and accelerate growth in our asset-light supply chain and dedicated businesses. I'll begin today's call by providing you with a strategic update. Cristy will then take you through our third quarter results, and John will review capital expenditures and our increasing capital deployment capacity. I'll then review our updated outlook for 2025 and discuss how we expect to leverage the strong foundation provided by our transformed business model. Let's begin with a strategic update on Slide 4. We remain focused on creating compelling value for our customers through operational excellence and investment in customer-centric technology while further improving full cycle returns and unlocking long-term value for our shareholders. We expect earnings growth in 2025, driven by the operating performance of our resilient contractual businesses and the execution on our strategic initiatives. We are on track to realize the benefits from the strategic initiatives we outlined at the beginning of the year. These benefits are the key drivers of the year-over-year earnings growth expectations. Long-term secular trends that favor transportation and logistics outsourcing remain strong, and we are well positioned to benefit from increased domestic industrial manufacturing as 93% of our revenue is generated in the U.S. We delivered high teens ROE of 17% for the trailing 12-month period, which is in line with our expectations during a freight cycle downturn. We expect our transformed business model to deliver ROE in the low to mid-20s when market conditions improve for our transactional rental and used vehicle sales businesses, which will enable us to achieve our over-the-cycle ROE target of low 20s. Earnings growth from our high-performing contractual portfolio reflects our value proposition as well as our pricing discipline. Over 90% of our operating revenue is generated by multiyear contracts. Our transformed business model has demonstrated its resiliency over this elongated freight cycle downturn, which is going on its fourth year. We are confident that our cycle-tested business model will continue to outperform prior cycles while providing us with a solid foundation to meaningfully benefit from the eventual cycle upturn. Consistent execution of our balanced growth strategy is increasing the earnings and return profile of our business while also growing our capital deployment capacity. Ample capacity and our strong balance sheet support our capital allocation priorities focused on profitable growth, strategic investments and returning capital to shareholders. Aligned with these priorities, our Board recently authorized a new discretionary 2 million share repurchase program that replaces a program that was largely completed. So far in 2025, we've returned $457 million to shareholders by repurchasing approximately 2.2 million shares and paying our dividend. Since 2021, we have repurchased approximately 22% of our shares outstanding and increased the quarterly dividend by 57%. Our new share repurchase program and the dividend increase announced earlier this year demonstrate our commitment to disciplined capital allocation. Our 2025 forecast range for free cash flow is unchanged at $900 million to $1 billion, which reflects lower year-over-year capital spending and includes an annual cash flow benefit of approximately $200 million from the permanent reinstatement of tax bonus depreciation. Slide 5 illustrates how key financial and operating metrics have improved since 2018, reflecting the execution of our strategy. In 2018, prior to the implementation of our balanced growth strategy, the majority of our $8.4 billion of revenue was from FMS. Ryder generated comparable earnings per share of $5.95 and ROE of 13%. Operating cash flow was $1.7 billion. This was during peak freight cycle conditions. Now let's look at what we're expecting from Ryder today. In 2025, a year which freight market conditions remain at or near trough levels, our transformed business model is expected to generate meaningfully higher earnings and returns than it did during the 2018 peak. Through organic growth, strategic acquisitions and innovative technology, we have shifted our revenue mix towards Supply Chain and Dedicated with 60% of 2025 revenue expected to come from these asset-light businesses compared to 44% in 2018. 2025 comparable earnings per share is expected to be between $12.85 and $13.05, more than double the 2018 comparable EPS of $5.95. ROE is expected to be approximately 17%, up from the 13% generated during the 2018 cycle peak. As a result of profitable growth in our contractual lease, dedicated and supply chain businesses, operating cash flow is expected to increase to $2.8 billion, up approximately 65% from 2018. As shown here, in 2025, the business is expected to continue to outperform prior cycles even when comparing the pre-transformation peak to the current market conditions. We're proud of the strong performance of our transformed business model and believe that executing on our balanced growth strategy will continue to deliver higher highs and higher lows over the cycle. I'll now turn the call over to Cristy to review our third quarter performance. Cristina Gallo-Aquino: Thanks, Robert. Total company results for the third quarter are on Page 6. Operating revenue of $2.6 billion in the third quarter, up 1% from prior year, primarily reflects contractual revenue growth in SCS and FMS. Comparable earnings per share from continuing operations were $3.57 in the third quarter, up 4% from $3.44 in the prior year. The increase primarily reflects higher contractual earnings and the benefit from share repurchases. Return on equity, as Robert previously mentioned, our primary financial metric, was 17%, up from prior year, reflecting higher contractual earnings and share repurchases, partially offset by lower rental demand and used vehicle sales results. Year-to-date free cash flow increased to $496 million from $218 million in the prior year due to reduced capital expenditures and lower income tax payments. Turning to fleet management results on Page 7. Fleet Management Solutions operating revenue was in line with prior year. Pretax earnings in Fleet Management were $146 million, up year-over-year, reflecting higher ChoiceLease performance driven by pricing and maintenance cost savings initiatives, partially offset by lower used vehicle sales and rental results. We continue to see progress on our pricing and maintenance cost initiatives and remain on track to achieve the benefits targeted for this year. Rental results for the quarter reflect market conditions that remain weak. Rental demand increased sequentially, but the increase was below historical seasonal demand trends. Rental demand this quarter was also lower than last year. Rental utilization on the Powerfleet was 70%, down slightly from prior year of 71% on an average active Powerfleet that was 6% smaller. Lower rental demand was partially offset by higher rental Powerfleet pricing, which was up 5% year-over-year. Fleet Management EBT as a percent of operating revenue was 11.4% in the third quarter, below our long-term target of low teens over the cycle. Page 8 highlights used vehicle sales results for the quarter. Year-over-year used tractor pricing declined 6% and truck pricing declined 15%. On a sequential basis, pricing for tractors was unchanged and pricing for trucks increased 7%. Sequential pricing benefited from a higher retail mix as we realized better proceeds using the retail sales channel versus the wholesale channel. In the third quarter, 54% of our sales volume went through our retail sales channel, up from 50% in the second quarter. As a reminder, in the second quarter, we exited out of some aged inventory and increased our level of wholesaling activity. Our retail mix is still below prior year levels of 68%, reflecting ongoing weakness in market conditions. Pricing in our retail sales channel declined 4% sequentially for tractors and was unchanged for trucks. During the quarter, we sold 4,900 used vehicles, down sequentially and up versus prior year. The sequential decline was driven by the actions we took in the second quarter to sell aged inventory. Used vehicle inventory of 8,500 vehicles was in our targeted inventory range. Used vehicle pricing remained above residual value estimates used for depreciation purposes. Slide 19 in the appendix provides historical sales proceeds and current residual value estimates for used tractors and trucks for your information. Turning to supply chain on Page 9. Operating revenue increased 4%, driven by new business in omnichannel retail. Supply chain earnings decreased 8% from prior year as the benefits from operating revenue growth were more than offset by e-commerce network performance and higher medical costs. Supply Chain EBT as a percent of operating revenue was 8.3% in the quarter at the segment's long-term target of high single digits. Moving to Dedicated on Page 10. Operating revenue decreased 6% due to lower fleet count, reflecting the prolonged freight downturn. Dedicated EBT was in line with prior year, reflecting acquisition synergies, offset by lower operating revenue. DTS results continued to benefit from strong performance of our legacy Dedicated business, reflecting pricing discipline as well as favorable market conditions for recruiting and retaining professional drivers. DTS remains on track to realize the benefits from the Cardinal acquisition synergies. Dedicated EBT as a percent of operating revenue was 7.8% in the quarter at the segment's long-term high single-digit target. I'll now turn the call over to John to review capital spending and capital deployment capacity. John Diez: Thanks, Cristy. Turning to Slide 11. Year-to-date lease capital spending of $1.2 billion was below prior year. Rental capital spending of $271 million was also below prior year levels, reflecting weaker freight market conditions. For full year 2025, lease spending is expected to be $1.8 billion, reflecting lower lease sales activity. Lease spending is expected to be down approximately $200 million from prior year, reflecting the prior year impact of OEM deliveries from vehicle orders in 2023. We expect the ending lease fleet to remain fairly consistent with current levels by year-end. Forecasted rental capital spending is approximately $300 million, down from prior year. By the end of this year, our ending rental fleet is expected to be down 12% and our average rental fleet is expected to be down 5%. The rental fleet remains well below peak levels as we manage through an extended market downturn. In rental, we've continued to shift capital spending to trucks versus tractors. As of the third quarter, trucks represented approximately 60% of our rental fleet. Our full year 2025 gross capital expenditures forecast of approximately $2.3 billion is below prior year. We expect approximately $500 million in proceeds from the sale of used vehicles in 2025 and full year net capital expenditures are expected to be approximately $1.8 billion. Turning to Page 12. In addition to increasing the earnings and return profile of the business, our transformed contractual portfolio is also generating significant operating cash flow. Improving the overall cash generation profile, the business is one of the essential elements of our balanced growth strategy. Better earnings performance is driving higher cash flow generation and in turn, is delevering our balance sheet at a more rapid pace. This momentum is creating incremental debt capacity given our target leverage range of between 2.5 and 3x. As shown on the slide, over a 3-year period, we now expect to generate approximately $10.5 billion from operating cash flow and used vehicle sales proceeds. Our operating cash flow will benefit from improving contractual earnings. This creates approximately $3.5 billion of incremental debt capacity, resulting in $14 billion available for capital deployment. Over that same 3-year period, we estimate approximately $9 billion will be deployed for the replacement of lease and rental vehicles and for dividends, leaving $5 billion of capital available for flexible deployment to support growth and return capital to shareholders. We estimate about half of this capacity will be used for growth CapEx and the remaining to be available for discretionary share repurchases and strategic acquisitions and investments. Our capital allocation priorities remain unchanged and are focused on supporting our strategy to drive long-term profitable growth and return capital to shareholders. Our top priority is to invest in organic growth. We've taken a balanced approach to investing and since 2021 have invested approximately $1.1 billion in strategic M&A and have deployed approximately $1.2 billion for discretionary share repurchases, reducing our share count by 22%. Our balance sheet remains strong with leverage of 254% at quarter end at the lower end of our target range and continues to provide ample capacity to fund our capital allocation priorities. With that, I'll turn the call back over to Robert to discuss our outlook. Robert Sanchez: Turning to our outlook on Page 13. Our full year 2025 comparable EPS forecast is updated to a range of $12.85 to $13.05, above the prior year of $12 as higher contractual earnings benefits from our strategic initiatives and lower share count more than offset the impact from market conditions in rental and used vehicle sales. Our updated forecast continues to reflect contractual earnings growth as well as a muted environment for used vehicle sales and rental. Although sales pipelines remain strong, the prolonged freight downturn and economic uncertainty continue to cause some customers and prospects in Lease and Dedicated to delay decisions. These near-term contractual sales headwinds are consistent with current freight market conditions. We are, however, encouraged by robust sales and pipeline activity in SCS. Our 2025 ROE forecast is unchanged at 17% and is in line with our expectations given current market conditions. As mentioned earlier, our free cash flow forecast of $900 million to $1 billion is unchanged from the prior forecast and reflects lower capital expenditures in 2025 and an estimated annual benefit of $200 million from the permanent reinstatement of tax bonus depreciation. Our fourth quarter comparable EPS forecast range is $3.50 to $3.70 versus a prior year of $3.45. Turning to Page 14. The key driver of expected earnings growth in 2025 is incremental benefits from multiyear strategic initiatives that are well underway and related to our contractual lease, Dedicated and Supply Chain businesses. They represent structural changes we're making in the business and are not dependent on a cycle upturn. Upon completion, we expect these initiatives to generate annual pretax earnings benefits of approximately $150 million, which will be a key component to achieving our long-term ROE target of low 20s over the cycle. In FMS, we expect to realize an incremental annual benefit of approximately $20 million in 2025 from our lease pricing initiative. This results in a total benefit of $125 million relative to our 2018 run rate, reflecting portfolio pricing under the new model. We expect $50 million in benefits over multiple years from our maintenance cost savings initiative announced in mid-2024. In DTS, we expect to realize $40 million to $60 million in annual synergies from the Cardinal acquisition at full implementation. The majority of these synergies are related to maintenance efficiencies and replacing third-party operating leases with the benefits of Ryder ownership and asset management. In SCS, we are focused on optimizing our omnichannel retail warehouse network through continuous improvement efforts, driving operational efficiencies and better aligning our footprint with the demand environment. During the third quarter, we incurred some incremental costs related to the optimization of our network but expect continued progress on this initiative with incremental benefits expected in 2026. By year-end 2025, we expect to realize approximately $100 million from these initiatives, benefiting all three business segments. Approximately $70 million of these benefits are incremental to 2024. In addition to driving our outperformance relative to prior cycles, our transformed business model also provides a solid foundation for the business to meaningfully benefit from the eventual cycle upturn. As such, we expect an annual pretax earnings benefit of at least $200 million by the next cycle peak. The majority of the $200 million benefit is expected to come from the cyclical recovery of rental and used vehicle sales in FMS. In Dedicated, improved driver availability and lower recruiting and turnover costs are benefiting earnings but have been a headwind for new sales and revenue growth. As freight capacity and driver availability tighten, we expect to see incremental sales opportunities and improved revenue growth in DTS as private fleets seek solutions to address these challenges. In supply chain, muted volumes in our e-commerce network have been a headwind to revenue and earnings. We expect supply chain results to benefit as volumes from these services recover and our optimized warehouse footprint is leveraged. We've been pleased by the business' resilience and performance during the prolonged freight market downturn and are confident each of our business segments is well positioned to benefit from the cycle upturn. Turning to Page 15. Our transformed business model continues to deliver value to our customers and our shareholders. We continue to outperform prior cycles, and our results are benefiting from consistent execution and the strength of our contractual portfolio. We continue to see significant opportunity for profitable growth supported by secular trends, our operational expertise and ongoing momentum from multiyear strategic initiatives. We remain committed to investing in products, capabilities and technologies that will deliver value to our customers and our shareholders. That concludes our prepared remarks. Please note that we expect to file our 10-Q later today. At this time, I'll turn it over to the operator to open the call for questions. Operator: [Operator Instructions] And our first question will come from Scott Group with Wolfe Research. Scott Group: I want to ask how you think these CDL regulations impact the business model? What are the puts and takes? I don't know if you have like a sense on your -- on the lease side of the business, like are you more exposed to large fleets, private fleet, small fleets where there may or may not be less exposure? And do you think there is risk that if there's fewer drivers that could pressure used truck pricing? I don't know, just some of the puts and takes. Robert Sanchez: Yes. Scott, I think that's still developing. But I would say that what it's likely to do is tighten the driver market. The drivers that are impacted just for the purposes of our supply chain and dedicated business, we don't have any of those types of drivers in our company. So tighter driver market typically is good news for our dedicated business as you're more likely to have companies looking for help on how to bring those drivers in. As far as our customer base on the lease side, let me hand that over to John, so he can give you a little more color on that. John Diez: Yes, Scott, the majority of our lease portfolio, if you think about it, there are private fleets that are doing specialized deliveries, whether they're food distributors or even local deliveries. Most of what we think is going to get impacted is that over-the-road transport space, which are doing dock-to-dock deliveries that don't require special handling. So I would say the majority of it is not impacted by this. Our estimates based on the number of CDL drivers out there could be as much as 5% impact to the overall capacity. So not expecting a meaningful change there to our customer base but certainly will put pressure on wages over time. And I think that will favor more outsourcing activity for our business, both on the dedicated side as well as individuals looking to cut cost and coming to us for either their fleet maintenance or dedicated solutions. Scott Group: Okay. And Robert, I know you -- usually on the Q3 call, you give at least some thoughts, perspective on the next year. We've had some multiyear initiatives like some of those like the lease pricing kind of -- I think this is the final year of it, the fleets sort of shrinking a little bit as the year plays out. So what are the drivers of earnings growth next year? Are there headwinds to be thinking about just overall puts and takes as you think about '26 earnings growth potential? Robert Sanchez: Yes. As I was going into this call, I thought there would be a lot more clarity this year than there was last year, given we had an election coming up last year. So there's still a lot of uncertainty. But I would tell you it's a very similar story in that you should expect contractual earnings growth. Really, we have $50 million left in our strategic initiatives of $150 million. So you should expect a good chunk of that, if not all of it, to really come in next year. In addition to that, although we've had some muted sales in Lease and Dedicated because of the freight market softness and extended downturn, the really strong part of the story this year is supply chain. We are seeing a very strong sales year in supply chain this year. It's on pace to be one of our best sales years. So those contracts should start coming in as we go into next year. Probably second, third quarter, we'll start to see more of them come in. But I would expect revenue and earnings growth really driven by the supply chain side next year. And then on the transactional side, it's really when do we think the freight cycle is going to turn. And we're now -- we're going to be in our fourth year of a downturn. So at some point, it will. If it happens earlier in the year, we'll get some boost from our rental and used vehicle. If it happens later in the year, we'll get less, but that -- but it's really that $200 million of incremental earnings that we're expecting by the time we hit our next peak. When that turn happens, you'll start seeing some of that. It doesn't all come in the first year, but you'll start seeing some of that. And there's still not a lot of certainty of when we're going to see that. But one of the things you mentioned around tighter market could be more capacity coming out of the spot market, which is probably a good thing for the overall freight market. As you know, we have zero-based budgeting here. So you expect us to continue to manage our overheads and look for cost takeouts there. If it is a slower -- if it is a slow market from a freight market standpoint, so we don't see an upturn, then you should expect another strong free cash flow year. Unless we see a big freight rebound, I think that's probably -- it's probably in the cards for us next year, another strong free cash flow year. And then also continued share repurchase. So really continued execution on our balanced growth strategy, which I think has given us really good results so far, and we'll continue to do so. Operator: [Operator Instructions] And our next question will come from Ben Moore with Citi. Ben Moore: I wanted to touch on more about your used gain being challenged in the quarter. In thinking about 4Q and 2026, can you share how you frame thinking about the truck tariffs? Presumably, you could allocate purchases towards U.S.-made trucks, USMCA compliance can alleviate tariffs on foreign-made trucks. You've got higher new truck pricing that should lift your used truck prices, and you can possibly pass through to customers higher new truck pricing given the strong truck leasing industry pricing discipline and also private fleets would probably want to outsource more to you. It's more economical to lease than buy. Can you walk us through kind of maybe some of these points and what you're thinking the puts and takes, whether it could be an overall benefit? Robert Sanchez: Yes. Ben, first, I'll say that we're still -- we still don't have clarity on what the impact on the pricing is going to be and how much if any of it will be passed through. But I think you hit on some of the key points that, #1, if there is a price increase. And I think there's market dynamics here. So all the OEs, regardless of where they're doing their final manufacturing will have to compete in the marketplace with those that may be doing more domestic versus across the border. But any increase that we see, obviously, we pass through in our lease rate with our customers. We're not buying trucks until we have signed leases. Those increases will likely -- if they do happen, will slow down the purchase of new trucks, I would expect, which should give -- which should accelerate getting the supply of trucks in the market down to where they need to be. So that could be -- help accelerate the balance of the freight market. But for Ryder, just as importantly, the cost of used equipment and the used equipment that was purchased prior to the tariffs should be more valuable. And we should see some help on the used truck side over time as the higher pricing of new trucks comes in. So those are the big ones. I think at the end, complexity at Ryder is our friend. And I think the uncertainty has not been our friend, just like uncertainty is not a friend of any business. But more complexity is good for us. And certainly, we're seeing plenty of it coming down the pipe with some of this tariff talk, also some of the changes in driver regulations and qualifications and who could be a driver. So those things over time really, I think, make the work that we do more complex, which should bode well for outsourcing and should bode well for companies like ours. Ben Moore: Great. Really appreciate that. Maybe as a follow-up, just thinking longer term, capital structure-wise, as you shift your mix to more Supply Chain and Dedicated, how might you think about maybe kind of trending down your leverage target to be more in line with your supply chain and dedicated peers? It looks like most of them have leverage around 0 to 1 to 2x. Robert Sanchez: Yes. Listen, that's a good question. But I think if you look at our balance sheet, you can see that the majority of the capital that we're spending is still heavily weighted towards our FMS business. The good news is the profitability of that business has significantly improved. So the contracts that we've signed over the last now 5, 6 years are certainly more profitable than what we had historically. So that allows us to continue to hold our leverage and keep our leverage where it is, even as there's been a shift in certainly the revenue and earnings for the company. So John, do you want to add something to that? John Diez: Yes. And Ben, I think right now, we're at the lower end of our target range. You should expect once the freight market recovers, we are going to be spending more capital to not only replenish the fleet but grow the fleet both for lease and rental. So you will see our leverage move up within the range as we kind of up cycle the business. So that's kind of one of the dynamics here is we're on the trough end of the cycle, which you're seeing us operate towards the latter end. It will take multiple years, I would say, before we start seeing a meaningful impact to our capital structure from the growth that we're seeing in Supply Chain and Dedicated. Operator: And moving on to David Zazula with Barclays. David Zazula: So Steve or Cristy, Robert's comments suggested a pretty positive outlook for Supply Chain Solutions kind of into the quarter and next year. Can you contrast that with some of the headwinds you saw this quarter? Were they temporary? Is some of the revenue going to be able to offset the poor network performance in e-commerce? Just any color you can provide there. Robert Sanchez: Steve? John Sensing: Yes, David, as you look at it, we had our ninth consecutive quarter of EBT earnings last quarter. We remain in high single digit. I'd really put it in three buckets. We had higher medical costs in the quarter. In e-com, there was a productivity miss really associated with a couple of accounts where volumes were lower than what was forecasted. And then as Robert said, in our strategic initiatives, the continued optimization of our multi-client e-com and Ryder last mile footprint, we did have some customers that requested to move earlier in the year. So we've got some moves going on here in the second half where we had planned those to happen in Q1, but we didn't want to accommodate them. So a little bit of higher move in shutdown costs as well. Cristina Gallo-Aquino: I'll add to that -- David, I was just going to add to that, that in the forecast that we've provided for the fourth quarter, what we're expecting there on the high end of the range is that rental will continue kind of at this flat sequential demand environment. And on the UVS side, on the high end, there would be some market improvement and also some benefit from us shifting to more retail mix on the used vehicle side. And then on the low end, it would just be that demand drops below Q3 levels, so a declining environment and that used vehicles also have a modest decline. David Zazula: Very helpful. And then just if I could squeeze one in on SelectCare. It seems like there's some headwinds in SelectCare there. I guess, one, can you maybe discuss whether we should think of those as temporary? Or is there something going on there? And then should we think of SelectCare as being more volatile than historically has been? It's been a pretty consistent grower over time. So anything you can provide there on the SelectCare line? Robert Sanchez: Yes, I'll let Tom give you color. Remember, SelectCare has a component that's contractual and then another component is more the re-billables or the more transactional part is we've got customers that need body work and other types of work to do but go ahead. Tom Havens: Yes. So I would view it as temporary. As we looked at the quarter, it was just lower activity. And as Robert mentioned, that lower activity in the transactional forms of SelectCare. And we certainly expect that to return to more normal levels in the fourth quarter. Operator: And the next question will come from Ravi Shanker with Morgan Stanley. Ravi Shanker: Just a follow-up on the non-domicile CDL rule. I understand that you said it's a very, very direct impact for you guys. But how do you think about the timing and maybe the indirect impact? If you can kind of rewind a little bit to 2018 with the ELD mandate and the 2020 Drug and Alcohol Clearinghouse kind of when there were regulatory changes in the industry that impacted small truckers, how quickly did that kind of the second derivative flow up to you guys? And also, how -- what's the timing that you think this impact will take place? Is this something going to happen right away? Is it '26? Is it going to take several years? And what are you guys seeing right now? Robert Sanchez: Yes. Those are good questions, but it's hard to tell at this point still, right? We don't know what the timing of this is. But the estimates are that it's 5% of the driver market that could come out over the next couple of years. So it's probably not something that happens overnight. It happens over a period of time. And whenever there's been a tightening of the driver market, it's typically good news for outsourcing. So again, we would expect to see some improvement, much needed improvement, I would tell you, on demand for dedicated services. And that's an area that as the market tightens up, you should see that. You should also see an increase in the transactional parts of our leasing business, rental and used vehicle sales because some of those drivers that are maybe one way and our typical truckload type fleets go down, some of the private fleets are going to have to pick up the slack. And we've seen that tilt over the last couple of years more towards the for-hire driver. You may see that come back towards the private fleet, which would benefit our leasing customers and our dedicated business. Ravi Shanker: Understood. And as a follow-up to that, just on that point of private fleets. I think there's been some speculation about private fleet growth over the years. And yesterday, we may have heard that there are some signs that maybe private fleets may be kind of giving back just given cost inflation and other issues. What do you think are some of the structural trends in private fleet growth right now? And kind of how do you think that lasts through the up cycle? Robert Sanchez: Yes. I think we've seen that in our lease fleet and our dedicated fleet over the last several years as coming out of COVID, there were a lot of trucks that were ordered that came in that probably our customers didn't need them all at that point once the COVID high came down. So you've seen those fleets defleeting over the last 2 to 3 years. And we believe that's probably getting closer to the tail end of it now. But yes, there's no doubt that private fleets have been defleeting over the last 2 to 3 years. Operator: And we'll take a question from Jeff Kauffman with Vertical Research Partners. Jeffrey Kauffman: Congratulations, everybody. I just wanted to focus a little bit on the bonus depreciation. How is that going to funnel into the financial statements? Is it just going to be a cash flow benefit? Is it going to help the operating margins? And how is that going to accelerate? I think you mentioned a $200 million benefit. Maybe I'm wrong, but I just kind of want to get a better idea of how that's going to flow through the financials. Robert Sanchez: Cristy? Cristina Gallo-Aquino: Jeff, so -- yes, the bonus depreciation right now for us is going to be a cash tax benefit, and we are estimating that to be about $200 million. We would expect that at the same level of capital spending in future years, it would continue to be about $200 million in the next several years. So that's the way it's going to flow through our financial statements. There is no tax rate effect of this. And from our operating margins, I mean, we continue to price our leases at market rates. So there really isn't a meaningful impact. It's just a cash timing benefit that we're going to be getting. Jeffrey Kauffman: All right. And the $200 million number is an annual number, correct? Cristina Gallo-Aquino: That is correct, yes. Operator: And our next question comes from Jordan Alliger with Goldman Sachs. Jordan Alliger: Just wanted to come back to supply chain for a second. You mentioned the margins were in the high single-digit target for the third quarter. You mentioned the e-commerce network productivity or performance. Is that something that just is isolated into the third quarter and it drops off and we could get back to some sort of a sequential improvement from here? Or does that sort of linger on? And then secondly, you commented that supply chain sales pipeline has been really strong, and it could start impacting in the 2Q, 3Q next year. You talk a little bit about the trade-off? If you start getting back to the revenue growth targets that you'd like to see longer term, is there a trade-off with margin on start-up? Or can we hold these high single digits as that starts to flow in? Robert Sanchez: Yes, I'll let Steve answer that. I'll tell you the last part of that. I do think we're certainly excited about the growth. We are not changing our earnings leverage targets, though for supply chain, no would expect same earnings leverage targets. Just to be -- it's going to be nice to get back closer to our target growth rates. But go ahead, Steve. John Sensing: Yes. I think in the quarter, as you think about Q4, there's going to be some continued optimization of the footprint, specifically in e-commerce and last mile. So I think that would continue, but it would set us up for a rebound in 2026. We also are seeing in the second half a few more plant shutdowns in automotive as they retool and move models around to different plants. So that's another one. It didn't really stand out in the quarter, but that's some items that we're seeing here in the back half. Operator: And our next question will come from Harrison Bauer with Susquehanna. Harrison Bauer: You've laid out your peak-to-trough market improvement opportunity of around $200 million, and that was off a 2024 base with used vehicle sales down on the gains part or maybe $50 million this year and rental earnings contributions also down notably. Do you think that peak-to-trough opportunity might be close to $300 million if we rebase the transactional earnings contribution to 2025? John Diez: Yes. Harrison, this is John. I think your observations are directionally accurate in that if you think about where we were in '24 from a gains perspective and where we're sitting today, obviously, we've had a pullback in our UBS gains. As a reminder, our expected normalized gains annually are in that range of $75 million. So clearly, more opportunity on the UBS side relative to where we were back in 2024. Rental has also taken a step back since then, which would suggest that it's a little bit more than the $200 million that we originally had calibrated. So we are going to need to make investments to grow the rental fleet and continue to invest in that fleet over time, which factors into that $200 million. But you're absolutely right. The $200 million is maybe not reflective of where we sit today, which is more depressed than where we were a year ago. Harrison Bauer: And as a follow-up to the non-domicile CDL conversation, I appreciate how you mentioned how the removal of drivers would impact different parts of your business. But what do you think the sort of other side of that where there might be additional trucks to the market and how that might affect used vehicle prices? Robert Sanchez: The question is additional trucks as a result of having fewer drivers? Harrison Bauer: Correct. Yes, like the displacement of drivers and what might happen with those trucks and any pressure to used vehicle prices or residual values. Robert Sanchez: So you're saying that -- yes, there'd be more used trucks in the market. Yes, I think that would be -- I mean, time will tell, but I think that would be more than offset by just the benefit of more trucks needing to be there to replace them, right? You're going to have to -- you're going to need more newer trucks or less or newer model year trucks to replace them. So yes, it's hard to tell exactly how it all falls out. But generally, I would tell you that as the market tightens for drivers, that is a good thing for used trucks, and that's a good thing for our rental business. Operator: And our next question will come from Brian Ossenbeck with JPMorgan. Brian Ossenbeck: Just wanted to ask for a little bit more specifics on the rental demand. I think you said it was a little bit weaker than seasonal. I don't know if you can call out anything in particular there. And similarly, for the e-com, it sounded like it was a productivity miss on maybe volume. So is there anything within that vertical that you can read into? Or is this more of a one-off from a specific customer and whatever their forecast was and whatever that warehouse was supposed to look like, but definitely didn't deliver? Robert Sanchez: So I'll let Tom address the rental, what we saw in the quarter versus what we expected. Tom Havens: Yes. Cristy mentioned it a little bit in her opening comments, but the third quarter was slightly down from our expectations and slightly worse than what we would typically see from a seasonal demand trend by about 1%. If you look at the trend year-over-year, you can see that. So as you step off into the fourth quarter here on that slightly lower demand, that's reflected into the fourth quarter forecast as well. So it's a little bit worse than what we had expected. Robert Sanchez: And certainly, well off of our target of where we want to be from a utilization standpoint. Steve, do you want to address the e-com? John Sensing: Yes, Brian, I'd say that productivity miss to a forecast was really a one-off situation in the quarter. Brian Ossenbeck: And I guess just on the rental demand, if it was worse, and I appreciate you updating the guidance for the run rate, but what -- is there anything in particular that surprised you to the downside? Was it a combination of things? Anything you can really point to? John Sensing: Yes. I guess there's good and bad in the detail of the data. But the good point is our pure rental business year-over-year, the demand for our non-lease customers renting trucks was flat year-over-year. So what we're seeing is our lease customers haven't picked up their demand. And we certainly haven't signed -- lease sales have been a little bit muted, and we would typically have awaited in leases as we sign new business. So those are the 2 areas that were down in demand. The other good point here, and you saw it in the numbers, the RPD was up about 5%. So we are seeing good rate discipline in rental. So I think when we see our lease customers start to rent again, that will be a really good sign for us. Operator: And we'll take a question from Ben Moore with Citi. Ben Moore: Just looking at the bright side, your strong sales performance in SCS, and you seem very excited about SCS leading growth in 2026. Can you talk more about your recent developments in your incubator for tech that had developed your RyderGyde, RyderShare, RyderShip and tech-driven sales. In our research, it looks like load board and broker apps using AI and supporting one truck owner operators. And I'd be curious to hear about similarity with your tech supporting your logistics managers and the outsourcers that you serve. John Diez: Yes, Ben, John Diez here. Two components to your question. One around tech. Clearly, what we're seeing, the investments we're making in RyderShare, RyderShip and some of the other technologies that are customer-facing is making a difference. That's really a big differentiator in what we're seeing in the sales activity. We are starting to see large customers take action in reshaping their supply chain. So these technologies are making a difference in those opportunities and how we compete. With regards to the second part of your question around AI, clearly, we're deploying some of these technologies, especially around Agentic AI technologies with regards to improving our service levels and improving the effectiveness of some of our solutions, specifically around our transportation management and brokerage part of the business. That's making a difference in optimizing rate for our customers, improving our overall service levels as well as improving our effectiveness around our freight bill audit and pay activity there. So you are seeing that in the supply chain space as well as some of the activities we're deploying to other parts of the business, including fleet management and dedicated. Operator: And our last question comes from Scott Group with Wolfe Research. Scott Group: Just real quick. Can you just let us know what's in the guidance for gains in the fourth quarter? And it's always a little hard to know with that slide on the residual values. Like how much cushion is left to stay within the ranges on residuals before we risk either losses or having to do something with depreciation assumptions? Cristina Gallo-Aquino: Yes. Scott, so on the guidance itself, well, first, let me remind you, in the quarter, pricing was somewhat stable. And at this level, we're still maintaining gains on the P&L. So I would expect the fourth quarter to be similar or somewhat better because we are expecting on the high end, a modest improvement in pricing. So we think that it will be higher than the third quarter results. As far as how much can we sustain, the sensitivity right now is we would need pricing to decline 8% from where it is today in order to hit the bottom end of our residual levels. We are not anticipating a decline. And so right now, that's not what we're forecasting, but that is the amount that it would need to decline to hit the bottom end. Scott Group: Okay. So it doesn't sound like, just to be sure, you're not planning any residual assumption changes or changes in accelerated depreciation or anything like that for next year. Cristina Gallo-Aquino: That's right. Right now, we're comfortable with our residuals where they're at. Operator: At this time, there are no additional questions. I'd like to turn the call back over to Mr. Robert Sanchez for closing remarks. Robert Sanchez: Okay. Well, thank you. We're near the top of the hour. So thanks again for your ongoing interest in Ryder and great questions. Talk to you guys soon. Operator: Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.
Operator: Thank you for standing by. Welcome to the Brandywine Realty Trust Third Quarter 2025 Earnings 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, Jerry Sweeney, President and CEO. Please go ahead, sir. Jerry Sweeney: Jonathan, thank you very much. Good morning, everyone. Thank you for participating in our third quarter '25 earnings call. As usual, on today's call with me are George Johnstone, our Executive Vice President of Operations; Dan Palazzo, our Senior Vice President and Chief Accounting Officer; and Tom Wirth, our Executive Vice President and Chief Financial Officer. Prior to beginning, certain information discussed on the call today may constitute forward-looking statements within the meaning of federal securities law. Although we believe the estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved. For further information on factors that could impact our anticipated results, please reference our press release as well as our most recent annual and quarterly reports that we file with the SEC. So during our prepared comments today, we'll briefly review third quarter results, provide updates on our '25 business plan and be prepared to answer any questions you may have. Looking at the third quarter, we posted solid operating metrics again, reinforcing the continued flight to quality and our strong market positioning. As we'll review in more detail, we do anticipate performing within all of our business plan ranges. At the midpoint, we have now executed over 99% of our spec revenue target. Our quarterly tenant retention rate was 68%, and we expect to end the year at the upper end of our range. Leasing activity for the quarter approximated 343,000 square feet, including 164,000 in our wholly-owned portfolio and 179,000 in our joint ventures. Forward leasing commenced after quarter end remained strong at 182,000 square feet with most of those leases taking occupancy in the next 2 quarters. Third quarter net absorption totaled 21,000 square feet. And as anticipated in our business plan, we ended the quarter at 88.8% occupied and 90.4% leased. In Philadelphia, we're 94% occupied and 96% leased. In the Pennsylvania suburbs, we're at 88% occupied and 89% leased with a solid pipeline of prospects for the existing vacancies. Boston remained at 77% occupied and 78% leased. We do, as we forecasted before, a large known move-out in the fourth quarter that will drop this region further into about 74% by year-end. Looking ahead, we have only 4.9% of annual rollover through '26 and one of the low -- which is among the lowest in the office sector and only 7.6% through '27. For the quarter, our mark-to-market was a negative 1.8% on a GAAP basis and a negative 4.8% on a cash basis. Both of those metrics, however, were heavily influenced by a large as is renewal in Austin that had a negative 16% GAAP and negative 18% cash, but no TIs were invested. Without that lease, the company would have been a 6.2% positive GAAP and 2.8% positive cash. By way of example, our CBD and Pennsylvania mark-to-market were positive at 6.7% and 3.1% on a GAAP and cash basis, respectively. Our capital ratio was 10.9%, slightly above our '25 business plan range. But based on leases already executed for the fourth quarter, we're maintaining our capital ratio range of 9% to 10%, which is the lowest capital ratio range we've had in over 5 years. Tour activity through the portfolio continues to accelerate. Third quarter physical tours were in line with second quarter, but more importantly, the square footage of those tours in Q3 exceeded the second quarter by 23%. Another positive sign is that as we track our deal status, letters of intent, legal negotiations out for signature is up 170,000 square feet or 25% from Q2 levels. For the quarter, 51% of all new leases were the result of a flight to quality, and we do not have any tenant lease expirations greater than 1% of revenues through 2026. Our operating portfolio leasing pipeline remains solid at 1.7 million square feet, which includes about 72,000 square feet in advanced stages of negotiations. To sum up, operations '25 is characterized by continued strong operating performance, supported by limited rollover risk, excellent capital control, the ongoing strengthening of our marketplaces and an expanding leasing pipeline. Looking at our balance sheet and liquidity, we remain in excellent shape with no outstanding balance on our $600 million line of credit and cash on hand at the end of the quarter. As previously disclosed, we recently issued $300 million of bonds due January of 2031, which generated $296 million of gross proceeds at an effective yield of [6.125%]. We used $245 million of those proceeds to repay our secured CMBS loan that was due in February of '28. That term loan payment leaves us fully encumbered in our operating portfolio, which provides much greater flexibility to lease and manage our assets and then also bought about $45 million into our unencumbered NOI pool. We have no unsecured bonds maturing until November of '27. And to ensure ample liquidity, we do plan to maintain minimal balances on our line of credit. As noted previously, our overall business plan is still designed to return us to investment-grade metrics over the next several years. As such, we will continue looking to reduce overall levels of leverage. And as a point of reference on that, our average cost of bond debt is slightly north of 6%, but we do have $900 million or about 50% of our outstanding bonds with coupons north of 8% which, assuming capital markets remain constructive, provided very good refinancing opportunities for us over the next several years. Looking at the markets from an overall standpoint, the real estate markets and overall sentiment continue to improve. That perspective is supported by the following fact patterns. Our pipeline activity continues to grow. Tour volume remains at very healthy levels. Rent levels and concession packages remain very much in line with our business plan and in select submarkets and buildings, we continue to push both nominal and effective rents. And all of our 2025 key operating goals have been achieved. The demand for high-quality, highly amenitized buildings remains a strong consumer preference. In Philadelphia CBD, as I noted on previous calls, market vacancy remains concentrated in a small number of buildings and high-quality buildings continue to outperform lower quality while pushing effective rents. Our competitive set continues to narrow through buildings being removed from inventory for conversion and several select assets still having financial issues, which essentially removes them from the leasing market. In fact, as an update from last quarter, our numbers now show that potentially 11 buildings totaling 5.1 million square feet of office is in the process of being removed from inventory for conversion to residential uses. As a frame of reference, that's about an 11% reduction in the overall office inventory in CBD Philadelphia. As such, with no construction on the horizon, our quality assets remain in an ever-improving competitive position. The city's life science sector, while still early in the recovery phase, should remain a forward growth driver, particularly with the return of capital as that submarket is backed by a strong regional health care ecosystem that includes over 1,200 biotech and pharmaceutical firms along with 15 major health care systems. Austin also remains in a recovery phase. Leasing activity continues to improve. As of last report, there are over 108 tenants actively seeking more than 3.5 million square feet with the tech sector accounting for 1.5 million square feet of that demand. So a bit of a resurgence from the tech company space demand standpoint. Third quarter leasing activity was 1 million square feet, which was 70-plus percent higher than in Q2. So green shoots are continuing to emerge in Austin, particularly in the higher-quality product. Our FFO for the quarter was $0.16 a share or $0.01 above consensus. We had 2 operating items that Tom will amplify in more detail that did impact our '25 guidance revisions. As previously announced, we will be recording in the fourth quarter an earnings charge totaling $0.07 per share related to the early prepayment of our secured notes. In addition, we did anticipate, as outlined on previous calls, making progress on recapitalizing at least 1 and possibly 2 projects of our development joint ventures in the second half of the year. We did anticipate these recapitalizations would add around $0.04 per share to 2025 FFO. During October, we did capitalize our 3025 JFK properties as the first step in this process. We do anticipate possibly one more later this year or very early in '26. As we talked before, the objective of these recapitalizations, which includes the full retirement of the preferred equity investments is to bring high-quality stabilized assets onto our balance sheet, which will deliver high-quality cash flow, improve earnings, reduce overall leverage and open up additional capital options for us on those properties. Due to several factors, including the slower stabilization of several projects and slower-than-anticipated interest rate decreases, these recaps are occurring a quarter or 2 behind schedule. As such, the full impact will not occur really until 2026. As a result of that, our revised FFO range as we outlined in our press release is $0.51 to $0.53 per share. Optimizing value in these development projects remains a top priority. With 3025 Avira and Solaris both 99% leased and stabilized, our joint venture development pipeline is really down to 1 Uptown and 3151 JFK. The leasing pipeline on these projects is up 700,000 square feet from last quarter. But as you noted in the supplemental package, even with this increase, given the uncertain timing of lease executions, the time to complete tenant space plans and the corresponding build-out time lines, we have slid the stabilization dates on both of those properties. Looking at Schuylkill Yards 3025, that commercial component is now 92% leased. We have a very good pipeline for the remaining space in the building. With leasing in place, the commercial component will stabilize in Q1 '26, immediately after our major tenant takes occupancy. Avira, as I noted a moment ago, is 99% leased and achieved full economic stabilization during the quarter. We're also experiencing that project a very good renewal rate with average double-digit rate increases thus far this year. 3151 was substantially delivered in the first quarter of this year and will be in a capitalization phase for the balance of '25. The pipeline on this project has increased to 1.7 million square feet, broken down to 60% office prospects and 40% life science prospects. They range in size from 25,000 to 200,000 square feet. Discussions with many of these prospects are active. Tour activity remains robust, and the project has been very well received. The life science market, as I noted, remains very much in a recovery mode. It's impacted by a challenging fundraising climate and public policy uncertainty, although we are seeing an increased traffic coming from that sector. Despite the strong increase in both Austin life science traffic, as I noted, we did slide the stabilization date just to be conservative on when leases will actually commence. At Uptown ATX, we're 40% leased, but have another 15% of the project in the final stages of lease negotiations. The remaining pipeline remains strong with tenant sizes ranging from -- between 4,000 to 100,000 square feet, including ongoing discussions with several full floor users. We're also nearing completion on building out some spec space on one of the floors to accommodate the accelerated move-in for several smaller prospects. Solaris, which opened about a year ago, has achieved stabilization during this quarter. So very successful on that with the renewal program well underway. As noted last quarter, our '25 business plan anticipated $50 million of asset sales. We have sold $73 million of properties at an average cap rate of 6.9% and an average price per square foot of $212. At this time, we're obviously not factoring any more sales closings during '25, but we'll certainly identify a target as part of our 2026 guidance. In general, though, from what we're seeing, the investment market continues to improve, both in terms of velocity and pricing. The pricing increase is notable because many asset trades are still on lower quality or underleased assets. For example, over the last 12 months, there have been about $475 million of sales in suburban Austin at prices per square foot ranging from $75 to $470 per square foot, an average occupancy of 67% and cap rates ranging from the low single digits to upwards of 12%. Likewise, in the PA suburbs, there were $242 million of sales at cap rates that range from 7% to 11% and an average occupancy of 85%. So buyers, including institutional buyers are continuing to reemerge. So we anticipate the investment climate will continue to improve into 2026. On the dividend, as noted, our Board decided to -- or previously announced, our Board decided to lower our dividend from $0.15 per share to $0.08 per share. We believe this revised dividend is sustainable and represents a CAD payout ratio much more in line with our historical averages. To the extent we continue to experience progress on the developments and cash flow growth from our operating properties, continued low capital cost and reduced borrowing costs to increase CAD, we'll certainly reassess our dividend going forward. But the idea was to set a good solid floor, give ourselves a position to generate $50 million of internal capital that we can use for reinvestment back into our properties. So with that, let me turn the floor over to Tom to review our financial results for the third quarter and an outlook for the balance of the year. Thomas E. Wirth: Thank you, Jerry, and good morning. Our third quarter net loss stood at $26.2 million or $0.15 per share. Our third quarter FFO totaled $28 million or $0.16 per diluted share and $0.01 per share above consensus estimates. Some of the general observations for the third quarter, our FFO from our unconsolidated joint ventures totaled a loss of $6 million or $1 million higher than our $5 million forecast, partially due to the delayed recapitalization activity during the quarter. G&A expense was below our reforecast by $600,000, primarily due to timing and other income was $600,000 above our reforecast due to various items. Other forecasted quarterly results were generally in line. Looking at our debt metrics, third quarter debt service and interest coverage ratios were 2.0, consistent with the second quarter. Our third quarter annualized combined core net debt to EBITDA was 8.1 and 7.6, respectively. Both metrics were within or below our business plan range. From a core portfolio composition during the third quarter, we made one adjustment to our projections. We had forecasted 250 King of Prussia Road becoming a stabilized core property during the third quarter. However, due to a tenant delay in occupancy, the stabilization date has been moved back to 1Q '26. As Jerry highlighted, we completed a successful 5-year bond issuance that closed in early October, which generated gross proceeds of $296 million. Proceeds were used to pay our $245 million secured CMBS loan, which was due in 2028. Both transactions closed in early October. It is important to highlight that in June of '25, we executed an unsecured bond cap of $150 million at 7.04%. And the recent issuance represents a 13% decrease in our unsecured borrowings since that June offering. In addition, the coupon on our recent bond issuance is slightly below our pro forma 6.26% weighted average effective rate. So we feel the significant increases to our interest expense from future refinancing should come down. We continue to maintain a strong liquidity position and use further sales and refinance proceeds to reduce unsecured debt and to improve our credit profile. We have time to work on this improvement with no unsecured bonds maturing until November 27. Giving effect to the CMBS loan prepayment at the end of the quarter, our wholly owned debt was 100% fixed with a weighted average maturity of 3.5 years. This excludes the 3025 construction loan, which will now be consolidated and matures in July of 2026. As highlighted, we adjusted and narrowed our guidance for 2025. The midpoint reduction is 10% and is comprised of $0.07 reduction from the transaction costs associated with the repayment of the $245 million CMBS loan, a reduction of $0.04 per share is primarily due to the delays in recapitalizing our development projects, which we expected to generate some benefit to our third and fourth quarter results. There is some negative carry from the bond issuance and the CMBS redemption, and we did have a delay in the stabilization of 250 King of Prussia. Looking at fourth quarter guidance, in connection with the October buyout and consolidation of 3025 JFK, the impact to our fourth quarter results will be an increase to GAAP NOI of $1.9 million, an increase to interest expense of $2.9 million through the consolidation of the construction loan and $2.7 million improvement in our loss from unconsolidated joint ventures and a reduction in interest income of about $600,000 to our reduced cash on hand balances. While that is muted to our fourth quarter, the opportunity to buy out our higher-priced capital partner ahead of a final stabilization gives us flexibility entering 2026. The $8 million of annualized NOI for the fourth quarter will increase to over $20 million in the first quarter and grow from there. With the property now wholly owned, we have the flexibility to refinance the above-market debt with lower-priced unsecured, secured or agency debt, and we assess -- as we also can assess the opportunity to find a common equity partner and potentially reduce our equity stake. Turning to the rest of the fourth quarter. Property level operating income will total about $71 million and will be similar to the last quarter results with 3025 being included in the fourth quarter, but lower NOI primarily due to a known move-out in Austin as well as the pushback of $250. Our FFO contribution from our joint ventures will total a negative $2 million, which is sequentially lower than the third quarter, primarily due to the fourth quarter consolidation of 3025, higher NOI at both Solaris and Avira and partially offset by a higher loss at 3151. G&A expense for the quarter will total about $8 million, representing a full year expense of $42.6 million and within our 2025 business plan range. Our interest expense will approximate [$38.5 million], sorry, and the capitalized interest will be about $2.5 million. Sequential increase in the interest expense is primarily due to the consolidation of 3025, lower projected capitalized interest and the negative carry impact of the $300 million of unsecured bonds, offset by the $245 million of CMBS loan repayment. Termination fees and other income will total about $2 million and net management and development fees will also be about $2.5 million. We anticipate no property disposition activity for the balance of the year. We anticipate no ATM or buyback activity, and our share count will be roughly 179.5 million shares. Turning to our capital plan. Our capital plan for the balance of the year totals $388 million and is fairly straightforward, but with some adjustments based on the recent capital markets activity. Our 2025 FFO payout ratio for the third quarter was 93.8%. And then looking at the larger uses, the repayment of the CMBS loan is $245 million. We used just over $70 million to acquire the preferred equity interest at 3025. Our development spend will total $24 million, which includes 165 and 250 King of Prussia Road. Our food hall at One Drexel Plaza is also in those numbers, and we have $14 million of common dividends, $8 million of revenue maintaining capital and $12 million of revenue creating capital. The funding sources are the $300 million unsecured bond issuance, $25 million of cash flow after interest payments and $5 million of a proposed and expected King of Prussia construction loan for our hotel. Based on the capital plan, we are anticipating an incremental $58 million of our cash being used and balance end of the year of roughly $17 million with no outstanding balance on our $600 million unsecured line of credit. While our 2025 business plan net debt-to-EBITDA range is between 8.2 and 8.4 due to the consolidation of 3025 JFK, we project this, will temporarily increase to 8.8x at the end of the fourth quarter. However -- and that is the 8.8x is generated by the consolidation of 3025 or about 0.4 of a turn. However, when 3025 JFK income stabilizes in 2026, that ratio will decrease by 0.3 of a turn for only a net increase of 0.1 of turn increase. Our net debt to GAV will approximate 48%. Our core net debt to EBITDA will also be impacted temporarily by the same EBITDA adjustments we just made for 3025. We anticipate our fixed charge and interest coverage ratio will be negatively impacted by the financing activity and the consolidation of 3025 and will reduce our fixed charge to about 1.8. With incremental income from the development projects, we anticipate that leverage will then begin to improve as we get into 2026. I will now turn the call back over to Jerry. Jerry Sweeney: Tom, thank you very much. Well, to wrap up, the operating platform remains in very solid shape, very limited rollover the next couple of years. We're growing effective rents in many of the submarkets, accelerated some of our leasing programs to make sure that we are doing everything we can to take advantage of both the recovering market and the reduction in our competitive base. We continue to have as a priority focus for the company, stabilizing all these development projects. And while we have great success thus far, we have work to do, and that pipeline has not completely translated to quarterly earnings growth yet. But as Tom outlined, even using 3025 as an example, there's tremendous levels of NOI coming into the balance sheet and P&L over the next year or so. So the groundwork has been laid, and we're building on the continued momentum to drive long-term growth. The operating platform, as I noted, remains stable with very limited rollover and our liquidity is in excellent shape, and we're well positioned to take advantage of continued market improvement. So Jonathan, with that, we're delighted to open up the floor to questions. As we always do, we ask that in the interest of time, you limit yourself to one question and a follow-up. Operator: Certainly, and our first question for today comes from the line of Seth Bergey from Citi. Unknown Analyst: This is Lauren on behalf of Seth. Could you go over in more detail how we should think about the timing and process of the recapitalizations? Jerry Sweeney: Sure. We'd be happy to. In fact, it's a great question because I know the recapitalizations and the timing of them is a big impact. So let me spend a few moments to answer your question. By way of quick background, those preferred structures were put in place as bridge capital for us that would preserve all the upside of these properties accruing to Brandywine. They were fixed payment structures with cost of capital from the high single digits to the teens. The financial reporting treatment of those structures was that we needed to recognize as a current period of expense, the accrued but not paid in cash return on that capital. And those structures were always designed to have the accrued unpaid return paid out of a capital event, which is exactly what just happened on 3025. And as we look at the development pipeline, as I think you all know because many of you have visited the properties, they're all very high-quality, extremely well-positioned assets in 2 mixed-use master planned communities. Two are now stabilized with 3025, which includes both the Avira and the office component. That took about 24 months from completion to stabilize. Solaris has stabilized. We delivered that in the late third, early fourth quarter of '24, and that stabilized about a year later. So good progress on that. The pipeline on 3151 and an Uptown is big enough where we have a clear path to stabilization, albeit with some uncertainty regarding the timing of when those leases will actually kick in place. But while the approach for each of the ones may vary a bit, the goal is to bring on as much NOI as possible onto our P&L and/or recover significant capital. And as we look at the different options, as Tom touched on a little bit, those recaps can be financed with noncore asset sales, lower cost financings, pari-passu ventures on some assets. So we have a fairly wide range of options on each one. But just spend a moment looking at each one, let me walk through. So 3025. We recapped at our highest cost of capital partner there. By the expensing of those preferred returns, we were going to incur in 2026, just shy of $10 million of preferred charges or about $0.04 a share. So that buyout eliminates that drag on earnings. And then the capital options we have are very robust. I mean the rate on the current construction loan is just shy of 8%. So if we did an unsecured financing to take out that construction loan, we can save close to 200 basis points or about $4 million in interest. And if we actually do an agency level financing on the residential piece, that overall cost of debt could be even lower. We also are looking at exploring a pari-passu joint venture, we could recover some capital. And then obviously, always considering whether we sell the residential component or not. So 3025, now with that buy behind us, take away highest cost of capital in the rearview mirror, full control by Brandywine. With the debt coming due, we think we have some positive refinancing outcomes at a very straightforward level. Solaris is stabilized, but cash flow and the NOI is still recovering. As we noted on previous calls, we -- to accelerate the lease-up in that market, we did give concessions burning off. We did give concessions to get that original lease-up achieved at the rate that we did. Right now, the capital markets aren't giving full credit to concession level rents. So we're now in the first wave of our renewals and very pleased with that progress. Our renewal rate on that project is 64%. We're getting about an 8% increase in rates. We're giving out no or very limited concessions on renewals and very limited concessions on new leases. Based on the expensing of that preferred in '26, we had about $4 million or about $0.02 a share of charges on that. So the approach on that project is we're already exploring a recap. That could be a sale or a joint venture on the existing asset. The current debt is just shy of 7% today. So again, agency debt on that would be somewhere in the very high 4s or low 5s. And our target really is in the first half of '26 to kind of achieve that recap once the concessions burn off on the lease schedule, on the renewals and the marketplace recognizes the net effective rents that we're generating on an ongoing basis. For One Uptown, we've clearly some leasing work to do there. We have about 75,000 square feet under advanced lease negotiations that would take that project to 55% to 60% and a really good pipeline behind it. Right now, we're projecting, if we do nothing with that about a $0.025 per share preferred expense charge in '26. And our approach there is get a little more leasing done to more visibility. We are already talking to several potential partners about a pari-passu recap. We have our lead tenant there has an expansion right in midyear that we'll see if they exercise or not. So One Uptown is most likely a late first half, early second half recap event. Looking at 3151, that's our second highest cost of capital. And we're obviously dealing with the challenge of getting that property leased up. The project has been very well received based on the pipeline by a number of select investors and several debt sources. So as the second highest cost of capital in our development ventures, we have about $8 million in expense charges on that property in 2026, just from the preferred. So with the process we have underway, we think that a partner buyout is a near-term event. That could be financed through other sales or much lower cost financing. We own that property without any debt on it. So our hope is to get 3151 across the finish line no later than the first quarter of '26. So hopefully, that road map is helpful. Operator: And our next question comes from the line of Manus Ebbecke from Evercore ISI. Manus Ebbecke: Just wondering if you could touch on a little bit more on Uptown ATX. It was obviously good to hear that the pipeline is up and you have some lease in the later-stage negotiation pass. Could you maybe clarify like out of the total leasing prospects that you see at the asset, how much is for spec suites versus like [indiscernible] users? What type of tenants those are, if those are real net growth in the market or just kind of like relocation tenants? And then on the second one, just like on the broader scope of the development land out there, what should we maybe expect in terms of starts in '26? I assume, obviously, like another commercial part is more kind of further out as we are leasing up the Block A first. But maybe I know there's contemplations for additional residential or hotel projects. So kind of maybe give us an idea in terms of time line or what to expect in '26 there as well. Jerry Sweeney: Okay. Great question. Thank you. And a couple of overview comments as you look at Austin. Look, I mean, Austin clearly has a disequilibrium, particularly in the CBD marketplace. I mentioned the number of tenants in the market looking and the increase in third quarter leasing activity. Any how, about 85% of that leasing activity in the market is being captured by Class A buildings. But when you drill down to the Uptown Domain submarket, which is really our competitive set right now since 405 Colorado downtown is fully leased, that's about 3.7 million square feet. That submarket is about 96.3% occupied. You've got about 68,000 square feet of sublease space in 2 domain buildings in 2 blocks of 35,000 square feet or so, which is down dramatically from just a year. One tenant indeed did put 100,000 square feet on the market for sublease in one of the domain tower buildings. So you've got about 168,000 square feet of sublease space in that submarket. So that's about 7% vacancy. So a fairly tight market. Also, the train station, which we noted in the supplemental package, did, in fact, start construction. That has spurred a lot of additional interest because now it's delivered in the first half of '27. CapMetro through this -- these are their numbers, not ours, projects us to be the second busiest train station along that red line, a real people mover that dramatically improves labor pool accessibility. So we think that's a nice catalyst to get some additional activity. And the other factor is that we have a number of tenants who are in our pipeline who are downtown or doing market-wide searches and we're really amplifying the fact through our team that there's a $23 cost difference between being downtown or being in Uptown. Most of that is -- there's a $5 stone in rent, $10 in expenses. So it's a very solid economic decision. So with that background, and sorry for all that detail, but I want to set the table for why we're still very optimistic about One Uptown success. We have a number of tenants in the pipeline. We have a number, frankly, that are kind of in-market relocations are kind of in the 4,000 to 10,000 square foot range that are kind of spec suite tenants prospects. And then we have a couple of tenants in the 80,000 to 100,000 square foot range. There are multiple floor tenants that have toured the property, and we're in discussions with them. And then we have one full floor tenant that is a lease under negotiation at this point. George, any other color you want to add to that? George D. Johnstone: Yes. I think we've got, like Jerry said, the one -- we have one floor dedicated to spec suites, and we've got either leases in late stages of negotiation and other pipeline prospects for that floor and then a lease out for another full floor user. And then, of course, we have the underlying expansion rights with NVIDIA, who signed last quarter. So again, I think we feel good about the pipeline, the composition of it, the spec suites have been well received. If the market continues to shift in the spec suite direction, we've kind of done that now with 2 floors and are prepared to shift quickly as needed. Jerry Sweeney: Thanks George. And then to answer the second part of your question, look, we're -- major folks at Uptown, make no mistake, is lease One Uptown and recap both projects. So that's #1 absolute top shelf priority. Recognize, I think, the value we have long-term at our Uptown development, we have a number of discussions underway with large users who would be interested in doing build-to-suits at that location. They are still early stage and are not detracting from our core mission of getting One Uptown leased. We are also, as we've noted in the SIP, moving forward with the planning of Block B to the objective there to be submitting site plan -- for site plan approval by the end of the fourth quarter of this year with hopefully getting approvals in late '26. Block B consists of a multifamily property rental, a large retail base and a hospitality component, i.e., a hotel and obviously, parking. We are working with a retail and hospitality partner as we think through the design components of that. And as those plans get finalized and priced, we will be looking for the right capital answer to facilitate that project moving forward. Obviously, with the partners we have involved, they have capital resources. Brandywine has significant embedded value in the land that, that project will sit on. So we think that's a very viable option for us in terms of equity contribution with land value. So we're looking at a number of other, as I mentioned, build-to-suits, but again, very low priority compared to mission-critical of recapping these development projects and getting One Uptown leased. But certainly happy to provide any color on that as the quarters go by. Operator: [Operator Instructions] Our next question comes from the line of Dylan Burzinski from Green Street. Dylan Burzinski: Maybe just first one on -- can you explain why you all decided to issue the unsecured notes and then take out the CMBS debt. If my recollection is correct, I thought the CMBS debt didn't -- wasn't too pricey in terms of the rate. So just sort of curious you guys' thoughts on how you guys approach that. Thomas E. Wirth: John, Dylan, this is Tom. I think the way we approach this is that we've been looking at the CMBS loan and thought about actually prepaying a couple of assets and bringing them out as unsecured for a couple of reasons, one for leasing, one potentially to do something with them on the capital market side. So we were already thinking about it. When the rates came in as much as they did and the differential in rate was only a quarter -- 25 basis points, basically, we thought, let's unencumber the assets. It helps our [UAP], it helps all of our unleveraged ratios, and we thought that was a good execution. We knew there was the charge, $10 million of cash that went out the door with that. But it also thought it was also a good way to reset our rates with the debt capital markets. So the 7.04% we had done -- the 7.04% cap we did in June was at a very high premium. I think it was close to 107% of face. And I think that really was hurtful in us getting that rate any lower. I think doing something at par, bringing our rate down into the lowest kind of helped reset that bar. Since it was issued, it's been trading fairly well, right around par. So we thought that was also a consideration as well. Dylan Burzinski: Maybe just a broader one. I know there's a few assets on the market in downtown Philadelphia. I'm not sure if you guys are sort of interested in buying assets. But I guess just -- as you guys think about your cost of capital today, just sort of long-term plans as it relates to how you think you can close the disconnect between where share trades versus where an NAV estimate might be, especially ours? And maybe you can sort of tie in just longer-term leverage targets and that it might be helpful. Jerry Sweeney: Yes, Dylan, Jerry. Thanks for the question. Yes. Look, I think the -- we think we have a couple of really good ingredients to start to turn that perception around fairly quickly. And that is the leasing up of the development projects and proving out their value proposition and then recapitalizing kind of, i.e., changing the capital stack of those projects that really does remove the earnings overhang. I mean if you really take a look at -- if you took the existing preferred structures without being touched, I mean, there's a significant impact to earnings because of the financial reporting treatment we have on those. So simply by clearing up those recaps, getting control of those assets and then pursuing better cost of capital outcomes for those I think, really winds up putting us in a great position with -- as I look at '26 into '27. So I think that's going to be a very key ingredient for us. Look, the operating portfolio continues to perform very well. We have -- as with any portfolio, there are some soft spots. But I think we're very encouraged with what's happening in each of the different submarkets we're in that really give us some significant ability to continue to drive effective rents across the board. We do have some assets that we have on the market and we will put on the market in '26 that we feel are not great growers for us and actually adversely impact some of our growth objectives going forward. And as we have done in the past, we look at those assets from a net present value standpoint and determine at what point in time we should sell those. So I think the major issue we're focused on right now is proving out the value thesis for these development projects. I think it's generally recognized in the private markets that the land holdings and the approvals we have in place at Uptown and at Schuylkill Yards are incredibly valuable long-term value generators. Our challenge, given our public cost of capital is to determine from a market timing standpoint, when we should move forward with the next phase, but more importantly, how we finance those. I think the objective we had going to this round of development was we did the preferred structures, which had an incrementally higher cost of capital, but left all the residual value to Brandywine. I think as we look forward at some of the future development starts, assessing different capital structures there, I think, will be very important because the ultimate objective is for us to get back to investment grade. We think we have a clear path to do that as we look at the numbers going forward. And one of the impediments for us getting to investment grade has really been the impact on our fixed charge coverage. And the reality, our fixed charge coverage has been impacted because our debt costs have almost doubled in the last 4 years. That's why as I even noted in the comments, when I look at the existing bond pricing, as Tom touched on our bonds are pricing -- are trading pretty well. We have 2 bonds outstanding, $900 million at rates north of 8%. So we think the refinancing opportunities there as the time is right, bring a lot of those financial and operating metrics back into a very good position. So I think the takeaway point, we got some near-term hurdles in terms of getting these development projects leased. We've got to prove out to the marketplace that we can effectively recap these properties and create long-term value, continue driving the operating results of the company as well as we have for the next few years into an ever-improving market and then really focus on how we overall reduce leverage to hopefully improve our overall cost of public capital. Operator: And our next question comes from the line of Upal Rana from KeyBanc. Upal Rana: Could you provide some detail on the Board's decision to reduce the dividend? How should we be thinking about timing of the cash flow ramping up in '26 in order to maintain a CAD payout ratio that's a little more sustainable? Jerry Sweeney: Yes. Look, I think as we took a look at and recommended to the Board a couple of things. One is, as I've outlined before, the Board really looked at what the operating cash flow was, what our refinancing requirements were, when we would expect the development projects to ramp up and what capital was really required for the recaps. And when they took a look at all of that and we looked at the '25, '26 and '27 landscape, the theory was, after we had done some preliminary work on recapping some of the joint ventures, it became very clear that the cost of outside capital was a lot more than our internally generated capital. And the opportunity for the company to save $50 million of cash flow at a time when, as I mentioned with Dylan, our public cost of capital is prohibitive. It simply seem to make a lot of sense. As we looked at the numbers, where we've reduced the dividend to, we feel, as I mentioned in my script, is very sustainable. We do believe that as we start to bring more NOI on to the P&L, we have an opportunity to grow that dividend. And then most importantly, as the last point, we talk to a lot of shareholders. We ask them their opinion on how they view the capital landscape, how they viewed the challenges the office sector faces. And I think a lot of our shareholders are very supportive of a dividend reduction as a pragmatic conservation of capital. So all those factors went into the Board's decision. We had a good discussion and validated that the level that we cut it to is certainly, we think, a floor from which we can grow. And hopefully, as the market conditions improve, the debt markets get more constructive, we can generate more liquidity that we'll be in a position to go back to raising that dividend. Upal Rana: Okay. Great. That was helpful. And then do you have any updates on the strategy to deal with the IBM move-out in Austin coming in '27? Jerry Sweeney: We actually do. Look, IBM is going to be vacating spaces between the end of the -- well, really beginning of the second quarter and through the third quarter of '27. The impact on '27 after factoring what we think will be expense savings because that lease -- we're getting reimbursed for expenses, many of which are variable. So we think it will be about a $12 million hole we need to fill. We're going down a couple of different paths. One is when we take a look at the existing leasing in place in our development projects, excluding 3151, we think the year-over-year growth in that income stream will more than amply cover that '27 loss of revenue. But more importantly, we are spending time looking at renovating the 902, 904 and 906 buildings at Uptown, which is about 500,000 square feet. We have plans underway. Our base in those buildings is very attractive. We are in the throes of pricing those renovation programs through, including thinking through the additional infrastructure that's required. And as it stands right now, we think we're in a very good position to deliver completely renovated buildings, they -- frankly, as you may recall, they have great super structures. It's really new facade, new mechanical systems that will be able to deliver these state-of-the-art newly renovated buildings at a significant pricing discount to existing office rents that we think can really accelerate the absorption there. So one of our hopes if the plan progresses on schedule, is that we'll be able to deliver the first level of renovation in early '27, kind of dovetailing with one of the IBM vacations. And one of the reasons we're able to do that, you may recall, is we were very successful in getting some additional approvals from the city of Austin to increase the density at Uptown from 3.1 FAR to 12.1 FAR and increase the height limits on the buildings from 180 to 491 feet. We also have the ability to transfer density between blocks. So by renovating those buildings, which are lower rise, we're not compromising any future growth density by doing that. And I mean, the maximum density under our zoning is well, well beyond what we're currently planning to build. But having that flexibility to respond to changing market conditions, particularly given that train station and the growth of residential neighborhoods in that marketplace, we think it is a very valuable commodity. So game plan is, I think we can bridge the gap with just incremental income coming through the NOI from these new development projects, again, excluding 3151 and the renovations coming online will help to all deliver better NOI for us looking into '28 and '29. Hopefully, that answers your question? Upal Rana: Yes, that was great. Operator: This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Jerry Sweeney for any further remarks. Jerry Sweeney: Jonathan, thank you very much. And thank you all very much for participating in our third quarter earnings call. Our next call for fourth quarter and '26 guidance will be in early February, and we look forward to talking to you at that time. So thank you very much. 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, everyone, and welcome to the Horizon Bancorp, Inc. conference call to discuss financial results for the third quarter of 2025. [Operator Instructions] At this time, I'd like to turn the floor over to Todd Etzler, Executive Vice President, Corporate Secretary and General Counsel, for the opening introduction. Todd Etzler: Good morning, and welcome to our third quarter conference call. Please remember that today's call may contain statements that are forward-looking in nature. These statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those discussed, including those factors noted in the slide presentation. Additional information about factors that could cause actual results to differ materially is contained in Horizon's most recent Form 10-K and its later filings with the Securities and Exchange Commission. In addition, management may refer to certain non-GAAP financial measures that are intended to help investors understand Horizon's business. Reconciliations for these measures are contained in the presentation. The company assumes no obligation to update any forward-looking statements made during the call. For anyone who does not already have a copy of the press release and the supplemental presentation issued by Horizon yesterday, they may be accessed at the company's website, horizonbank.com. Representing Horizon today are Executive Vice President and Senior Operations Officer, Kathie DeRuiter; Executive Vice President, Corporate Secretary and General Counsel, Todd Etzler; Executive Vice President and Chief Commercial Banking Officer, Lynn Kerber; Executive Vice President and Chief Financial Officer, John Stewart; and Chief Executive Officer and President, Thomas Prame. At this time, I will turn the call over to Thomas Prame. Thomas? Thomas Prame: Thank you, Todd. Good morning, and we appreciate you joining us. Horizon's third quarter results, highlighted on Slide 3, display the successful execution of our previously announced strategic balance sheet repositioning and the continued excellent performance of our community banking franchise. The balance sheet restructuring effort has exceeded our initial expectations, and it is on pace to achieve the top-tier financial outcomes outlined in our plan. The team did an outstanding job on the equity and debt raises as well as the subsequent execution optimizing the securities and loan portfolios as well as the funding sources of our balance sheet. Additionally, our third quarter results further evidence the continued strength of the organization's exceptional core community banking franchise. Our net interest margin continued to expand with the commercial loan engine producing solid results and the core client-driven deposit franchise displaying its strength. Horizon's credit quality remained excellent and the management team remains diligent on managing core operating expenses. A few key items to note within the quarter results. The margin continued to expand for the eighth consecutive quarter with an exit run rate in September above 4%. Loan balances for the quarter reflect the planned runoff and sale of the lower-yielding indirect auto portfolio. Net of these activities, loans would have increased approximately $48 million, led by the efforts of our commercial banking teams. Our relationship-based deposit portfolios remained resilient in the quarter with predicted outflows within higher cost non-core transactional accounts as outlined in our balance sheet restructuring plan. Additionally, the combined relationship-based fee income categories of service charges, wealth, card and mortgage income performed well and an increase from the third quarter, and expenses outside of the transaction-related activities remain well managed and aligned with our internal and market expectations. This provides confidence in our ability to deliver additional positive operating leverage moving forward with a more effective balance sheet. Heading into Q4 and 2026, we are confident in delivering a superior community banking model to our shareholders, consisting of top-tier financial performance and a balance sheet producing peer-leading capital generation metrics. As we move forward in a front-footed position and with significant positive momentum, we will remain steadfast in our disciplined approach to create durable returns and sustainable long-term value for our shareholders. Turning to Slide 4. As I mentioned previously, the team did a great job on the balance sheet restructuring with the majority of the initiatives comparing favorably to our expectations in terms of financial outcomes and timing. Our execution left minimal activities for the fourth quarter, which included the redemption of the previous sub debt that has already been completed and the continued modest reduction of select non-relationship high-cost transactional accounts. As previously mentioned, the team has already seen a significant positive increase in performance in September, and we are confident the fourth quarter will provide a clear outlook of Horizon's top-tier financial performance and peer-leading capital generation model. John will provide additional insight into our Q4 outlook and 2026 guidance during this presentation. Overall, a very solid quarter, reflecting the disciplined execution of the balance sheet initiative, combined with the continued strength of the high-performing core banking franchise. A key element of our go-forward plan will be continued profitable loan growth and excellent credit quality that has been a cornerstone of Horizon's success. I will transition the presentation to our Executive Vice President and Chief Commercial Banking Officer, Lynn Kerber, who will share highlights for the third quarter on our loan growth and continued excellent credit performance. Lynn? Lynn Kerber: Thank you, Thomas. Net loans held for investment decreased $162 million in the quarter, consisting principally of net growth in commercial loans of $58 million and the $210 million combined impact of quarterly runoff and sale of indirect auto loans. Commercial loans continues to be our primary lending focus at this time, driven by our core franchise and focus on traditional lending products. Net commercial loan growth for the second quarter was $58 million, representing 7% for the linked quarter annualized. Net growth in the quarter also reflects syndication of $10 million in equipment finance instruments with a net gain on sale of $300,000 in the quarter, representing a 3% gain on sale. Overall, our pipeline remains steady and quarterly volumes are consistent with our averages for new origination activity, payoffs and that line of credit activity. As we look forward to 2026, our focus remains on steady diversified growth, disciplined pricing and credit and growing well-rounded customer relationships to drive cross-sell activity in deposit gathering and treasury management services. Residential mortgage lending continues to be a foundation product for the bank, and volume has been predominantly sold in the secondary market to align with our balance sheet strategies and the generation of gain on sale fee income. Balances for the third quarter were essentially flat in alignment with this strategy. Turning to credit quality and the allowance. Credit quality remains satisfactory with substandard loans and nonperforming loans representing 1.31% and 0.64%, respectively, consistent with credit performance over the past year. Net charge-offs were $800,000 in the quarter, representing 7 basis points on an annualized basis, which compares to historical performance over the past year. Year-to-date charge-offs totaled $1.9 million, representing an annualized charge-off rate of 5 basis points. Finally, our allowance for credit losses decreased to $50.2 million, representing an allowance to credit loss to loans held for investment of 1.04%. The reduction of $4.2 million consisted predominantly of release of reserves related to the indirect auto loan portfolio in the amount of $3.1 million as well as the benefit of a reduction in loss rate experience in the portfolio. Provision for credit losses was a net release of $3.6 million, which is a combination of the allowance reduction of $4.2 million, replenishment of quarterly charge-offs, modest changes in unfunded commitments and the release of the prior reserve on the Held-To-Maturity portfolio. We continue to monitor economic conditions and future provision expense will be driven by anticipated loan growth and mix, economic factors and credit quality trends. Now I'd like to turn things back to Thomas, who will provide an overview of our deposit trends. Thomas Prame: Thank you, Lynn. Moving on to our deposit portfolio displayed on Slide 9. Horizon's core relationship balances continue to show the strength of the franchise's community banking model. Noninterest balances remain resilient with planned outflow and higher rate transactional balances aligned with the balance sheet transformation. We are very pleased with the stability of the core client base relationships and optimistic about this segment of our deposit portfolio, fueling our loan growth in subsequent quarters. Additionally, we believe our deposit portfolio continues to be well positioned to benefit the organization moving forward with its granular composition and long-standing relationships in our local markets. The team has made significant improvements in growth, enhancing our go-to-market activities for treasury management services and proven its agility by leveraging our excellent branch distribution and multiple funding options to create shareholder value. Let me now hand the presentation over to our Executive Vice President and Chief Financial Officer, John Stewart, who will walk through additional third quarter financial highlights and our outlook for the remainder of 2025 and into 2026. John Stewart: Thank you, Thomas. Turning to Slide 10. Q3 marks the eighth consecutive quarter of net interest margin expansion, totaling 110 basis points from Q4 of 2023. And as I will discuss in a minute, the expansion is planned to continue. That said, these results are the direct result of the execution of a series of intentional initiatives and transactions to reposition the mix and profitability of our balance sheet, which culminated in this quarter's activities. Most notably, we have completely changed the company's risk profile, significantly curtailing both liquidity and interest rate risk through these actions, while establishing a pro forma cash flow profile that should create durable returns for our shareholders. Specific to Q3, the net interest margin increased by 29 basis points to 3.52%. While the margin this quarter was partially impacted by the repositioning of the balance sheet prior to those events, we continue to see the positive momentum in the margin, driven by the same key organic trends we have been experiencing for several quarters now, well-priced commercial loan growth leading the asset remix story, while core deposit balances continue to deliver stable funding costs. Turning to the balance sheet repositioning. There was only a partial quarter impact in the 3.52% margin. The common equity raise closed on August 22, which was the same day all the bond sales were completed. $535 million of the reinvestment settled during the last 10 days of August, with the remaining roughly $45 million in purchases settling over the first 10 days of September. The Federal Home Loan Bank advances were also repaid during the last week of August. The $100 million subordinated debt issuance closed the last week of August and the targeted high-cost transactional funds runoff of about $275 million during the quarter took place over the last few weeks of September. Therefore, while our September margin exceeded 4%, it too, does not capture the full benefit of the balance sheet repositioning. As you saw on Slide 4, there are still a few items yet to make their way through the margin. First, a full month of the $275 million in deposit runoff from September; second, the balance of the $125 million in targeted deposit runoff remaining as of quarter end, which we anticipate will largely take place over the fourth quarter. And finally, the October 1 payoff of the $56.5 million of subordinated debt, which carried a cost of about 9.8%. Therefore, while we are expecting the margin to expand further in Q4 into the range of 4.15% to 4.25%, we should exit the year a bit above that in the range of 4.2% to 4.3%, where it should generally remain through 2026. This view is consistent with our prior expectations following the balance sheet efforts. Slide 11 is a new slide showing an improved return, more liquid and lower risk profile of the securities portfolio in June compared with September. As you can see in the top left quadrant, the mix of the portfolio is significantly different, carrying less credit risk and a greater mix of highly liquid assets, and it is earning more with less overall duration. Additionally, the reliance on investments in our earning asset base has been reduced and notably, the portfolio uses significantly less capital. All that said, the new portfolio was constructed to complement the interest rate risk profile we set out to achieve with the new balance sheet, which is relative neutrality to changes in rates. We intentionally purchased cash flows that are already fully extended with prepayment optionality that is significantly out of the money for the underlying borrowers. Our objective was to build a portfolio of stable cash flows at strong yields that complements the rest of the balance sheet and provides the functional liquidity it is ultimately there for. As you can see on Slide 12, reported noninterest income was materially impacted by the balance sheet actions this quarter and included the $299 million loss on the sale of securities and the $7.7 million realized loss on the sale of the indirect auto portfolio, which includes the write-off of any related unamortized dealer reserve. The auto loss was partially offset by the associated release of the $3.1 million allowance for credit loss against this portfolio, all of which was contemplated in our original planning. Excluding these items, which will not carry forward in our results, our fee-based businesses performed well during the quarter and for the first time, included about $300,000 of gains on the sale of syndicated equipment finance credits. This is a business line we expect will grow in contribution to our fee income throughout 2026. Additionally, service charges and interchange fees reflect our concerted efforts to grow the core client base and seasonally strong market activity. Looking ahead to the fourth quarter, while we do anticipate some normal seasonal headwinds to impact service charges, interchange and mortgage and therefore, expect Q4 fees to approximate $11 million, this result would still express high single-digit year-over-year growth, excluding the securities loss in the year ago period. On Slide 13, here, too, you can see the quarterly expense results were also impacted by our balance sheet activities. Specifically, the quarter includes the $12.7 million prepayment penalty on the repayment of the higher cost $700 million in Federal Home Loan Bank advances. Additionally, the quarter included about $900,000 of expenses directly attributable to these efforts that are not expected to carry forward. Excluding these 2 items, total noninterest expense was roughly flat linked quarter and is trending favorably compared with our previously issued full year guidance. Turning to capital on Slide 14. While each of these metrics was ultimately impacted by the balance sheet activities, in all cases, the outcome exceeded our initial projections. It resulted in better-than-expected execution, resulting in lower realized losses. Just a couple of quick comments on a few of the metrics. First, the leverage ratio is expected to recover back closer to Q2 levels in the fourth quarter as the balance sheet reduction moves its way through the average asset denominator. Second, the total risk-based ratio is expected to revert back lower in Q4, closer to Q2 levels as the September 30 Tier 2 capital balance includes both the new and previously existing subordinated debt issuances. As of October 1, we have repaid the more expensive $56.5 million prior issuance. As we have previously communicated, we are comfortable with the company's current capital position, particularly against what is a significantly derisked balance sheet. Additionally, as our outlook suggests, our peer-leading levels of profitability will accrete capital very quickly, which you will see in the coming quarters. To provide some clarity on the other side of the balance sheet transition, we have provided an outlook specifically for the fourth quarter on Slide 15. Overall, we are pleased with the progress and the outcome of the balance sheet efforts, some of which will continue here in the fourth quarter. More notably, the strength of the core community banking franchise remains intact, and we are well positioned to deliver durable top-tier performance metrics starting in the fourth quarter. There are a few items I'd like to highlight. Growth in loans held for investments is expected to remain in line with what we experienced in Q3 on a normalized basis, which is for mid-single-digit growth on an annualized basis. Most of the growth is expected to come from our organic commercial growth engine. Deposit balances will decline in Q4, primarily related to the remaining targeted reduction of high-cost non-relationship balances. Non-FTE net interest income is expected to grow in the high single-digit range from the reported Q3 figure. This will be driven by the continued expansion of the net interest margin into the range of 4.15% to 4.25%, while average earning assets will decline from Q3 to slightly below $6 billion from the impact of the planned deposit runoff and the subordinated debt redemption. This outlook does include two 25 basis point rate cuts in October and December. Total reported expenses should approximate $40 million for the quarter, but will include about $700,000 of nonrecurring expense from the write-off of the unamortized issuance cost from the previously existing sub debt position. The Q4 effective tax rate should be in the range of 18% to 20%, which is attributable to overall stronger pretax income and a significantly smaller tax-exempt municipal exposure. Given the reduced tax-exempt exposure, it should also be noted that our fully tax equivalent adjustment to income is expected to be about $1 million per quarter going forward or about half of the prior run rate. As our fourth quarter outlook illustrates, we are pleased with the performance levels Horizon will achieve going forward. Additionally, while we are currently finalizing our budget for 2026, we would like to provide a few comments on our initial view for the year. Overall, we are in alignment with the current consensus estimate for earnings per share at approximately $2 per share. Our initial look at full year non-FTE net interest income is for growth in the low double-digit range. Our FTE adjustment for 2026 should approximate $4 million, as noted earlier. The net interest margin on an FTE basis should remain relatively consistent in the range of 4.2% to 4.3%, which is in line with our prior projections following the balance sheet repositioning. Our current view on fees and expenses is generally consistent with current consensus expectations. Similar to Q4, the effective tax rate is expected to approximate 18% to 20%. Overall, 2026 should be a strong year for Horizon, steady growth with durable peer-leading returns on assets, returns on tangible common equity and internal capital generation. With that, I will turn the call back over to Thomas. Thomas Prame: Thank you, John, and I appreciate the summary of the third quarter outlook for Q4 and initial guidepost for 2026. As you can see from our financial results, we are an organization that will quickly realize top-tier financial metrics and peer-leading capital generation performance. We expect that the well-executed balance sheet restructuring, combined with Horizon's long-standing and high-performing community banking model will deliver durable returns and sustainable long-term value for our shareholders. As we move into 2026, we will be front-footed in our optionality to create further shareholder value through a disciplined operating model, focus on profitable growth and smart stewardship of the positive capital generation platform we have created. The third quarter was an excellent performance on many fronts for the team, and we look forward to continuing to deliver on our promise to create significant shareholder value moving forward. This is the end of our prepared remarks, and I welcome the operator to open up the lines for questions for our management team. Operator: Our first question today comes from Brendan Nosal from Hovde Group. Brendan Nosal: Maybe just kind of starting at a top-level strategic view here. It's just -- it's a vastly different company today than it was 1, 2, 3 years ago. And in recent years, the narrative has just been so focused around the securities book and capital. And now that you finally kind of put that issue to bed, can you just kind of update us on what you think the new narrative for Horizon is and the next major areas of strategic emphasis? Thomas Prame: Thanks, Brendan. Thomas. I appreciate the question very much. We're very pleased with the organization as it exits Q3 and goes into Q4. And I think our financials are showing what we consider a new horizon heading into 2026. What you'll see with us is that we're going to be very consistent about the positive stewardship of capital that we're going to be delivering to our shareholders on a go-forward basis. Our new balance sheet is positioned well to generate capital at a significantly greater pace than before. We're also going to be very pleased with the optionality that this is going to present the organization, different than perhaps what you said before, we are a little bit more focused on the securities positioning. But again, we're going to be very measured in our deployment strategies and don't feel like we need to go out and quickly do something, but rather take a very measured approach on profitable deployment options going forward. That could be, for us, as we move into '26, very logical and accretive M&A that's additive to the community banking platform that we just created, expansion or lift of teams or acquisition of fee income platforms that create durable and franchise value earnings profile. And also, we're going to be very front-footed position moving to '26. But again, we'll be very respectful of capital deployment strategies and making sure that we enhance shareholder value. Brendan Nosal: Okay. Maybe just as a follow-up to that on capital specifically. I guess, first, are there any other potential outlets for capital outside of organic loan growth and M&A? And then second, now that there's a potential M&A element to the story, just kind of take us through some of the criteria, whether it's size or geography or business mix that you would be interested in? Thomas Prame: Sure. Thanks for the follow-up question. Specifically in M&A, Horizon has a great history of M&A success over -- for many decades. It's really been built on the fact of our great brand reputation in our core markets and also being just a really good company to transact with. As you look over the last couple of years, we have not been as well positioned in the space because of some of the earnings power that we had at the time and also the risk elements within the balance sheet. Heading into 2026, we have a significantly different and more efficient and derisked balance sheet that's going to be producing peer-leading financial metrics and top-tier capital generation. Successful M&A for us is going to be consistently focused around franchises that add to the current franchise that we have that we feel is extremely profitable. The size will probably be between $300 million, $400 million up to several billion dollars. But again, it's going to be logical and very accretive to the franchise from a space. We think there's great opportunities for us in Michigan and also in our core markets of Indiana. And again, from a positioning standpoint, Horizon will be in a stronger position and very much more front-footed. Again, the profile of the organization is significantly different and more optimistic. And also the balance sheet is more attractive towards potential partners, who would look at Horizon as an opportunity for them to be a long-term partner with us. Operator: Our next question comes from Terry McEvoy from Stephens. Terence McEvoy: Maybe start with a question for John. You mentioned the balance sheet being pretty rate neutral in terms of changes. When I just look at the mix today, a little more commercial heavy, fewer higher beta deposits and probably less fixed rate assets, which would tell me more asset sensitivity. Could you just kind of tell me where I'm wrong and how you can -- how you support that rate-neutral position? John Stewart: Yes. Terry, thanks for the question. I appreciate that. Yes, I think as you look forward, I mean, the changes in the mix of the balance sheet would certainly lean us to be very modestly asset sensitive. We do a lot of -- obviously, the shock analysis, a lot of non-parallel shifts. And we really just don't see much change if we get a steepening or a flattening of the curve. We've got about 25% of loans are going to be floating on the asset side, a very modest amount of the securities portfolio is going to be floating. And then on the other side of the balance sheet, we do have some callable CDs in the structure and some really good deposit positioning such that we don't think that there'll be much of an impact from changes in rates either way. Terence McEvoy: And then maybe, Thomas, a follow-up question for you. There's the legacy bank in Michigan where generations of families and businesses have banked, that's going to be changing names. I guess my question is, how do you play more offense? And how do you balance that with some of the expense outlook that John talked about? Thomas Prame: Thanks, I appreciate it very much. First, I agree. I think the opportunity for growth in Michigan is going to be very optimistic going forward. There are some transactions that are happening in the marketplace that are giving us some opportunities. I think we also need to remember, over the course of the last 2 years, from an offensive standpoint, specifically in commercial and treasury, we've made some really good human capital decisions there and some great teams in Grand Rapids, Lansing, Detroit in those growth markets and also Southwest Michigan. Those teams are in place and many of those individuals are now coming off their non-competes. Lynn has also done a really nice job with the treasury management franchise. We've added about 40% more salespeople. A lot of those individuals are in the Michigan market. So from an expense base, I don't think we're really looking to add a lot to our expense base in the franchise versus more take advantage of the expenses that we've already taken and really be able to open our stride on new growth. Operator: Our next question comes from Nathan Race from Piper Sandler. Nathan Race: Congrats on all the progress coming out of the quarter. Just going back to the margin discussion, John, I wonder if you could just help us just in terms of with the securities portfolio repositioning, how much cash flow coming off each quarter over the next 12 months or so? And also kind of what the back book repricing tailwinds look like on the commercial real estate portfolio that's fixed. Thomas Prame: Sure. Thanks, Nathan. I'll pass the second question over to Lynn and answer your first question first. In terms of the cash flows coming off the securities portfolio, honestly, very minimal. That was part of the repositioning efforts. As you could see on the slide, we bought a lot of discounted cash flows. So those are bonds with underlying coupons kind of in the 2s and 3s. And so that's what I was referring to when I said the optionality for the -- the prepayment optionality for the borrowers underlying those are de minimis. So as we look out over the next year, it's probably only, call it, $10 million to $15 million worth of cash flow coming off that portfolio each quarter, not much. Lynn Kerber: Yes. In regards to commercial real estate repricing, I don't have the prepared dollars for you this morning. But when we've done that analysis in the past, it's a fairly minor portion of our book. As I recall, it was less than 5% per year for 2026. So a pretty small amount. Nathan Race: Okay. Great. And then, John, I think you mentioned about 17% of the portfolio is floating on the loan side of things. Is there managed deposit rates that you can kind of reprice kind of in lockstep with Fed rate cuts at a similar proportion, just given some of the changes in the deposit portfolio in 3Q? John Stewart: Sorry, just repeat the question again one more time. I was -- the number I quoted on the repricing on the loan side was about 25%. If you could just repeat the second question? Nathan Race: Yes. No, I'm just trying to understand kind of where the short-term rate-sensitive deposits stood at in terms of what you can reprice kind of lockstep with what you have repricing in terms of those floating rate loans. John Stewart: Yes, sure. I mean we do still have a core public funds business within the balance sheet. So the transactional -- higher cost transactional balances that we were intentionally running off does leave us with -- we do still have some public funds exposure that will reprice lower. We've seen some of that recently. We do still have some commercial betas that we can bring down or commercial deposits with some nice betas that we can bring down. In those assumptions, we actually don't assume much repricing downside beta with the consumer balances really at all, but that should be enough to get us there. As I also mentioned, we do have some callable brokers in there that will give us some really good optionality if that market continues to cooperate. Nathan Race: Okay. Great. And then maybe one last one for Thomas. Just going back to your M&A commentary. Curious if you're just seeing any kind of increase in dialogue or opportunities to maybe consolidate some of those subscale institutions across your footprint or is still somewhat of a slower pace of conversations these days just relative to the increase in activity we're seeing across the industry these days? Thomas Prame: Thanks for the question. I think starting end of last year, beginning of this year, the increased dialogue was definitely evident. I think there was a little bit of uncertainty at the time of whether or not you should transact from a seller perspective. As you've seen, there's been a couple of activities here in the marketplace on footprint, [ e-commerce ] activities we've been involved in, which is great from a brand reputation and also individuals looking for Horizon as a potential partner. But as I mentioned previously, our former balance sheet probably didn't position us as well to get us to the finish line. We anticipate that these activities will still continue in '26. I think as you're seeing out in the overall environment as a whole, it's a good market to transact. I think folks are -- if they're looking to sell right now, it's probably a good time to have that consideration at their Board level discussions and our footprints in Michigan and Indiana. We feel like we've positioned ourselves at a higher level and a more attractive position for execution on those. Operator: Our next question comes from Damon DelMonte from KBW. Damon Del Monte: Just had a question on credit and kind of, if you, Thomas, give a little bit of color on maybe some of the trends you guys are just seeing. NPAs were up $5 million quarter-over-quarter, not a big amount. But just wondering, are there any areas of the portfolio where maybe you're starting to see some signs of stress that are requiring a little bit more attention? Thomas Prame: Yes, I'll pass this one over to Lynn. She can walk you through some of what we saw in NPAs and how our commercial credit is looking. Lynn Kerber: On commercial portfolio, if you turn to our slide, Page 8, where we have our asset quality metrics, first of all, you can look at our substandard loans, and those have been very consistent and actually went down just a bit this quarter. So when you see the increase in nonperforming loans, it's really just a migration in that bucket. We had 2 commercial loans that moved to nonaccrual. One, we have payment arrangements on, and we expect that to be brought current. The second one, just a series of misfortunate events for that particular customer. We have an SBA 75% guarantee, real estate based. So really nothing that we're losing sleep over. Commercial non-accruals, I think we have 6 or 7 customers, roughly $11 million. So very modest number for our portfolio size. Thomas Prame: Okay. Great. Just real quick follow-up on that question. From our transaction in the third quarter, what we consider the highest risk portfolio we have was indirect auto, that consistently was $2 out of every $3 of our charge-offs. And also as we go into a period where we may see more stress on the consumer side, exiting that portfolio, I think this really truly enhance our overall credit profile and will keep us in the ranges that we historically performed. Damon Del Monte: Got it. Okay. And then with the improvement of the profile, as we think about the provision in the coming quarters and kind of growth, I mean, is it fair to kind of assume that maybe the provision will kind of be more like the average of the first 2 quarters of this year? Or should we expect it to be a little bit lighter just given the removal of those indirect auto loans? Lynn Kerber: Yes. So in regards to the provision, as you see, we did have a release this quarter that was predominantly related to the indirect portfolio as well as just the overall calibration of our loss rate because of that. And so we pulled out roughly $200 million in indirect loans, which dropped the -- reduced the current allocation requirement. And then the long-term loss rate for the portfolio also goes down. And so I would expect that it's going to be more similar to an average, like you said, in the first and second quarter, but it's going to be reflective of predominantly just growth rate and credit trends and charge-offs. Damon Del Monte: Got it. Okay. Great. And then I guess just lastly, I think it was mentioned -- I think John mentioned that you guys had about $0.3 million of a gain related to the syndicated sale of equipment finance. Can you just talk a little bit about that strategy and kind of where you see that progressing over the next couple of quarters? Lynn Kerber: Sure. This quarter was really our first quarter in piloting that. It's gone extremely well. We've established relationships with 8 to 10 purchasers and with kind of identifying and formalizing the purchase agreements and identifying their credit box. For us, it's not going to be a significant portion of our business, but it is an opportunity for us to manage our outstandings and fee income and just gives us more flexibility, again, with our balance sheet strategies. [indiscernible], I don't think it's going to be significant. I think this year, so far, we've done $10 million. As we move forward to next year, it might be $20 million, $30 million at most, maybe more. Operator: And our next question comes from Brian Martin from Janney. Brian Martin: I just wanted to -- one of my questions was just asked there, but the -- just on the loan growth outlook, can you just talk a little bit about just the loan growth outlook for maybe more 2026 and just kind of where you expect the growth to come from? And then just are there plans to add some additional staff? Are you good with the talent you've got in place right now? Or just kind of -- I know you've talked a little bit about M&A, just kind of more on the organic side. Do you really -- do you need to add people to kind of pick up the growth rate? Or do you have the staff now and there's not really plans to do that? Thomas Prame: Yes. It's Thomas. Thanks for the question. I think if you look through this year, our growth rate was very solid in the core franchise. If you take out the indirect auto, our commercial growth rate was probably in the low double digits number on a consistent basis. As we move into '26, this will be the main part of our growth rate. And as John highlighted in his comments, we're anticipating that to be in the mid-single-digit level. The main difference is that Horizon isn't having an opportunity finding options to lend. We're just being very disciplined in our credit profile and also our margin management. So from a need to add additional -- significant additional headcount, we don't see that in the marketplace. We've entrenched ourselves in the growth markets and also of our core markets and are doing very well. We'll just be very selective on a go-forward basis, but making sure that we still continue to grow, but grow in a very smart and profitable way and make sure we hold our credit profile. So very confident in our ability for '26. This isn't a need for us to do a hockey stick on growth. It's more for us to be just measured in the approach and continue what we do best and be part of our local communities. Brian Martin: Got you. No, that's helpful. And in terms of the -- just the full quarter impact, I mean, getting to the ROA level, kind of that 1.60 type of level, I mean is that something you can achieve with kind of the full quarter impact we should start to see that in fourth quarter here? Or is that -- I guess, is that maybe a first quarter type of event kind of getting to that run rate on the ROA target? John Stewart: This is John. Thanks for the question. I think if you kind of work your way through the guidance we gave specific to Q4, I think you'll find a result that's approximating the numbers you quoted or what we had quoted in the pro formas with the announcement of the balance sheet transactions. And then it's incumbent upon us, which we think will be the case to make sure that, that's durable and sustainable and view that to be the case as we look at 2026 at this point, too. Brian Martin: Got you. And just last one, maybe you mentioned this, I didn't think the capital outlets and just the capital accretion here, I guess, are buybacks part of that equation? I know you talked about M&A and organic loan growth. Just remind us where -- if you already talked about it, I apologize. Thomas Prame: No, I appreciate the follow-up question on it. As we look at buybacks here in the near term, we just -- as you know, we just raised capital. We always will keep buybacks as one of the opportunities for us to create shareholder value in the near term, or I wouldn't put that as our first option. Operator: And ladies and gentlemen, that will conclude today's question-and-answer session. I would like to turn the conference call back over to management for any closing remarks. Thomas Prame: Thank you, everyone, for joining us today, and I also appreciate the very thoughtful questions. We appreciate your time and interest in Horizon. And as we look forward to sharing our quarter -- our fourth quarter results, which we will do in January, I hope you have a great week, and thank you very much for your time. Operator: The conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.
Operator: Welcome to the Atlas Copco Q3 2025 Report Presentation. [Operator Instructions] Now I will hand the conference over to CFO, Peter Kinnart. Please go ahead. Peter Kinnart: Thank you, operator, and a very warm welcome, good morning, good afternoon or good evening to all of? You attending this third quarter 2025 earnings call. Together with me is Vagner Rego, who will guide you through the presentation together. But before we start, I will repeat the same topic I always say when we start the call, and that is when we start after the presentation with the question round, please only ask one question at the time. So we make sure that all participants have the opportunity to raise their most important question. Is there more time available afterwards, you are, of course, more than welcome to line up again to ask your next question. With that, I hand over to Vagner Rego, who will start the presentation. Vagner Rego: Thank you very much, Peter, and welcome to this conference call. We're quite happy to be here once again. So if we go straight to the summary of this quarter, we have seen a mixed demand with stable orders pretty much aligned with what we have said on the guidance for Q3 during the Q2 conference call. So -- and then you can see industrial compressors flat. Gas and process, we see a decline in the orders received when you look to year-to-year comparison was good on the industrial vacuum side, but negative on the semiconductor vacuum side. When it comes to industrial assembly and vision solutions, there, we saw a negative development, mainly driven by automotive due to the conditions in the market. We had a solid growth for power equipment that we were quite happy to see that. And again, good growth on our service business. We see that our efforts to further develop our service business and the implementation of the installed base, I think we managed to capture that installed base that has been deployed over the years. When it comes to revenues, it was somewhat up, and we had 2 business areas with a good organic -- reasonable, let's say, organic development and 2 business areas with a negative development that led us to a growth of 1%. The profit margin has been affected by restructuring costs. We will come back with more details and acquisitions. We have done 6 acquisitions. 2 acquisitions I would like to highlight because they are very important for our strategy. The first one is ABC compressors that is increasing our ability to serve customers in hydrogen and CO2 applications. And the other one is Shareway, which is a joint venture. We acquired 70% of the company, and it's going to be a very important one for our development in China, adding as well technologies that we didn't have in our portfolio. So cash flow was quite solid. We were very happy to see we continue to generate very good cash flow. So going to the next, if we look into the financials, how was that translated? We reached SEK 40.5 billion in terms of orders received, as you can see, SEK 41.6 billion in revenues, orders received more or less aligned with previous quarter, but unchanged organically. And like I have mentioned, 1% organically in the revenues. Operating margin was 20.5%. But then if we readjust for the restructuring cost, we end up at 21.3%. And the operating cash flow, we have mentioned already SEK 7.3 billion, which is quite solid, and we were quite happy to see that development. If we then move to how we have performed all over the world. If I then start with North America, we saw still the environment there is, let's say, has challenges, uncertainty, but we are happy with the quarter with plus 10%, if you correct for currency. So -- and there, we see very strong development in Compressor Technique and Power Technique that it was really good to see. And Vacuum and Industrial Technique were slightly negative, impacted by semiconductor and the automotive market. When it comes to Europe, it was also good to see 10% development. And here, again, Compressor Technique had a good development, positive development, Power Technique, the same, and we had a negative development in Vacuum Technique and Industrial Technique. When it comes to Asia, basically, all business areas had a good development, positive development. The only headwind we had was in Compressor Technique, mainly due to large gas and process compressors and some large industrial compressors where we saw negative development. But combined, we still had a positive development of 1%. Latin America continues -- not Latin America, but South America being more specific, had a positive development, almost basically most of business area with positive development [indiscernible] Industrial Technique negative. And then Africa, Middle East, they had quite a big comparison to be. And there, we saw a negative development that is mainly influenced by Compressor Technique and Power Technique. Overall, if we adjust for currency, plus 2% in orders, which is more or less aligned with what we have seen year-to-date. If we then move -- if we combine again all the figures, we can see that we had plus 2% in structural change. That is basically our acquisitions. In revenues, the acquisitions performed better, plus 3%, quite a lot of currency headwind, minus 6% in orders, minus 7% in revenues, organic growth unchanging orders like we have mentioned, we end up at SEK 40.5 billion in orders received and SEK 41.6 billion in revenues. So if we then see the split among the the business areas. We can see now that Compressor Technique in the last 12 months as an order -- has contributed to 46% of our orders received and this quarter with 0% growth or no growth basically. Vacuum Technique, 21% of our orders with 1% growth, very good contribution from Industrial Vacuum and Service. Power Technique continues a good development in orders, 17% now of our business, plus 5% in the quarter and Industrial Technique with minus 3% in orders received. If we then move to Compressor Technique, it's what we have seen, industrial compressors were basically unchanged. Let's say, a little bit more negative towards the larger compressors, a little bit more positive towards the smaller compressors. That is not a big indicator, but just what happened in the quarter. We saw decreased order intake year-on-year on gas and process compressor, but sequentially, we saw a good development and improvement compared to Q2. Service business continued to develop very well. Once again, quite happy to see that. Revenues as well that shows that the quality of our order book is good, and we continue to develop 4% organic growth profitability, we are quite happy with this level of 25.3%. We should have in mind, we have done slightly larger acquisitions that has a bigger impact, and we are focused to do more integration items at the beginning, meaning deploying our IT, our -- especially when it comes to cybersecurity. So a little bit more cost at the beginning to safeguard our acquisition. So a bit more cost, but we are happy with that level of 23.5%. So ROCE remains at a good level. And we continue our innovation pipeline with Compressor Technique. And here, today, we brought an example of our development in China that sometimes you have to develop to come with more features that you can come with a different value proposition to the customer. Sometimes you have to innovate to cost reduce. And this is a good example of how we innovate also to cost reduce to be competitive in China, but also to create options as well in other regions. A very good achievement now with this new innovation. Then if we go to Vacuum Technique, we saw 1%. It's good to see positive development, although it's not in the semi market, but it's very good to see that industrial and scientific vacuum in terms of equipment continues to develop very well. We still don't see -- we are yet to see a positive development in the semi market, but we still have headwinds, especially for North America when it comes to the semi. In the other hand, it's very good to see the service business developing very well, especially in the semi part of the business, new fabs being built coming into operation, and we managed now to get the aftermarket from these fabs. But also not only on the semi service, but also the industrial service is developing quite well. And then we have headwinds in the revenue. Revenues were down 6% organically. That put pressures in the bottom line, but we see good traction on the restructuring activities that we have announced and performed during the year. But this quarter, we felt that we could -- because of the headwinds we have in the North American organization when it comes to some market and semi as well, we decided to further optimize our footprint there without damaging our ability to grow, to sell, to further develop the business. I think that we didn't touch, but we have reorganized our North America that include to reorganize one factory to adapt one of our service centers to integrate and also to work in our customer center, try to optimize, decrease management structure and safeguard that our ability to support our industrial and semi customers are not touching. I think that was the main target. And that's why we decided to do a new round of restructuring in Vacuum Technique to make sure we safeguard our bottom line. So then the adjusted operating margin was 20.1%. So return on capital employed 18%. And we continue to innovate in the semi market. You know that real estate is very important in the semi market. I mean, the footprint that your product utilized is very important, and we managed to come now with this integrated abatement system that we occupy 30% less space in the fab. That's also important to support our customers in that market segment. If we then go to Industrial Technique, we saw order decline of 3% and is mainly driven by the headwinds in the automotive. And I would say not everything is negative in the automotive. We still get quite a good level of orders when it comes to flexible production lines, meaning if the production line needs to be more flexible, we can support our customers on that. We have more products, more software-driven products as well that can support our customers. And we also see more demand for automation. That is good. But in the other hand, we see less production lines being built, and that means less project. And the project business is having more headwinds. So -- and that's what we have seen. And service was basically unchanged. That has also -- that is also influenced by the number of cars produced. And that's why we see a stable level in Service and Industrial Technique. Revenues were down 1% organically. Operating margin were at 18.8%, excluding the restructuring costs, a minor restructuring cost of SEK 53 million compared to Vacuum Technique. So we keep on fine-tuning our organization in Industrial Technique because we have the headwinds. And it's the same concept. We have optimized management structure, and we try to adapt to the circumstances that we see today in the market. And again, the innovation efforts continue. Here, we develop a product that is reducing the dispensing time in about 50% that definitely can support some of our customers, and we are also quite happy with that development. So if we then move to Power Technique, and that is more a positive picture when it comes to the orders development, solid growth in equipment. Basically, most of the Equipment division had a positive development. Good growth in rental. I think that we continue to develop. Revenues were up 3% organic and operating margin at 17%. And here, we have higher functional cost and then a little bit of dilution from the acquisition. But I think the main topic here is higher functional costs. We have created a new division to sell industrial flow products. We are building up competence in our customer centers. I think that will bring -- is bringing a good organic growth, but I think we haven't seen -- we are yet to see translation in improved margin that will come over time. We believe we can operate in a higher margin with a higher margin in Power Technique. And now it's important as well, the acquired companies, we also invest in innovation. On the functional cost, there is also a component of higher R&D because also the acquired companies, we buy technology, but we believe we should continue to innovate. And this is one example of an innovation of one of our acquired companies, Wangen that they managed to come with a new twin screw pump for applications, pumping high viscous media in demand high flow rates. So also there, very good to see our innovation. So with that, I will transfer to you, Peter, to talk about our profit margin. Peter Kinnart: Okay. Thank you, Vagner. So from the operating profit of SEK 8.5 billion, we go through the net financial items, which are slightly lower due to somewhat lower exchange rate -- financial exchange rate differences to a profit before tax of SEK 8.5 billion compared to SEK 9.2 billion last year. and an income tax expense of SEK 1.8 billion. That means that we have an effective tax rate of 21.1% for the quarter, which is on the low side. Main reason for that is that besides the normal things that we see recurring that we also had a lowering of deferred tax liabilities linked to the lower announced tax rate for the German market. Therefore, this is a fairly low tax rate. It also still includes some of the release of provisions from the past from China high-tech we used to have. And so for the next quarter, we think the effective tax rate will be somewhat higher, probably around 21.5% to 22% in the near term. And that gives us a total profit of the period of SEK 6.7 billion and basic earnings per share of SEK 1.37 for the quarter. Then I will move on to Slide #12, talking a bit more about the profitability in detail. I would say, first of all, overall, I think we were quite pleased with the overall profit level that we managed to achieve in these quite turbulent and difficult circumstances. As already explained by Vagner, we had some restructuring costs. Actually, also last year, we had some restructuring costs. So therefore, you see here in the bridge, the net. For this year, the total cost was about SEK 205 million. For last year, we had a cost of SEK 123 million, leading then to the net SEK 82 million in the bridge, slightly diluting the margin as well as the impact of the LTI programs also having a small negative impact. But the main headlines of the profitability development, I would say, were, on the one hand, a slightly positive currency development. As you remember, last quarter, we had quite significant impacts of currency, but this month -- this quarter, it's much more mild and actually slightly positive. So I will not go into more detail like I did last time. The acquisitions, however, are then a detractor of about 0.6%. And also the tariffs had a bit of a negative impact on the profitability for the quarter. Nothing dramatic, but I have to admit that we did not manage to completely compensate for the tariff impact and the turmoil in that particular area throughout the quarter. And so I think that are the main contributors to the profit development for the quarter. Talking about currency, also for next quarter, we do expect actually, in absolute terms, a continued negative development of the currency contribution due to the fact that the average rate continues to lower, all things being equal. And therefore, we would expect anywhere around SEK 800 million potentially of cost impact, also depending, of course, and that remains to be seen on the revaluation of assets on the balance sheet. If we then take the profitability and dive a little bit deeper into each of the business areas, highlighting the main contributors to the respective profit developments on Slide #13. Then starting with Compressor Technique. First of all, 25.3%, continuing at a very good and solid margin. There was a slight detraction from the acquisitions, which is, in our belief, a very important investment in future growth. We also front-load a bit more with costs in order to safeguard a good, speedy integration process from the beginning onwards. And that is the reason why we see a bit more of detraction from the acquisitions. Otherwise, I don't think anything else was very strong. Secondary, maybe also, of course, the tariffs had to have a minor impact as well. On Vacuum Technique, here, a bit of a mixed picture, a bigger impact from currency, as you can see. The main reason is that last year, we had quite a big negative impact, and that in the bridge then turns into quite a significant positive. Otherwise, it would be relatively comparable to the other business areas, but that's the reason for the high positive. On the other hand, volumes were the main detractor. We see, of course, the top line going down with SEK 591 million, and that has an impact on the profitability on the bottom line. That's the main contributor. But also here, tariffs are part of the equation. Again, a minor impact, but still an impact in our profitability development. And of course, we already mentioned the restructuring net impact in the profit bridge as well. Industrial Technique, also here, the impact of the restructuring cost, as I already mentioned. Further then also revenue volumes being negatively affecting the profitability. The currency also slightly negative impact from a margin point of view. Also, the acquisitions were a bit dilutive. So overall, going to 18%. But I think with the restructuring activities, we are also there working hard to try to turn the corner and improve the profitability. As already indicated, we evaluated quarter-by-quarter how things develop. And whenever needed, we take the necessary measures. And we need to do it cautiously because, for example, in Vacuum Technique, you've seen the very solid development of service. So obviously, we cannot just cut away everywhere in the organization. We need to do it in a careful way, so we don't jeopardize the growth of the respective businesses. And then last, in the table here, Power Technique with delivering a solid margin of 17% again. Here, as we already mentioned, the main topic of the lower profitability from an organic point of view was more the functional costs. We are investing in a new division as one aspect of it. We are also working on a number of transformation projects, rejuvenating some of the old ERP systems we have for specialty rental for some of our production entities, for example. And that also triggers a number of additional costs for the time being. But over time, of course, we expect them to become more efficient and as a result, also improve the margin coming from those different investments. Also investments in dedicated salespeople in Power and Flow also within IFD in the Industrial Flow division, we are working hard to build that organization so we can leverage the sales of all the different technologies we have acquired in the last few years. So I think that explains the overall profitability business area by business area. If I then move to the balance sheet, I would say, relatively uneventful. Of course, on the one hand, intangible assets go up due to the acquisitions. On the other hand, we amortize, so basically quite stable. We see some impact on the inventories, for example, which is beneficial. We are actually indeed improving the inventory levels across the organization with all the different actions that we have ongoing. The receivables overall fairly quite stable, especially from a relative point of view. So we are quite happy with maintaining that good performance on the receivables side. On the equity side, also there, not so much to mention, mainly the equity is changing because of the fact that we are generating more profit, while on the other hand, of course, we are also paying dividends. And on that point, I would like to just highlight the fact that tomorrow, we will actually pay the second installment of the dividend related to 2024, SEK 1.50 per share roughly in total volume, an amount of SEK 7.3 billion. And with that, I turn to the cash flow. In the cash flow also there, I think a solid performance. You could say, well, yes, it's a little bit lower than last year. But on the other hand, quarter-over-quarter or over the different quarters, I think this is quite a significant value of operating cash flow we are generating. On the one hand, we have a little bit lower operating cash surplus, but we have a little bit less taxes paid. On the other hand, we have a slightly less positive impact from the change in working capital compared to the same quarter last year. But we also see a gradually slight slowdown in the increasing rental equipment, but also in the investments of property and plant. We continue to do a number of investments that are necessary for the future to replace some of the old assets, but also to build some new capacity, but at a slower pace than we used to a while ago. Also, of course, given the current climate, I think that makes a lot of sense. And with that, we end up with the SEK 7.3 billion operating cash flow. And with that, I think we have come to the end of the comments to the financial statements. And I would like to hand over back again to Vagner, who will comment a bit more on our near-term outlook. Vagner Rego: Good. Thanks, Peter. And once again, I would like to repeat that our forward-looking statement when it comes to the outlook is not -- is a sequential guidance. It's not a straight projection of our orders received. And again, to do that, to come to that statement, we look to the external world. And once again, we don't see a change in the environment. The world continues with a lot of uncertainty that are not supporting our customers to take decision, especially on large orders. So -- and then when we also look to our business internally, we don't see a dramatic change. We talk with our 24 divisions, look to the pipeline, different market segments, and we see no reason to believe that there will be a dramatic change compared to Q3. So that's why we continue with our statement that we expect that our customer activity to remain at the same level -- to remain at the current level. And then I would like to invite you for our Capital Markets Day that will happen in Germany. We will first go to Stuttgart, and there, we will have some presentation. And after lunch, we will go to our innovation center in Breton, where we will share some of our innovations related to Industrial Technique and Vacuum Technique. And I'm looking forward to see you there. Peter Kinnart: Yes. Thank you, Vagner. And we actually have still a few places left. So if you're really eager to see those products, then please come forward so we can reserve your seats. With that, we come to the end of the presentation, and we would like to start the question round. Again, I would like to repeat, please refrain yourself to only asking 1 question at a time. And then we are looking forward to receiving your questions. Back to the operator. Operator: [Operator Instructions] The next question comes from Daniela Costa from Goldman Sachs. Daniela Costa: I want to ask a question about sort of what you mentioned regarding the margin still and the fact that you didn't fully compensate the tariffs entirely. Is this -- do you see that as sort of a delayed impact? We should see sort of eventually the full compensation within the coming quarters? Or is it more sort of an intention to not fully compensate it, I don't know, because of competitive reasons or anything else? Can you elaborate a bit there, please? Peter Kinnart: Sure, Daniela. Thank you for your question. No, first of all, it's definitely not intentional not to fully compensate for the tariffs. I think it's just been a very turbulent quarter with a lot of changes, especially towards the end of August with Section 232 being added to the equation and asking quite a lot of effort from big parts of the organization to investigate more deeply and to qualify a number of products, et cetera. So that has caused, of course, a bit of delay in being able to answer fully to some of these issues. And therefore, we have somewhat higher tariffs. I wouldn't say that it is necessarily so that in the very short term, we would be able to fully compensate, but we are quite confident that over time, over the quarter that we will be able to compensate for the tariffs as they exist today. With that, I also need to immediately apply some caution because as the changes are happening overnight very often, we don't know, of course, what's coming, but we continue to monitor it very closely. Maybe one thing to underline as well is that I did indicate that the tariffs did have an impact on the profitability for the quarter, but I also want to underline that the impact was not humongous that it was not totally destroying the profitability level. But we do admit that we did not manage to fully compensate for the tariff impact for the time being. Operator: The next question comes from Michael Harleaux from Morgan Stanley. Michael Harleaux: I'll limit myself to one as requested. On the large gas and process category, would it be possible for you to help us understand where we are in the LNG ordering cycle? Vagner Rego: Well, I think to say exactly where we are in the cycle, I think it's a bit more difficult. What I can say is this -- our presence in the market, we cover several market segments including LNG. Particularly this quarter, we did have orders on LNG as well. We had orders for fewer gas boosters. There are quite a lot of investments ongoing to increase the energy production capacity with gas-fired turbines. So -- and we do have products for that. And -- but we also saw good order development in industrial gases, for instance. So it's a quite a diverse market, let's say, segments that we cover, and we saw a good development this quarter, including in LNG. Operator: The next question comes from Klas Bergelind from Citi. Klas Bergelind: So I just want to come back on the impact from tariffs. You mentioned Section 232 added through the quarter, but that was 18th of August. And then you probably had some inventory to cover you through September, right? So shouldn't Section 232 hit you harder, Peter, in the fourth quarter when the full effect kicks in from steel and aluminum. So shouldn't we see a weaker drop-through here in the fourth quarter? Or can you take out enough cost to raise prices to mitigate that incremental impact? Peter Kinnart: Thank you, Klas. I think a very fair question and logical reasoning, of course. But I think it's also fair to say that the introduction of 232 didn't allow us immediately to get to lower tariffs with the Section 232. There's a lot of documentation required to pass the customs in order to prove that you don't need to pay 200% tariff or that you pay 50% tariff. So as a result, I think we had a bit of a spike, you could say, maybe in September towards the end of the quarter when it comes to the impact of 232. While now, of course, we have worked with a lot of people in the organization on trying to sort out both through our suppliers, both through our engineering departments throughout different locations, et cetera, how we can document all the products in the best possible way in order to be able to get the best possible tariff, so to say, under the present rules. So as a result, I think in quarter 4, we are better placed to pass the products to custom duties. That being said, I think on the other hand, of course, there will be more products going through the full quarter, as you indicate. And therefore, you could say that in absolute terms, the cost will be higher. But I think overall, and it's hard to really estimate, of course. But overall, I don't think it would result in a dramatic increase of the tariffs in the fourth quarter for us. Operator: The next question comes from John Kim from Deutsche Bank. John-B Kim: I'm wondering if you could give us some color on what you're seeing in semiconductor demand. I'd say fairly recent news flow has been positive both on the memory side, plus you have better clarity on what Intel is going to do or not do. Can you just tell us what you're seeing in VT right now and how we should think about development into next year? Vagner Rego: Yes. What I can say, I think when it comes to leading edge nodes, I think the market environment is very positive, very good. A lot of investments ongoing, players that are -- some that are more mature on scaling up really the leading-edge nodes. Some are trying. And there, I really cannot say where they are. So we also not -- we don't comment on specific customers. We are not allowed to talk about specific customers. But one thing that is important to remind, leading edge node is going well, and we get orders. We are happy with that business. But of course, the entire market still has quite a lot of capacity. So -- and if you take a little bit advanced nodes and legacy nodes, there -- there is overcapacity. And of course, we need the entire market developing very well in order we can see a bend in the trend when it comes to orders received in that market. John-B Kim: Okay. And can you comment on memory, please? Vagner Rego: Sorry, I didn't get the last comment. John-B Kim: Could you offer a similar comment on memory, memory customers? Vagner Rego: No, we are a bit more agnostic when it comes to memory and logic. We are present in both markets. And I think if there is a good development in that market, we will be able to capture that development. I think we are well positioned to capture any movement in that market. Operator: The next question comes from Sebastian Kuenne from RBC. Sebastian Kuenne: I spoke recently to some of your competitors in Europe, and they speak of a more aggressive pricing behavior of some of your American competitors inside of Europe. Could you maybe give us an idea of what the pricing situation is and whether that's related to the currency differential? Vagner Rego: Yes. I cannot really comment what is happening with our competitor. I must say we do have positive price development in our -- if you are referring to our compressor business, for instance, we do have positive price development, including in Europe. We also have positive development in the U.S. that we try to compensate as well for the tariffs. That's what I can say. difficult for me to judge what's happening. I think our position in Europe remains quite solid. I think we had a good development in Q3. As you could see, I mentioned that we had positive development in Europe. So we are quite happy with the development in the orders that we have had in Q3. So good. That's what I, let's say, I would like to comment when it comes to price. Operator: The next question comes from Magnus Kruber from Nordea. Magnus Kruber: Magnus from Nordea. Sorry to labor the point about the tariffs. I think you had a 40 bps headwinds on the organic part in the bridge -- margin bridge this quarter. Could you help us frame the tariff impact within that? I'm not sure if you want to comment exactly what it was, but some help on the magnitude would be helpful. Peter Kinnart: Yes, I think it's hard to pinpoint exactly, of course, because, okay, on the one hand, we do follow up quite closely what is the exact impact of the tariffs. As such, the custom duties that we need to pay when we clear the goods. On the other hand, there's, of course, a lot of indirect costs as there's a lot of people in the organization working hard on the whole topic. Secondly, there's also additional storage costs when you are holding goods for a longer time before clearing them into -- waiting for maybe additional information or other type of things. And then last but not least, of course, we also work a lot with extra support external to help us make sure that we don't make big mistakes in the way we assess the value on which the custom duties will be paid. But like I said, overall, I think the tariff impact was not dramatic. It didn't turn around the profitability completely. It was one of the contributing factors. So okay, as you say, minus 0.4% overall on the group from an organic perspective. Tariffs were a contributor to that, but not the only one in there. There was also volume mix and price combined, you could say. So I think, like I said, no very substantial impact, but altogether, still an impact in that I think we didn't -- we don't want to shy away from, so to say, to say that there is a minor negative impact from the tariffs in the profit margin. Operator: The next question comes from Alexander Jones from BofA. Alexander Jones: You mentioned that industrial compressor orders in Europe were up in the quarter, whereas last quarter, you talked about stable. Could you highlight for us whether that's driven by any particular areas? And how are you thinking about that European outlook in the coming quarters? Vagner Rego: I think it came especially from our effort -- we have created as well a new division that we call Air & Gas Solutions. And they managed to have quite a good development for some gas generation project. I think we did quite well. Also, medical air did quite well. There are some pockets where we can find good opportunities for growth. But the industrial market in general, there was not a huge uptick. But in some pockets, we managed to have good business. I think it's also fair to say smaller compressors developed quite okay as well. That was important. So -- but not something that I wouldn't like to say the overall market is bouncing back. It's more driven by the activities that we have done to try to gain market share and in some areas to have -- to capture the opportunities in a market segment that is developing a little bit better. Operator: The next question comes from Rizk Maidi from Jefferies. Rizk Maidi: So the question is, can we double-click, please, on Compressor Technique in 2 regions, North America and China. If you could just walk us through how you've done in small- to medium-sized compressors, gas and process and large industrials and how you feel your competition has done as well, how you feel you've done versus the market? Vagner Rego: I think in North America, to say against the market, I think it's a bit difficult. But in North America, we are quite happy with the development in Q3 because we have all these uncertainties around tariffs and Session 232 and the teams, they did a very good job, very solid job. We had a double-digit growth in North America when it comes to compressors. We also had good development in -- in gas and process compressors. And there is more around industrial gases and fewer gas boosters that they go to gas-fired power plants. So that was the pockets that we're doing quite well. And then if I comment a little bit more about China, there is a little bit more challenging. I think the scenario has not changed. We see less projects in industrial compressors, but also in gas and process gas and process is a little bit more difficult than industrial compressors. Operator: The next question comes from Rory Smith from Oxcap. Rory Smith: It's Rory from Oxcap. I just wanted to sort of double-click on that industrial compressor piece. And if you could add any more color to the difference you're seeing in the quarter between the sort of small and medium-sized industrial compressors and the large industrial compressors. Is that by market, by region? Any color there? And I might try my luck with a follow-up, if that's okay. Vagner Rego: I think overall, like I said, it's a bit more difficult in Asia, particularly in China that we have mentioned already. There is a very small difference between small and large, a little bit more in favor of the smaller compressor, but it's not a huge difference. It's not something that is becoming an indicator, I would not use as an indicator because the difference is very small. But it was more in favor of the smaller compressors. Rory Smith: Understood. And if I could just follow up on that. You obviously called out the investment you're making to innovate to cost compete in China. I was just wondering if you'd be able or willing to put some numbers around that R&D piece, yes, for the investment in sort of, I guess, not lower spec, but yes, innovating to cost compete. Any numbers around that, that would be the question. Vagner Rego: No, I don't have a number to share. But what I can say, we are focused as well to be competitive in China. We have done an investment in our facility in Wuxi that we call now the Wuxi campus, where we have concentrated most of the Compressor Technique facilities in one place. And that gave a lot of R&D capabilities to the team we have in China, capabilities that we didn't have before with more test cells with more R&D facilities to do test, to do design. We are increasing the autonomy that our Chinese teams, they have in terms of design, still with good collaboration with our Belgium team, but a little bit more independence. And I think that is going well. And that's why we would like to share that product because I think that comes out of that reorganization and that investment. Operator: The next question comes from Johan Sjöberg from Kepler Cheuvreux. Johan Sjöberg: My question is also regarding semi CapEx. I understand your near-term comments on leading edge and also the overcapacity. I think that is sort of comments you made before, Vagner, if I'm not mistaken. But given all this, a lot of news flows in during Q3 here, when you're talking to your customers about sort of 2026 and beyond, how have they responded to these news and also especially the future CapEx plan from their side because -- I stop there. Vagner Rego: Yes. It's difficult to talk about 2026. We only talk about Q4 first. In Q4, we believe that it's going to be stable. I think it's difficult. You know this market, how it works. It's key account business. When they decide to place order or to populate a fab when they -- first, they do the R&D stage and then they do the pilot, then they need to try to nail that production facility with the right yield and then they scale up and sometimes can come very fast. I think it's difficult for me to comment looking at 2026 or even 2027. What I can say from Q3 to Q4, we see the market -- we don't see any reason to change the trajectory that we have seen lately. Operator: The next question comes from Anders Idborg from ABG. Anders Idborg: Just wanted to ask about acquisitions. So we've seen a very nice flow of bolt-ons. I'm just a little bit surprised when we look at the -- over the last, well, 6 quarters, basically, there's been very little of EBIT contribution on the bridge, and I don't have really the impression that you bought unprofitable companies here. So what is the reason? Is there some just initial cost restructuring going on? Or could you -- would you care to explain that? Vagner Rego: Yes. Thank you for the question. I think we -- definitely, we try to add good businesses to our portfolio of technologies and companies that we have definitely. But we also have an effort to integrate these companies faster and I mentioned during the presentation that we -- for instance, cybersecurity is very important. And we try to -- that is a kind of nonnegotiable. We try to bring that to our spec as soon as possible. We have deadlines to meet because I think it's very important to protect the assets that we have bought. And of course, that incur in some cost at the beginning. We have seen now with the acquisition of Shareway. For instance, there was quite a lot of costs that we had at the beginning. So -- but of course, those companies are profitable. And that happened -- that has happened as well in the years before. So the first year is a bit more challenging. And then we recuperate over time deploying synergies. And acquisition is very important for us. We have reorganize our post-acquisition process to be able to capture the synergies in a good and structured way. We are reinforcing the teams there because we have acquired more companies that required even more structured process that what we used to have. So we are investing on that as well to be able to capture this value that we believe when we -- before the acquisition. So I think we are happy with the companies, a lot of activities. And year 1, we see that is normally challenging because we want to do some of the integration items quite fast. Operator: The next question comes from Sebastian Kuenne from RBC. Sebastian Kuenne: I have a question on VT. You mentioned lower volume as one of the key reasons for the lower margin. But at the same time, you have competition that sits in Japan like Ebara, you have Busch in the U.S., [ Pfeiffer ] in Germany. Is the price situation in the global vacuum pump market stable? Or do you see the pressure from manufacturers in lower-cost countries effectively? Vagner Rego: What is key for the price development is technology, and we need to continue to develop our products to come with better products to be able to exercise some pricing power. And I think that's our focus, and we will continue to develop the products that will allow -- that can deliver superior value to our customers, and that could help us with our price efforts. So -- and I think that's where we are focused on now. Sebastian Kuenne: Okay. So no change in pricing. Operator: Next question comes from Magnus Kruber from Nordea. Magnus Kruber: Just reverting to some of these announcements that has been in the media over the past couple of months with respect to some big framework agreements, particularly on the memory side. Is there any way you can sort of help us scope what these opportunities could mean to you if they come to fruition over the coming years? How -- can you frame them, for example, with respect to sort of how big that potential is compared to your legacy semi business? Vagner Rego: What I can say about the market, we -- let's say, we know all the players in the U.S., in Asia, including China. So we are present in all these players. We have a good position in most of the players. If this comes to fruition, we will be there to capture. I think that is our main focus. We don't know which one we will scale up first or later. That we don't know. I think the most important for us is what give us confidence as well is the fact that we are very well positioned. Any movement we will be able to capture. Magnus Kruber: Got it. And can I just have an additional question. You talked a little bit about ramping up on R&D in Compressor Tech going forward to drive additional growth. Is that sort of a China-focused initiative? Or could you highlight a little bit of potentially how much you would be willing to interest and invest and in which pockets? Vagner Rego: I would say the investment were more in capabilities in facilities, better places where they can test the machine testing environment. So those capabilities we have -- we have created -- we have increased actually. We always had, but we have increased in China. And I think we continue -- this is not a dramatic increase in R&D in Compressor Technique. They have been focused. They will continue being focused. But I think we can get more out of our Chinese organization. That's what we are doing, getting ready for that. Peter Kinnart: Okay. Thank you very much, Magnus, for that question. And actually, with that, we have also answered the last question on the call. I would like to thank you all for your presence and for listening to our presentation. As always, of course, should you have any further detailed questions on any of the business areas or the group overall, you're more than welcome to contact our IR department as always. So with that, thank you very much for attending, and have a great rest of the day. Thank you. Bye-bye.
Operator: Welcome to Dometic Q3 Report 2025. Today, I am pleased to present CEO, Juan Vargues; CFO, Stefan Fristedt; and Head of Investor Relations, Tobias Norrby. [Operator Instructions] Now I will hand the conference over to the speakers. Please go ahead. Juan Vargues: Good morning, everybody, and welcome to the presentation of this third quarterly report. I would like to thank you all for participating today. We know that this is a very busy morning for many of you. And with that said, let's move rapidly to the highlights. Starting obviously with still tough market conditions where the most effect is really by consumer confidence still staying at pretty low levels all over the world. We see also retailers, dealers, OEMs being keeping to be still today being very, very careful in building up inventories. At the same time, we also see encouraging signs of stabilization in order intake, and we see few quarters. We see improvements already in Q2, clear improvements as well in Q3. Looking at performance, a decline of 6% organically with Service & Aftermarket showing an improvement in comparison to Q2, moving from minus 12% to minus 4%. Distribution declined by 6%, very much driven by Mobile Cooling Solutions, and we will get back to that. There are some aspects or some reasons for that negative decline. And then OEM also showing negative minus 8% organically, which is a good improvement versus first quarters. and where we see Land Vehicle Americas moving in a positive manner as well as Marine after many quarters being positive in the quarter. Strong EBITDA margins landing at 10.4% versus 8.6% for last year, a combination of one side of the margin improvements led by cost reductions. As you all know, we are running a restructuring program that has been kicking in since day 1, and we see very positive effects out of that at the same time as we are working in many different areas. And at the same time, we also see that all segments with exception of Mobile Cooling are improving our margins in comparison to the last quarters as well. And again, we will comment specifically on Mobile Cooling Solutions. And strong cash flow, free cash flow, EUR 527 million and a leverage landing on 3.2% (sic) [ 3.2x ] in comparison to 3% -- to 3x last year. Looking in more detail to the numbers, almost SEK 4.9 billion in revenues with 6% organic decline -- 6% decline driven by FX and then 1% decline led by the portfolio changes that we have been doing, leaving some of the businesses that we have been into before. EBITA, just a little bit over SEK 0.5 billion over an EBITA margin of 10.4%. Looking at adjusted EPS, we ended up at SEK 0.64 and again, a free cash flow of SEK 527 million. And leverage, I already commented, landed at 3.2. Looking at the year-to-date numbers, almost SEK 17 billion in revenues with a decline of 9% organically, 5% led by FX and the same 1% led by portfolio changes. And EBITA just below SEK 2 billion. And good to see, obviously, that we are getting closer as well on the EBITA margin where we landed exactly the same level as 1 year. So we have seen a recovery in recent months in comparison to the first half of the year. Adjusted EPS, SEK 2.90 and a strong free cash flow of SEK 1.4 billion. Looking a little bit deeper into the sales evolution over time, Land Vehicles ended up at minus 9%, which is a clear improvement versus Q2 with Americas showing 3% negative growth, which is a substantial improvement in comparison to the situation we saw in Q2. EMEA showing a degradation as well as APAC in comparison to last quarter, very much led still today by the OEM side. Marine positive, was great to see after many quarters and also showing a positive order intake, which is positive for us, obviously, Mobile Cooling, 8% and then Global Ventures, minus 6%. When looking at the different channels, no major changes in reality, perhaps to point out that the OEM side is for the first time in many, many, many years below 40%, while both Distribution and Service & Aftermarket are moving 100 basis points upwards. And just as a reminder, looking at the RV OEM situation, we are just now -- RV OEM stands for 18% of total business in comparison to the 49% in 2017. So obviously, we are a less sensitive company to the cyclicality that we have seen on the OEM side. Looking a little bit more in depth into the different channels. We see a clear improvement in Service & Aftermarket. Still, we see that -- we see volatility month-to-month, but again, moving in the right direction. Distribution, very much affected by Mobile Cooling Solutions. And the main reason for that is really inefficiency in Katy, Texas since we had to employ above 200 new employees and by that training, a lot of training cost us inefficiencies, we will see this negative effect in Q3. We will also see that in Q4 and then it's going to be gone. And then -- so we will come back to Mobile Cooling, but we have a double effect on one side that had a negative impact on the growth and that had also a negative impact on the margins. Looking at OEM, we see a clear path moving forward, different segments. So we see LVA turning positive in the quarter, and this is the second quarter in a row that OEM in LVA has been positive, and we also see Marine turning positive, while we see still -- LVE and LVC being negative. Positive to see, obviously, when looking at our results, strong margin recovery in comparison to last year. We see strong gross margins, almost 30% compared to 27.3% last year, very much driven by cost reductions. Again, on one side, we have restructuring program, but we also have contingencies driven in all segments simply because we still see negative growth coming in. And we also have a positive impact on the sales mix. When looking at operating expenses, another area where we are working very, very hard. We see a decline of 6% in constant currencies despite the fact that we continue to invest in a number of areas. We see product development, one of the areas where we are investing the most, but also building up our sales organizations in a number of segments where we see a stronger growth moving forward. We see, again, margin improvements in all the segments with the exception of Mobile Cooling in the quarter. When looking at tariffs, not much new here to comment in comparison to last quarter. As you know, we have good protection in the U.S., having 9 of 12 factories that we have in North America based in the U.S. In the short term, obviously, and this is still carrying a lot of uncertainties moving forward. We -- it's very much about passing prices to the market, something that we have done in a pretty good way, and we have compensated for everything, but for a few customers in the Mobile Cooling Solution area. And that's really the impact that we see negative in the quarter of SEK 35 million that will be compensated by the pricing. We implemented prices already twice in all of the areas, by the way. But in the specific case of Mobile Cooling, we had a couple of customers where we prolong the time for kicking in with the new prices. This is going to have also a negative effect in Q4. And from Q1, We will not see any more negative effects. Looking at the different segments, starting with Land Vehicles. Total organic growth, negative organic growth of 9% with soft distribution on sales and aftermarket, while we see as well a double-digit decline in OEM in both EMEA and APAC, but positive growth in Americas. We see also a pretty strong recovery of margins for the entire segment, 6.3% versus 3.7% with clear profitability improvements in EMEA, a decline -- a slight decline in APAC, but still showing very robust margins. And then we see as well reduced losses in Americas. And we will continue, as you know, to drive the recovery on the Americas situation. And as we informed a couple of times during the last quarters, the most of the restructuring program that we are driving, it will have an impact on LVA and LVE. Moving over to Marine. Positive Q3 quarter with organic growth of 1%. We see OEM coming back to growth. We still see a single-digit decline in Service & Aftermarket, but we also see a positive order intake that should help us as well in coming quarters. EBITA recovered as well. We are again over 20% in EBITA margin, 20.8%. And as a consequence of the mix and also the cost reductions that we are driving in the segments. Then Mobile Cooling Solutions, a double hit, I would say. On one side, we didn't manage to see growth due to the labor constraints that we had in the factory that are costing us in efficiency. At the same time, we also saw a negative effect on the margins coming from both the tariffs. Again, that will be gone in Q1 next year at the same time as we have the labor ineffeciencies. And we also have negative wage impact simply. The Mobile Cooling business is highly seasonal. Historically, we always had a couple of hundred of non-immigrant foreigners working on our factories to keep up with the capacity needs. And the U.S. administration did some changes on forcing us to increase the salaries. Again, we are compensating on prices, but we have a time lag. And those negative effects will be gone from Q1, as I commented before. Moving over to Global Ventures, where we see also a negative growth of 6%, with growth in Other Global Verticals, very positive in some of the areas and then still decline in Mobile Power Solutions driven by the soft RV industry. Good margin improvements, 11.5% versus 9.2%, very much driven by Other Global Verticals. Happy to see as well our progress in the sustainability area with injuries well below target, 1.5. We see as well that we are on target in regards to female managers, and we'll keep working hard in that area moving forward as well. We see renewable energy also quite a bit already now above the target for the year. We keep assessing our suppliers, our vendors, and we ended up at 60%, slightly below the target for the year. And of course, we will reach the target at the end of December. and we see also progress in innovation where we landed at 22%, a couple of percentage points above last year. We are talking a lot about sales decline. We are talking a lot about cost reductions, but we keep investing in the product area and product innovation. This is for the first time. It's the first time that as the Dometic brand, we have soft coolers. It's a totally new area for the Dometic brand. We have soft coolers under the Igloo brand, but we're also launching a new series of soft coolers under the Dometic brand for the first time and we have great expectations. Also from a branding perspective to help us to reinforce the Dometic brand among consumers. Then if we move over into the gyro. We have very, very positive reception by customers. We have been introducing the products in a number of different shows around the world. We see order intake kicking in, in many different areas. I'm happy with the results. And on top of that, we are getting a lot of awards, which is always helping us when visiting new customers offering a totally new product area for us as well. And again, we are getting awards, a lot of awards, not just for the gyro in the Marine industry, but also for many other products that we have been launching in the last 12 months. So positive to see that our investments are paying off both in terms of awards and order intake. And then on the restructuring program that we initiated 1 year ago, as you all know, will generate savings of SEK 750 million when it is completed at the end of 2026. We closed down so far 1 factory and 3 distribution centers affecting 250 people altogether. And we are running just now at annual savings of SEK 250 million as the running rates. We had a cash out in the quarter of SEK 35 million and year-to-date a little bit above SEK 100 million. We keep continuing on our portfolio, and we discontinue one of the product areas that we had before. This is leading to a negative organic growth of 1% and we keep investing on -- sorry, keep spending time on the divestments. Still, we have not seen the finalization of any of them, but we keep working and are convinced that we will see the results moving forward. And with that said, Stefan, let's go a little bit deeper into the results. Stefan Fristedt: Okay. Thank you, Juan. Starting off by summarizing the P&L for the third quarter. we are very satisfied how the gross profit margin continues to develop, 29.6% versus 27.3% (sic) [ 27.4% ] last year. And the increase is driven by sales mix. We also have the restructuring program and other efficiency measures that are taking effect. Then we also need to mention here that Juan has mentioned a couple of times of the effects, especially in Mobile Cooling, where we have a time lag between the tariff cost as well as labor cost increases versus the mitigating price increases, and that has had a negative effect in the quarter of approximately 0.7%. And we expect that to continue in Q4, as was mentioned before. But from Q1 next year, we expect that the price increases are done to fully mitigate this development. Moving over to operating expenses. We have reduced operating expenses in constant FX due to the decline in net sales, it has increased somewhat in percentage of net sales. We keep on investing in strategic growth areas, as we have mentioned, and you have seen some of the results of that in terms of product development, Mobile Cooling and Marine are definitely 2 areas where we keep on investing deliberately. Other operating income and expenses, SEK 18 million, a small number in the quarter, and it's mainly related to a part of the FX effect. Net financial expenses is up a little bit in the quarter. However, the net interest on bank loans and financial income is down SEK 197 million versus SEK 214 million, and then we have a negative FX revaluation effects and other items leading towards that. On tax, we have an effective tax rate of 32%, which is equivalent to SEK 54 million in tax in the quarter. Moving over to the summary of our cash flow. Operating cash flow-wise, we see that we are continuing to drive efficiencies in working capital, coming back to that in a second. Then we have cash out related to restructuring of SEK 35 million in the quarter. And then as you can see, we are carefully managing our capital expenditure and where we spend. Free cash flow before M&A, as we mentioned before, paid and received interest is spending down and then we have been paying lower tax. Then cash flow for the period has also been impacted by that we did a bond issue of EUR 300 million in Q3. Coming back to that. At the same time, we also did a tender offer of EUR 100 million, so -- which was then a partial repayment of the bond that is falling due in May 2026. And then I would also like to underline that we are going to see further debt repayments in Q4 and in 2026. Moving over to more of how has the free cash flow developed over time. And as you can see, I mean, SEK 527 million. It's not on the same level as last year, which I did not expect either, but still solid level, I must say. And then you can also compare it to the other periods before that. So satisfied with the level of free cash flow in the quarter. Moving over to the working capital components. You can see that working capital over the last 12 months is starting to come down 26% compared to 30% in relation to net sales. And if we look on the quarter stand-alone, it was down to 21%. So we are moving in the direction that we have been talking about, where the target is to reach around 20% of net sales. And you can see on the inventory balance, we are SEK 4.6 billion now compared to SEK 6.3 billion 1 year ago, and the number of days is down to 124 versus 139. So things are moving in the direction that we have been planning for and expecting. As you can see, accounts payable level is staying stable as well as accounts receivables. Then moving over to CapEx and research and development. We are prioritizing among our CapEx project, and we have been spending a little bit less than SEK 100 million in the quarter. It's 2% of net sales versus 1.7% in the last 12 months, that's equal to 1.3%. If we look on R&D, as I said, we continue to keep up that level very deliberately because we believe in that this is important for the future. And the R&D expense to net sales is now 3% compared to 2.7% 1 year ago and 2.8% last 12 months. And as I mentioned before, it's a strategic important growth areas for us, example being Mobile Cooling and Marine. Next is going to talk about the debt maturity. As I mentioned, we did a EUR 300 million bond on a 5-year maturity with a fixed rate of 5% in the quarter. And the proceeds are going to be used to refinance our debt portfolio. We already did EUR 100 million in connection with this transaction by doing a tender offer on the 2026 bond. So there is EUR 200 million left on that one. And then as I mentioned before, you will see further debt repayments here in Q4 as well as in 2026. We have a USD loan that matures in '28, but it can be prolonged 1 year to 2029. And the average maturity is 2.8 years, which is obviously a longer average maturity compared to last year. Average interest rate is 4.8%, and we still have an undrawn revolving credit facility of EUR 300 million maturing in 2028. So moving over to our leverage. Maybe we can -- I mean, leverage went down 0.1 versus Q2 and which is obviously positive. And you can see in the table down below that it is mainly our cash flow development that has contributed with that development. We are obviously having a high focus across the organization on protecting margin and reducing working capital, as you know. And we just keep on repeating that we are committed on achieving our leverage target of 2.5. That is important to us. and it's -- but it is difficult to give an exact timing of when we will achieve it. So with that one, I hand back to you to give a summary of the quarter. Juan Vargues: Thank you, Stefan. So I mean, in tough times like we are going through and we have been going through now for 4 years, we have to control what we can control. And from that perspective, I feel good that we are improving our margins. We had a tough first half. We saw improvements at the end of the quarter. We have seen more improvements in Q3. And our intention is obviously to keep showing improvements moving forward as well. We see -- even if it's still tough and difficult to predict, we see a market stabilization. I'm happy to see the order intake improving and happy to see the backlog becoming stronger for every month. I have been spending a lot of time on the marketplace. I have been visiting a lot of shows. I have been meeting a lot of customers. And again, it's still tough out there, but the sentiment in the value chain is slightly better than it was 3 months ago and much better than it was half a year ago. So that's kind of sending some positive signals and some faith that we are getting closer and closer to positive territory. I'm happy to see cash flow. We are working extremely hard on our working capital on driving down inventories, but not just on inventories. I think we do an excellent job on receivables and we do an excellent job in payables, trying obviously to improve as much as we can our capacity of releasing cash and improving our leverage. Tariffs situation, lots of uncertainties, of course, but we are dealing with that in a good way. We had a negative effect in the quarter. But again, in comparison to what we expected on the 4th of April, I believe that the organization has done a terrific job landing the situation with our customers and our customers are also keeping faith in what we are doing every single day. Moving forward, difficult to predict, as I said, but the starting point in Q4 from a top line perspective is a little bit better than we had 3 months ago. And hopefully, we will see that even in the future. And then from a strategic perspective, we keep investing despite all the cost reductions that we are doing in a number of areas. There are 2 areas that where we are not cutting. The other way around, we keep investing in product development, innovation, and we keep investing in building up our sales organizations. And of course, we need to finance that, and that's why we are driving a restructuring program, which is clearly paying off. And with that said, I would like to open for a Q&A session. Please. Operator: [Operator Instructions] The next question comes from Agnieszka Vilela from Nordea. Agnieszka Vilela: I will ask them one by one. So on growth, Juan, you sound cautiously optimistic about the OEM business now in Marine and in RV in the U.S. But when I look at some of the peers commenting on the market development such as Malibu Boats or Winnebago, they do point to still flat wholesale volumes in 2026 in RVs and even declining both retail and wholesale in Marine. So can you give us an explanation why you are relatively a bit more optimistic on that? Juan Vargues: I mean everything is relatively in line, right? I mean we are coming from a situation where we have been kind of shrinking 11%, 12% quarter after quarter after quarter. For the first time, we see order intake moving upwards. We see the fact that we delivered 1% organic growth, and we have a different backlog situation that we have seen. I fully agree with you that we are not going to fly. I don't see the market turning back anytime soon, but I see an improvement. I see obviously that we are launching new products. I see that we are taking orders. I still believe that we might be seeing as well what we saw on the American RV industry, growth for a number of quarters and then slowing down for a couple of quarters, stabilizing the market. So that's the expectation. I don't see that we are dropping 11%, 12% again from where we are. So that's on the Marine side, Agnieszka. On the other side, Americas, I think, it's pretty stable, just now. I think that, again, retail is still coming down slightly at the same time as manufacturing is adapting again, as you have seen in the last couple of months and expectation is that it will be balanced between retail and wholesale in Q -- sorry, in 2025 and expectation for 2026 is a growth of some 3% versus 2025. Agnieszka Vilela: Perfect. And then the second question is on EMEA and profitability in the business. When I look what we expected in Q2, you beat our expectations quite significantly. Now in Q3, you missed a bit. So just if you could give us some factors that are affecting profitability right now in EMEA. What are the tailwinds, maybe savings and less logistics costs? And what are the negative impacts in EMEA right now for you? Juan Vargues: So you have a couple of questions. I mean, first of all, we had a better mix in Q2 than we have in Q3. So after OEM, the balance of the aftermarket and OEM was different. Then we have a second issue. We -- as you know, in EMEA, we have also an important business for us, which is the CPV, the Commercial Passenger Vehicles. We have the situation of one of the main customers we have, JLR, did suffer a cyber attack. In that business, we have decent margins and that had a negative impact, both from a sales perspective, but also from a margin perspective. So those are the 2 main differences that we have in EMEA. Stefan Fristedt: So on JLR, I mean, their factories have been closed for a big part of the quarter. Agnieszka Vilela: Okay. Can you quantify the impact on your EBITA in the quarter? Juan Vargues: No, not on EBITA, but it had quite an impact on the EMEA numbers specifically. Stefan Fristedt: On sales. Juan Vargues: On the sales, absolutely. Stefan Fristedt: I mean, CPV is generally a more profitable -- or yes, it's an over-average profitable business. Operator: The next question comes from Daniel Schmidt from Danske. Daniel Schmidt: A couple of questions. And then maybe turning back to Marine. I appreciate that it's quite difficult to exactly know if this is a longer turnaround or not. But I think given that sort of retail is not super strong, but it's also a function of the fact, I guess, that it's been quite hefty underproduction in Marine over the past 4, 5 quarters. So I guess there's some catch-up to be done there. Is that your feeling as well? Juan Vargues: Yes, it is. But at the same time, I need to comment as well, Daniel, that we might be seeing what we saw on the RV side that we had a couple of positive quarters and then might slow down before getting stability. So again, I do believe that we need just now to be super agile, right, on the way up and the way down as we have been on the RV side. I mean, the good news, when I perceive still, Daniel, I mean, again, you can take it from a negative perspective or a positive perspective. The positive perspective is obviously that I don't see the market coming down 12% again, that even the decline in retail is becoming smaller than what we have seen. At the same time, as you are totally right, production has been very, very low in comparison to retail. So there is a catch-up. So my feeling is that some manufacturers, they have started to produce again. But then, of course, if retail doesn't come in Q2 when the high season starts in the U.S. specifically, then we might have a slowdown again. And then you have another factor, which I would like to comment because, obviously, a lot of the questions that we get are always about the U.S. market simply because it's 75% of the market, the world market. But we have positive growth in EMEA that was pretty nice in the quarter, and we had positive growth as well in APAC. So as a matter of fact, for us, the growth in Marine in the quarter was not negative, but we want to fly in Q1. And just again, 75% of the business is in the U.S. So I was telling you that the rest of the world, we performed better. Daniel Schmidt: Okay. And could you say something about the pace? This is very detailed and sorry for that. But given that you are shifting from decline to growth now in Marine after 8 quarters in a row of decline, could you say anything about the pace you saw from July until now basically when it comes to Marine on a year-over-year basis in order intake or in sales or anything? Juan Vargues: It has been pretty stable in sales. We have seen improvements on the order intake. So our intake was positive -- the order intake was more positive than sales in the quarter. Stefan Fristedt: But keep in mind, Dan, that the part of that order intake is obviously for delivery also next year. So not everything is going to be delivered now. Juan Vargues: In the coming weeks. Stefan Fristedt: In the coming weeks or in the coming quarter. Daniel Schmidt: Yes. But even though there's no sort of big meaningful improvement in top line in Q3, it is back to growth, but the margin is up quite a bit, and of course, it comes back to the savings. But is there anything -- has there any impact at all when it comes to the gyro that you've talked about? Is that selling. Has that been delivered in Q3? Is that having an impact? Is that going to have a bigger impact in the coming quarters? Juan Vargues: We are delivering the gyro. It doesn't have any substantial impact on the margins. On the contrary, you have, as I commented, the geographical mix, which is benefiting us just now. Daniel Schmidt: Okay. And then when we -- as you mentioned, if you look at OEM on Americas on the LVE side, it is the second quarter in a row that you are performing better than the market. Is that the function, you think, of the work that you did last year in trying to get back to on certain customers that have been maybe discarding you a little bit and you're back to the model year '25 and '26 now. Is that what we're seeing because the market was -- it looks to be a little bit down on shipments so far in Q3 and the same was -- I think it was flat in Q2, the market and you were up a couple of percent. Is that what we're seeing? Juan Vargues: We have a lot of activities ongoing. We have -- so that's what I can tell you is that we are working very, very close to our customers just now. We're spending a lot of time. I am visiting quite a few of the customers myself, getting the feeling. We see positive -- we get positive comments in the recent shows as well, both in the U.S. as in Europe. So I'm optimistic. I mean we are not there, obviously. As you know, we shrunk more than the market for a couple of years. And of course, our intention is to recover part of what we lost. Daniel Schmidt: Yes. And then on EMEA, if you look into the last quarter of this year, I think there was quite substantial production shutdowns, especially from one of the bigger players. Do you see the same development happening in this year? Or will there be less shutdowns, you think? Juan Vargues: I think that we will see improvements versus last year simply because last year was brutal, right? I mean Q4 last year was very, very, very healthy. So I don't expect -- I mean, as you know, this industry is always kind of correcting by running shortened weeks, still to be seen what's going to happen in connection to Christmas, but I'm not expecting the same negative effect that we saw in Q4 last year. You're reading and you are talking to more or less the same people as I'm talking. I mean the positive is more optimistic today than we had 1 year ago. I mean 1 year ago is really when all these massive shutdowns took place, right? Now we have seen very low production numbers for 9 months basically. Stefan Fristedt: And registrations are bit higher than production. Juan Vargues: Absolutely. I mean registrations, if you look at registrations, registrations after 9 months are down to minus 4% in Germany, minus 2% for Europe, right? So of course, that after 1 year, you will get more and more into balance. Daniel Schmidt: Yes. And then sorry for missing the very early part of this call, but you did refer to labor irregularities impacting Mobile Cooling in the quarter, and you said something about needing to hire 200 people. Is that coming back to immigration policy in the U.S.? Is that -- was that the reason? And what was the impact in terms of impact on profitability? And is that continuing into Q4? Is that ending now? Juan Vargues: It's Q3 and Q4 and then we are going to be done. Stefan Fristedt: Yes. So I mentioned that the impact for Q3 was approximately 0.7% on the profit margin as a whole. And then it will continue into Q4 somewhere 1% to 1.5% units on the margin. And then from Q1, we expect these effects to be fully compensated by price increases. So it's... Daniel Schmidt: And that impact, is that both the tariffs and the labor irregularities combined? Stefan Fristedt: Yes. It is mainly tariffs and the labor efficiency/labor cost. There is also some currency effects in there as well. But the majority is related to the 2 first ones. Daniel Schmidt: Okay. And also, sorry for dwelling here. But Juan, you mentioned at the end of your remarks, I think that the starting point on -- from a top line perspective is a little bit better. Was that referring to the start of Q4 compared to the start of Q3? Or what was that comment relating to? Juan Vargues: Yes. So we have seen order intake improving quarter-by-quarter, right, since Q4 last year. So we had a pretty low Q4. Backlog situation was pretty low at the end of Q4 last year. Then we saw a further deterioration in Q1. We saw a clear improvement in Q2, and we saw an additional improvement in Q3. So our backlog situation at the end of the quarter is much better on the backlog situation than we have had at the beginning of Q3, which is positive. Operator: The next question comes from Gustav Hageus from SEB. Gustav Sandström: If I can ask a question on the organic growth in the quarter down with 6%? You mentioned customers trading down in aftermarket. You mentioned some price increases, but more to come. So it would be very helpful if you could try to sort out the components in organic decline here in respect to price mix and volume and what you expect in terms of prices now, if you can quantify that a bit with your new price hikes going into 2026, that would be helpful. Juan Vargues: I mean the vast majority of the prices is going to take place from a Service & Aftermarket perspective. And then the other one is really on Mobile Cooling, what we have seen. We compensated for the tariffs in both Marine and LVA. We almost compensated for the tariffs in Mobile Cooling. But again, we had a price time lag for a couple of customers, and they are major customers for us. So that's where we have the difference. And then, of course, we are doing minor price adjustments depending on the market, depending on the product and depending obviously on the competitive situation. So I would not expect massive price increases moving forward as far as the market looks as it does. I think we need to be careful just now, and we also need to find the right balance, obviously, between keep improving our margins, but also starting to recover some volume now when the market seems to move into a little bit easier situation. Gustav Sandström: Sure. But the negative organic growth in the quarter, is it fair to assume that the volume growth was bigger than that number? So we had... Juan Vargues: No, but I wouldn't overestimate how much bigger. I think we are a little bit bigger, not much. Gustav Sandström: Do you think single-digit volume decline in the quarter. Is that a fair assumption? Juan Vargues: Yes, it is. Gustav Sandström: Okay. Okay. And you mentioned the order intake improving sequentially. Do you see any trends in terms of mix, what type of products that are sold. And in terms of price versus competitors, if you can have a comment on that given that you have quite a lot of exposure from internal production versus some peers? Juan Vargues: Yes. So we see -- let me say, there were 2 questions. The first 1 was -- the second one is competition. The first 1 was? Gustav Sandström: Sort of did you see any improving mix sequentially? Juan Vargues: Yes. So we have seen very clear improvements on the OEM side. We have seen very clear improvements on the distribution side. And then on the contrary, Service & Aftermarket has been a [ second ] month. Gustav Sandström: And that comment relates to mix, so gradually improving mix in those 2 first? What was that comment on? Juan Vargues: But again, if we think about the 3 channels, we have seen very clear improvements on the Marine side, right, is on the OEM altogether, but especially on the Marine side and LVE, we still see that LVE and LVC are tough still today from an OEM perspective. But again, altogether, the OEM channel is improving quite a bit. We see the distribution channel also improving. And there, we have, as you know, a number of businesses where the biggest one is Mobile Cooling. So as I said, Mobile Cooling order intake is improving quite a bit as well. and then Service & Aftermarket has been pretty flattish in comparison to where we are coming from. So still a negative order intake, less negative, but still negative. Gustav Sandström: Okay. And in terms of pricing in U.S. versus some competitors, I guess, in particular, in Mobile Cooling and so forth, are you following also nondomestic producers in terms of price? Or are you -- yes. Juan Vargues: No, I think the difference -- the main difference is that we were pretty early. I feel some of our competitors were pretty late, but we see that all of them are increasing prices step by step. So I feel the difference, obviously, that most probably they built up a lot of inventories just in case as soon as Mr. Trump was elected, while we implemented the prices in connection to the tariff implementation. Gustav Sandström: Okay. And then final one for me, I guess it's a bit speculative, but on the net debt-to-EBITDA gearing target, what you chances are that you'll come below 3 as we end the year? Stefan Fristedt: I think we are now moving into the part of the year where cash flow is a little bit less strong, right? Q2 and Q3 is the 2 strongest cash flow quarters that we have. So it's -- I would probably say that 3 years would be nice, but I would still feel that I think we are still going to end above. Operator: The next question comes from Fredrik Ivarsson from ABG. Fredrik Ivarsson: Sorry, I got in a bit late, so excuse me if you already discussed this, but I'll try. First one on Mobile Cooling. We've seen sales declining, I guess, for 3 years now, and we've been talking about inventory reductions among retailers for quite some time now. Do you guys have a view on the inventory levels at the moment where you're at, especially Igloo in the U.S.? Juan Vargues: Inventories are not bad on the channel, what we can see, right? I mean then, of course, you have -- we have seen 2 months pretty nice inventories coming down and then you get major orders and then all of a sudden, the sell-through is a little bit worse. So I mean, something that we didn't comment on the report is that the last month, meaning September was pretty rainy in the U.S. And for the Mobile Cooling business, that has a lot of impact. So we cannot say that we perceive inventory levels in the Mobile Cooling channel being high just now. They are gone. I think people on the contrary are very, very, very careful in not building unnecessary inventories. So everybody is placing the orders in the very last minute. And that's a change from where we are coming from pre-pandemic, where people were building up inventories in advance. Now people are -- I don't know if we can talk about Just In Time manufacturing, but retailers are as much Just In Time as they can and putting on us being ready. Fredrik Ivarsson: Very clear. And then staying on Mobile Cooling, it seems to me like the margin is almost set to expand in 2025 despite all the issues you mentioned and then obviously, sales being down 20% organic over the last 3 years. So my question is, where do you see the margin in this business under more, say, normal circumstances? Juan Vargues: I mean we commented from the beginning, right, that we expect Mobile Cooling to be 15-plus EBITA. That's where we -- and that's still below, so to say, what the Dometic brand is coming from, right? But we believe that lifting from where we acquired the company to 15% is a pretty nice achievement. If you look at what we have been delivering during the last year, we have seen an improvement year-by-year, and that's our expectation. Stefan Fristedt: And I mean if you look on the product launches that we have been showing here over the last couple of quarters in Mobile Cooling, I mean, that is products that is certainly going to contribute to that development. Juan Vargues: So I mean this is one of the areas, clearly, where we are investing a lot in product development. We are investing in building up our sales organizations. And despite all the investments that we have, still, we see margin improvements. Now we have a couple of one-offs this quarter, and then we had also the production issues in Q2, right? But apart from that, we see an underlying improvement year-by-year, a clear improvement year-year. Fredrik Ivarsson: Yes. Yes, I appreciate that. And a follow-up just on the one-off you mentioned just now. Juan, did I hear you right? Do you guide for 1% to 1.5% on the group margin impact in Q4? Juan Vargues: Yes, based on both the tariffs and the wages and the labor efficiencies. Fredrik Ivarsson: Okay. So like SEK 40 million to SEK 60 million. Juan Vargues: It will be gone again from Q1. Fredrik Ivarsson: Yes, absolutely. Good. And maybe last one from my side. I saw the Igloo lawsuit trial moved to March from September. Do you have anything to comment on that? Juan Vargues: No. I mean from our side, the sooner, the better since we feel very, very confident that we are going to win the case. So there is not -- we have not provoked that delay. It's not us trying to delay. It's the other way around. We would like to get it done. the discussion beyond us. Operator: The next question comes from Rizk Maidi from Jefferies. Rizk Maidi: Sorry if this has been tackled. So I'll start with tariffs and Section 232 extension in August. Just wondering if this drives you to -- if there's any impact direct or more importantly, indirectly on the business, and I'll start there. Stefan Fristedt: I think that we will have to see where this ends in the bidder end. But I mean, with the price increases and other measures we have taken, we believe that we have -- when the time lag has closed, we believe that we have taken the measures to compensate for the increased tariff cost. Rizk Maidi: Okay. And then secondly, on Service and Aftermarket, I mean, the decline now, as you said, Juan, was less than before. Historically, you talked about this bullwhip effect. Maybe if you could just talk about sort of sell-in versus sell-out here. This market has historically been quite resilient. This is exceptional. Do you actually expect to recoup those big, call it, destocking years sort of -- does that need to reverse at some point in your view? Or that's basically you see it as a post-COVID buildup in inventories that would never go back to? Juan Vargues: No, I think that we are human beings. I think that's going to come back. But in order to get into that point, we need to get consumer confidence. We need to see the traffic and the foot traffic into the stores, the foot traffic, both physically and digitally to increase for the dealers to there to build up more inventories that they are doing today. Just now it's in the very last minute. But again, I'm fully convinced. Remember, if you go back 5 years ago, we -- the flight industry would never come back, right? The carriers would never recover, and you know where they are today, right? I think it's time. Rizk Maidi: Understood. And then perhaps last one on my side, just perhaps an update on divestments of noncore assets. How much has been achieved? How much is left? I don't know if you can communicate on this? And how do you see the appetite from potential buyers at the moment and the valuations you're able to get? Juan Vargues: So you have 2 different areas. One is product areas that we are leaving that we are discontinuing, low margins, we don't see that we can get into a #1, #2 position globally, and then we don't want to be part of that. As you know, we have already left 1% and is more to come. We will see changes over time. And then we have the divestments where we are working extremely hard. We are in discussions with a number of partners. But obviously, we still have a gap between the sell side and the buy side. And as we said, I mean, we want to create value. We don't want to give things away. And if we need to wait until the market looks in a better way, then we will do it. But again, all those discussions keep on going. Operator: The next question comes from Johan Eliason from SB1 Markets. Johan Eliason: Juan and Stefan, just a few questions here at the end, maybe on the cash flow again, you already alluded to where you sort of think net debt will end up to. But are there any particular issues we need to bear in mind when modeling the final quarter cash flow? Or are there any sort of higher charges from the restructuring programs or tariffs being paid out, et cetera, that could potentially impact the fourth quarter cash flow? I guess, otherwise, the pattern this year has been a decent cash flow, but a bit weaker than last year. And I thought that would be the case for Q4, but I just wanted to see if there's anything to bear in mind there. Stefan Fristedt: I think that you should look on the seasonal pattern, right, of our cash flow. That's number one. Then we were talking about that we had SEK 35 million in payout in Q3. I think you should expect that to be a little bit higher in Q4. And that will then, of course, also give you an indication that the cash out has been a little bit lower for 2025 compared to what we did believe in the beginning. But that's more related to the timing of certain activities. So that will be a little bit more that is flowing over to 2026. So -- but I think you should expect the payouts of that to be a little bit higher. So I think that's what I should comment. I mean it's like I've said, I mean, '23 was the best year ever. '24 was the second best year. And then I think 2025 is coming thereafter. So it's probably a good way of thinking about it. Johan Eliason: Good. And then you are leaving some areas where you see are not competitive. You have seen some competitive pressure. I think you talked about the big fridges over in the U.S. previously. Are you seeing any changes in the competitive picture now after tariffs and all what you have out there? Juan Vargues: Not much that far. I mean what we have seen is that we were pretty early increasing prices on the tariffs. Most of our competitors in the U.S. were slower, I guess, that they built up inventories in connection with the election. And -- but we have seen that all of them are increasing prices step by step. So I do believe that we need to wait a little bit longer to see what happens. I think that a lot of people have been living on inventories. Unknown Executive: And we have one question from the webcast audience. Could you please give some color on the inventory situation in the different distribution channels? Juan Vargues: We commented before. We see inventories in both APAC and EMEA coming down stepwise simply because of the difference between retail and manufacturing in the last 12 months. We see the U.S. LVE side. So the RV side in the U.S. is in balance, total in balance. We see Marine still unbalanced. In the marine side, 70% of dealers, American dealers still feel that they are carrying too high inventories. We are talking about distribution, we don't see any inventory buildup. I think that what we see there is that dealers and retailers are carrying as little as they possibly can. They rather lose business than they carry inventories. So everything is in the last minutes. And then on the Service & Aftermarket, it's exactly the same. So wholesalers nowadays, bigger distributors are not carrying inventories. They want manufacturers like us to carry the inventories. And dealers and smaller dealers, they are gone. So I believe we got a question before. Do you think that this kind -- the typical inventory buildups are going to come back? I'm fully convinced that they will. But in order for that to happen, we also need to see consumers starting to spend more money. I think we have been suffering the entire industry or industries. It's not just this industry. I mean we see that everything having to do with consumers with the exception of food is behaving in a very similar way. Unknown Executive: And we have one question remaining in the queue, I believe. Operator: The next question comes from Daniel Schmidt from Danske. Daniel Schmidt: Yes. Just 2 short follow-ups. On the savings program, it sounds like you're quite happy with the progress so far and a run rate of SEK 250 million by the end of Q3. How should we view that going into '26? Because it's quite meaningful steps that are supposed to be taken in terms of savings in '26. I think you've said run rate SEK 750 million as we leave 2026. And of course, it comes back to the actions that you need to take, how are they sort of scheduled for '26? Or how should we view that? Is that back-end loaded or even through -- evenly distributed through the year or... Stefan Fristedt: I would probably say that it's a little bit more back-end loaded because you're obviously going to get the full effect is coming -- going to come gradually after the implementation. But we have some bigger projects, right, that is going to take until like mid next year before they get fully implemented. But on the other hand, we also have some other activities that is going to be completed now in Q4. So -- but I would probably say it a little bit twisted towards the second half. But I mean, we still confirm SEK 300 million run rate saving at the end of this year and SEK 750 million by the end of next year. Daniel Schmidt: Yes. Okay. And then just maybe coming back again to the CPV incident in EMEA, you got the question and you said that it had an impact on sales, sounded meaningful. Would you dare to estimate how much that was in top line impact for you guys? Juan Vargues: It was -- well, in terms of krona, we are doing about SEK 30 billion for EMEA. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Juan Vargues: Thank you very much to all of you for your attention. As we commented at the beginning, we know that it's a very busy day for many of you. We will keep working hard to protect our margins, but also to keep investing in the areas where we see the growth moving forward. And we are fully convinced that we are going to get down our leverage to the target. We cannot say when, but that's our firm intention, and we will get there. So thank you very much for your attention, and have a great day, all of you. Thank you. Stefan Fristedt: Thank you.
Operator: Welcome to the PowerCell Group Q3 2025 Report Presentation. [Operator Instructions] Now I will hand the conference over to the CEO, Richard Berkling and CFO, Anders During. Please go ahead. Richard Berkling: Good morning, and a warm welcome to this quarter 3 report on what is a very busy day on the Stockholm Stock Exchange with a lot of companies making their presentations. So we're extremely happy to see that many joining us at PowerCell. So we have closed quarter 3, and we are quite happy with the outcome. Previously, in quarter 1 and quarter 2, we reported with the headlines of steady pace through rough waters in quarter 1, which actually gave a good description on how quarter 1 played out. Quarter 2 had the headline steady pace through improving waters, really showing that we saw improvement in the market. And now the third quarter, what is describing the headline is the steady growth and solid margins, which actually described the company quite well where we are at the moment. We saw good growth in quarter 3 compared to 2024, up 90% compared to last year. Year-to-date, it is up over 50%, which is quite encouraging. Gross margin is continued to improve, although not on record levels, but we have talked about this before that we see volatility over the quarters. Also encouraging to see that the rolling 12 months revenue remained over SEK 400 million, which is the top line momentum we want to have in the company. Also encouraging that we protected the EBITDA in a way that we are still positive overall [Technical Difficulty]. Can you hear me? Anders During: Yes. Go ahead, please. Richard Berkling: I was kicked out for some reason. So continued positive EBITDA on rolling 12 months, also very encouraging. This is one of the focus areas we had for PowerCell. I would say, since the beginning, we need to show a breakeven level also in the early stage of this technology shift. So this is quite interesting. Anders will go more into details on this. We managed to leverage on the fixed cost base and drive growth and then despite having a slightly lower quarterly volume. So we're really happy with this progress that we can now show. Also some orders in quarter 3, although I would have expected or hoped for more, but it's also quite volatile in this market. What is encouraging is that we are continuing to see more OEM orders in the marine sector, where we now broke into the bulk carrier segment with the first -- world's first bulk carrier to GMI Rederi in Norway. So quite encouraging to see how the quarter was playing out. What we are in is a time of very focused execution where we also see then a quite good tangible process. I would say that the middle section here, where we talk about the operational resilience, is what is most important to me. We managed to provide a positive EBITDA on rolling 12 months because we are now in delivery mode. We are now actually tomorrow shipping the final shipments to our large Italian marine OEM, which means that we have completed deliveries of all those orders. And now in quarter 4, we are ramping up the final production assembly and will complete delivery to Torghatten up in Northern Norway with a large 2x 6.4 megawatt ferry installation, which means that we have now actually managed to build a company that is industrially stable. Starting production as we did in April this year is always something that you need to ramp up and industrial stability doesn't come for free. So the fact that the organization has been able to pull this off, deliver high quality on time or even before time, is something that is a very important quality mark for PowerCell. So the focused execution is something that I think that we should talk more about the PowerCell. Quite often, we talk about growth and we talk about the innovation of the company. But being an industrial credible partner is something that is going to win the orders going forward because with the OEMs that are placing the trust in new technology, they also need to place the trust in a very, very stable partner. So this is something that we're quite happy to be able to provide and also report. We also see, as we said, repeated demand around the Marine System 225 that we introduced last year in June. And that has been a very strong commercial success based on the fact that it is world-leading when it comes to performance, when it comes to energy density and when it comes to the value it creates for the customers that put this into operation. And then for PowerCell, once again, the operational resilience that we were able to start production and work on productivity, efficiency protecting the gross margin, which is extremely important for PowerCell going forward. So the combination of this is something that I'm quite happy to be able to report. With this, I would like to hand over to Anders on the numbers, and then I will come back and talk more about the outlook and how this connects into the broader context. Anders During: Thank you, Richard. I will take the opportunity to just run through the numbers. I think these numbers, after having listened to Richard, are in a way that, of course, the 19% growth is something to notice. I remember us saying in the beginning of this year and even at the quarter 4 report last year that we would find some more stabilization between quarters. And I think the third quarter is another evidence for that the more even, let's say, turnover in each quarter is there to stay for the future. Gross margin is slightly up. That is -- I mean, to the volumes we have and to the product mix we have when we sell, the variation of 6 percentage in a single quarter is not for us anything that is unexpected. It's more important to look at it when we get to the accumulated numbers and understand why the changes are there. EBITDA, I think, it goes without saying that we are happy with only being at minus SEK 2 million, given that we have taken SEK 5 million in provisions for the reorganization that we have announced. And I think the burning platform, and that what everyone is more concerned about listening to us today, is the operating cash flow. I think we have been quite explicit in the report describing what has happened in the first 3 quarters this year. I think that having listened also to now Richard saying that we're in final deliveries of immediately one of our larger orders ever and then continuing final deliveries of the second one, everyone can understand what that will do to cash flow as we progress into the future quarters of this year and the beginning of next year. So we go on to the accumulated numbers. We look at this point basically on the gross margin. Everyone recognized from the second quarter that we had a large deal with Bosch that brought in a lot of gross margin to us, given the fact that we were selling IP. And of course, for the remainder of this year, we will still see, on an accumulated level, a very high gross margin based on that deal. That is a level that, if I would guide anyone on this thing, may not be contained over the near future. We hopefully get back there later on. But short term, in each quarter, that level will not be maintained. I think it's important to also see that if we look at -- Richard mentioned operational leverage, you can claim a lot of things about what different things derives from. But one thing is certain that given the turnover we had last year, given the turnover this year and the change, excluding for all unusual items in the different accumulated book numbers are about SEK 88 million. And that for us feels very strong, acknowledging that at least half of it, when you make comparison, derives from the deal we made in Q2 with Bosch. But still, it's a very impressive for us at least change in how we manage profitability and earnings in the company. And as I mentioned and as I've highlighted to the right in this picture, background being given and everything that we feel completely comfortable about is that we have passed a lot of what has been described as the reason for building up working capital, and we also come to a stage where we can see that we are delivering and what follows with that. So moving on to the next one. It is basically saying that we feel comfortable having a stable path. We grow 30% plus in our industry. If you went back 5 years, I guess, that would be viewed as very humble. If you flip it around and say that this is an industrial company in an earlier stage of the market, it's a number that I feel that we are very comfortable with. And also that we have brought on rolling 12 months EBITDA to a positive number of SEK 21 million, and that makes us feel comfortable for the future as well. Having said so, I will leave it back to Richard for the continuation of the presentation. Richard Berkling: Then also reminding you on the upcoming reports, quarter 4 report February 4, 2026, and then quarter 1 report in 2026 on April 23. So then if we look at the segment highlights and what is building up the result and the business at the moment, we see good commercial traction in Marine, all subsegments. We saw the order from GMI Rederi, which was quite encouraging because that is, as we said, the first break into the bulk carriers. We need to mention then the IMO decision or postponement of decision last week. It was a disappointment to the industry. Many put their trust in the fact that the IMO would regulate the net zero tariffs on a global scale. However, in Europe, we already have in place even stricter regulations. So to me, I'm not too surprised that they delayed it because it takes time to change industries in a technology shift. So you will always have resistance. So hopefully, a year from now, they will have a resolution that is signed that is perhaps a bit more easy to adapt for the operators. But in the meantime, we continue to see a strong demand from especially Europe, but a lot of interest globally as well. Power generation, we were quite happy to yesterday report that Zeppelin Power Systems placed an order for 2 different systems implemented in Europe. The fact that they are now exploring to different applications is quite interesting because power generation, as we have pointed out, we believe that power generation will be the largest segment going forward. The difference from marine is that we have still not seen a trigger where an OEM is putting a stick in the sand and said, now we do this. But we are seeing a more clear commercial landscape emerging for backup power and peak shaving applications. There is a lot of discussion on data centers. Of course, we have a quite close collaboration with parties out there. But as I said, we have not seen the trigger where somebody is really putting a stick in the sand and say, now we do this. So we try to contribute with that. We try to challenge the industry, and I will have later on in the presentation some more news on what we will do in that segment. In aviation, we continue the certification process with ZeroAvia and other aerospace partners. They're not the only one who are in certification process. What is quite encouraging is that now ZeroAvia actually have delivered their first systems to customers, and they will be put in operation in 2027. So now we have a deadline on that one, which is really, really encouraging. This is the first information we have seen from them on when this will be put into operation. What we also have seen is that we have now industry validation that our strategy with the medium temperature PEM, which is our next-generation fuel cell stack is the good enough step for larger turbo aircraft in the next generation. So more interest in our collaboration together with Honeywell on the Newborn platform, which is already materialized in the commercial agreement in marine. But for aviation, the fact that we can do with the medium temperature is a technology step that is really valuable to PowerCell because that's where we have invested our position from a technology perspective. Going once back to the operational leverage. One reason why we are able to show this rather good underlying progress when it comes to operational leverage is that we have had for 2025, a strategy to consolidate. And we have consolidated to be able to accelerate. We have consolidation of product platforms. Previously, it was a bit fragmented, which was a risk for a company like PowerCell because you might end up in doing projects everywhere. Now since the introduction of MS 225, we have seen now a serious delivery, which you see in the bottom there. Start of production in April. We now have more than 100 systems in order and in the pipeline. As we said, we are completing the delivery to our Italian shipyard this week, tomorrow, which, of course, is one of the reasons why we have been tying up working capital to the extent that you have seen in the report. Now when we move on to delivery to the Norwegian ferries up in Bodo that is just one more proof point on how well the consolidation strategy have worked, which is also seen in the gross margins of PowerCell. But then in quarter 3, we also reported a change in the management group, which is also a consolidation of the organization. When building up a company like PowerCell, we changed more or less everything in the last 4 years, building up technology portfolios, product portfolios, operations, marketing, sales. I wanted to have a large management group to be able to cover all the aspects of PowerCell. Now we are more mature. We now see a more clear path towards growth. And then we need to have a more streamlined operational management team, which is also why we have consolidated the organization. So this is to increase speed and acceleration and also clear out more accountability now when we actually will speed up everything we do. Anders talked about this before, the fact that we have growth without cost base inflation, I think, is really, really important. Many companies like PowerCell when they grow, they tend to overinvest and always scale up with more and more resources. We are actually going to run 2026 on a lower overhead cost base than we have had before, which is also one proof point of this consolidation strategy, which is also then, I would say, a mitigation to make sure that we can defend both EBITDA and EBIT breakeven on lower levels than most of our colleagues in the industry. So the strategy is, of course, being profitable and scale through discipline. This is something that is in the DNA of the company, but you always need to be there and protect it, especially when you grow. But we see now that we maintain a breakeven level at around SEK 400 million of top line revenue. So then looking at the product strategy and next-generation platform. This is now something we have had in the reports a number of times, but it's worth reiterating. We see that the Marine System 225 platform that was introduced in June last year has been very successful. I would say the most dominant product in the marine industry for fuel cells. Now we are complementing it with a CE marking in quarter 4, optimized for power generation segment, which is a very important proof point and a quality stamp for PowerCell. We continue to see interest in the methanol reformer, both cruise ships, service vessels [indiscernible] and but we also see a growing interest from power generation. The main value there is that you get more energy on a smaller energy storage footprint. So where we have backup power for potential data centers with hydrogen, you need 1/6 of the size, if the energy is stored as methanol. So there is a large interest in this technology from the power generation segment as well. Also availability of methanol is quite good in different regions of the world at a low cost. So this could be something that is enabling growth in areas where you don't have access to hydrogen. And then power generation. In quarter 4, we will have an enhanced product offering in power generation, more optimized for that segment. It is built on the Bosch collaboration that we communicated in quarter 2, to be able to attract more price-sensitive applications. And this is something that is quite important in a technology shift that willingness to pay between segments are different. Marine commercial, for instance, have much higher requirements on performance, quality, robustness, et cetera, which makes the product there more expensive. For power generation, we need to have something that is a bit less expensive. It's a bit more price-sensitive segment, and this is where we now will introduce a new product platform in quarter 4. And then as we said before, we have a strong interest in our next-generation fuel cell stack, which is, I would say, our guarantee for future earnings, which is quite valuable to PowerCell. So reiterating what we said before, the building of the strategic foundations for PowerCell is that we have a platform system and product readiness, the ability to actually have industrialized components because right now, we see growth with a rather short from order to delivery. The demand is a bit volatile, but when we see an order, it's rather short delivery time. And this is really important to us that we are able to meet that. This is also why we have tied up a bit more working capital than perhaps we would have liked, but that is a trade-off that you have to do as both CEO and CFO in a company like PowerCell. It's also important to have the industrial partnerships because the OEMs will drive growth in the industry. They are the Tier 1 to the end user, and they need to invest and be the guarantee of technology, not just as a delivery but also over the life cycle as a service partner. We support with service to them as the second tier. And then, of course, the fiscal discipline. This is really, really important for PowerCell. And we will protect breakeven at low volumes, more or less regardless of anything. So if we then look back to what we set out to achieve in 2025, this was part of what we have said as the focus areas for 2025. So one focus was to reach breakeven on rolling 12 months. We can check that one. We also had an ambition to continue to grow with OEM contracts because we believe that, that is what we give the most sustainable growth. Also, those customers put products in operation. So they are proven and tested and actually validated that they generate value to the end customer. That one with the 2 recent OEM contracts that we have signed in quarter 2 and quarter 3 is quite encouraging. We have said that we need to scale existing product generation. And this is also what has now been generating the growth and also the fact that we reached breakeven. We are doing this, while still investing into the next generation. And I think that the last sentence there is quite important that we are proud of the ability to balance innovation, industrial stability and leverage growth. It's quite easy for a company like PowerCell to optimize on either/or. But the fact that the company has been able to provide this and also that we have had the support from the Board to pursue this sometimes complex strategy is something I'm really happy about because it is not just giving us the fact that we have breakeven today on low volumes. But with the next-generation products, we are now also well positioned for what will happen in future earnings. So that balanced approach is something that I'm really happy about, and I'm proud that we have had the support from both Board but also the commitment and the, I would say, brilliant performance from our team, both in operation and innovation and technology and sales and marketing. So really happy with that progress because it's -- we need it. It's difficult to do business in any technology shift, but we have proved that we can do it and we can actually breakeven on very low volumes. So with that, we open up for questions. Operator: [Operator Instructions] Richard Berkling: Now I have to admit that I don't see the question. Let me see here. Here we are. Do you have any concrete initiatives in the data center area? We know that Bloom Energy and the situation in the U.S. is a question from [ Ari ]. Yes, of course, but as always, we cannot talk about things before they have materialized. There is a massive interest from the data center industry. And this is not only for CO2 emissions, but it's also for energy resilience. In many areas, the grid is full. So getting access to the grid, getting access to stable electricity is quite difficult. So replacing some of the old diesel generators with either fuel cells or something else is quite attractive for the data center operators. And they also have rather high margins on their own business, so they can do this. So we see a lot of commitments from the larger players. We met with some of them in New York during the New York Climate Week. But as I said, it is a combination of getting the whole value chain in position. You need to have supply of fuel, you need to have the grid access, et cetera. So finding the right balance point has been a bit tricky. But in quarter 4, as I said, we will come back with a more clear product offering and hopefully some clarity also in the potential that we see in this industry. So let me see here if we have more. Operator: [Operator Instructions] Richard Berkling: Anders? Anders During: Yes. Richard Berkling: Yes. We had a question, of course, on the cash position and how we see the end of the year and the beginning of next year, even though we don't make the detailed forecast, do you want to comment on that one? Anders During: I think it's without making forecast, which we will try not to do, but we would like to guide everyone reading the report as we understand that this is one of the key questions from a financial standpoint. And I think the efforts we have done in the first 3 quarters this year would -- either way you would have done it, accumulated more working capital. On top of that, we also spent money on those proceeds that we discussed during the share issue last year. And following what Richard just mentioned in the beginning of the presentation that we are in final delivery stages in 2 large projects. Obviously, those 2 large projects has terms and conditions included in them that indicates that once delivered, we get paid to not giving you any guidance, but with more stating that we feel comfortable about those dynamics. We are comfortable at this point in time. Richard Berkling: Very good. And then we had a question from [ Niklas Holmgren ] here. Once again, regarding the data centers, do you think you have the right product offering to make this a significant source of revenue for PowerCell over time? So far, it's been mainly SOFC manufacturers like Bloom Energy has been successful in this space. That is a very good question, and it requires some explanation. One reason why our technology, the PEM fuel cell complements the SOFC is that SOFC is a very stable installation. It doesn't take dynamic load well. So where we see a potential growing demand is for backup power and peak shaving because that's when you have the fast dynamic load that the PEM fuel cell is very strong with. The solid oxide fuel cell cannot do that because it takes a very long time to ramp up and ramp down. So there are different applications. So I think that the different technologies complement each other. And we believe that PEM fuel cells and the backup power peak shaving is a very relevant application for data centers because there are today very few areas globally where you can fully rely on grid access. So we believe that our technology will have a strong opportunity for the data center segment. With that said, as we presented here in the report in quarter 4, we will come back with a more clear product offering because we believe that the price point is slightly different from other segments. And we are now preparing an introduction of more targeted products to be able to capture that growth. So it's a very good question, and it gave us an opportunity to also explain the difference between our technology and the one that has been prevailing so far in this segment. Then also, we have a question on Torghatten. With Torghatten final delivery, can you comment on the service agreement with Torghatten? Yes, I can. Since we are completing delivery, we start delivery now in quarter 4 and will be completed in quarter 1. That means that for 2026, the service contract will be in place. It is a 10- to 15-year service contract that we will sign together with Torghatten. But the details of that contract, we need to come back to when it's signed because it's still under discussion. But of course, now when we are getting more large installations in operation with customers, the service side of PowerCell will be more interesting because now we will have a service revenue and a service opportunity that has been lacking before. And this is also one positive benefit of moving away from the early stages of project execution to more normal industrial applications and customers that put products into operational service. So it is both an opportunity for revenue, but also an opportunity to learn more and also show the industry how this works. So it's a good question. We had a question from Rakesh at Chevron Shipping. How do you expect the IMO Net-Zero talk failure to affect future orders? Well, since we didn't see any effects on the contrary that we had a positive effect because the IMO was not signed yet. This was just a proposal. It's been postponed now for 12 months. I think that the -- what we see now is that certain areas will wait. That is for sure, but I think that they waited anyway. So the segments and geographical areas where we see growth like Europe, that will continue because Europe already, as we said, have a more strict regulatory framework than what the IMO proposal was. So it's more likely that we see a continued hesitation in the U.S. for certain marine applications. But on the other hand, there are also those who want to accelerate because this is actually making business sense in certain areas already now. So we will continue to follow this and monitor, but we don't see any immediate impact on the order book or on the leads funnel that we are operating. I think that, that more or less concluded. We are now 1 minute past the deadline. So as always, thank you very much for listening in. We always encourage you to come and visit us in Gothenburg at the factory if you have time, regardless if you are a shareholder or if you are a financial analyst. So look us up, come visit us. And with that, have a nice day, and see you in February. Anders During: Bye-bye.
Operator: Good morning, and thank you for joining us today for QCR Holdings, Inc. Third Quarter 2025 Earnings Conference Call. Following the close of the market yesterday, the company issued its earnings press release for the third quarter. If anyone joining us today has not yet received a copy, it is available on the company's website, www.qcrh.com. With us today from management are Todd Gipple, President and CEO; and Nick Anderson, CFO. Management will provide a summary of the financial results, and then we will open the call to questions from analysts. Before we begin, I would like to remind everyone that some of the information management will be providing today falls under the guidelines of forward-looking statements as defined by the Securities and Exchange Commission. As part of these guidelines, any statements made during this call concerning the company's hopes, beliefs, expectations and predictions of the future are forward-looking statements, and actual results could differ materially from those projected. Additional information on these factors is included in the company's SEC filings, which are available on the company's website. Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures. As a reminder, this conference call is being recorded and will be available for replay through October 30, 2025 starting this afternoon, approximately 1 hour after the completion of this call. It will also be accessible on the company's website. I would now turn the call over to Mr. Todd Gipple, at QCR Holdings. Todd Gipple: Good morning, everyone. Thank you for joining our call today. I'd like to start with an overview of our third quarter performance, and then Nick will walk us through the financial results in more detail. We delivered exceptional third quarter results, achieving record quarterly net income and strong earnings per share growth of 26% compared to the second quarter. I would characterize this as a return-to-form quarter for our company as we have internal expectations to drive sustained top-tier financial performance for our shareholders and we hold ourselves accountable to achieve this level of success. We delivered across the board on our key operating metrics and exceeded the upper end of our guidance range for loan growth, NIM expansion and capital markets revenue. I would like to thank all 1,000 of our team members for their hard work delivering these exceptional results. Our record earnings were driven by a rebound in capital markets revenue as well as robust loan growth and continued net interest margin expansion that drove a substantial increase in net interest income. Also contributing to our strong results was an 8% linked-quarter increase in wealth management revenue as this business continues to perform at a high level. We are pleased to report continued margin expansion again this quarter, driven by strong earnings asset growth and higher loan and investment yields while maintaining a static cost of funds. Our loan growth accelerated significantly, increasing by $286 million or 17% annualized and was 15% net of the planned runoff from M2 equipment finance loans and leases. This growth was fueled by strong new loan production from both our LIHTC and traditional lending businesses. Looking ahead, we have a solid pipeline and remain optimistic about sustaining this momentum and are guiding to gross annualized loan growth in a range of 10% to 15% for the fourth quarter. As I discussed in our last earnings call, I view our company is operating through 3 primary lines of business: Traditional banking, wealth management and our LIHTC lending platform. I am pleased that each of these delivered improved performance this past quarter. We continue to deliver robust organic growth and improved profitability in our traditional banking business. Our multi-charter community banking model built around separate autonomous banks that attract top-tier talent and the best clients in our markets allows us to consistently capture market share from our competitors. We had strong traditional loan growth and core deposits grew at an annual rate of 6% for the quarter, and $410 million or 8% annualized year-to-date. Additionally, our digital transformation remains on track with key milestones achieved this year, including foundational work toward our Bank of the Future, and the successful conversion of the core operating system for the first of our 4 charters earlier this month. By streamlining and improving our technology stack, we expect to unlock significant operating leverage in the future as we convert our banks into a unified, more modern and efficient operating system. These upgrades are expected to drive measurable improvements in productivity, service delivery and cost structure while empowering both our bankers and our shared services support teams with better tools to serve clients more efficiently and effectively. Looking ahead, we anticipate continued progress on this initiative with each conversion bringing us closer to a fully integrated agile platform that enhances efficiency and reduces long-term operating costs. This will further improve the profitability of our traditional banking business. Wealth management also remains a strategic growth engine. Year-to-date, we've added 384 new client relationships and brought in $738 million in new assets under management. In the third quarter alone, AUM grew by $316 million or 5% and revenue surpassed $5 million, an 8% increase over the prior quarter. Wealth Management revenue year-over-year is up $1.5 million or 15% annualized. Our success in this business continues to be driven by the experience of our team and the power of our relationship-driven model which connects our traditional banking clients and key professionals in each of our communities with our dedicated wealth advisers across our markets. As we expand into Central Iowa and Southwest Missouri, we are gaining momentum and deepening client engagement, reinforcing Wealth Management as a key driver of our long-term strategy. Our LIHTC lending business delivered exceptional performance in the third quarter. Activity rebounded sharply, underscoring the continued demand for affordable housing and the strength of our seasoned team. Developers are actively navigating the broader macroeconomic challenges from earlier in the year. demonstrating resilience and a commitment to advancing their projects. We continue to view LIHTC lending as a highly durable, highly profitable and differentiated line of business for QCRH, anchored by our deep network of developer relationships and the historically high-quality assets, our platform consistently delivers. The demand for affordable housing remains high and recent legislation has expanded access to affordable housing tax credits. Our strong relationships with industry-leading LIHTC developers, combined with persistent market appetite, positions us well to grow this business and further strengthen our financial performance. In addition to winning more deals with our existing developer clients, our team has created new relationships with 10 experienced LIHTC developers this year with several of these being among the best developers in the country. Given the strong momentum and the resulting strength of our pipeline, we are increasing our guidance for capital markets revenue to be in the range of $55 million to $65 million over the next 4 quarters. On the topic of annual guidance for Capital Markets revenue, I wanted to share some facts about our past performance that will provide some strong evidence on the durability of this business. We first provided next 4 quarters guidance for Capital Markets revenue in January of 2023 as part of our Q4 2022 earnings call. Since then and through our earnings call in October of '24, we provided next 4 quarters Capital Markets guidance a total of 8x. Our actual capital markets revenue results are perfect 8 and 0 in those 8 periods. Capital Markets revenue for those next 4 quarters was within the guidance range once and actually exceeded the upper end of the guidance range, the remaining 7 times. During this 2-year period, our LIHTC team has navigated a variety of interest rate environments and other challenges to deliver consistently strong rolling 12-month results. We believe that this clearly demonstrates the durability of this highly profitable business. We do not evaluate our success or the value of this business by a single quarter, but rather our performance over a 4-quarter horizon. This is not a transactional business, but one built on relationships with some of the best LIHTC developers in the country and their projects have a long production cycle. We will work hard to continue to demonstrate the durability of this business in order to drive the high valuation that we believe it deserves. We also continue to work on our strategic goal of improving the balance sheet efficiency of our LIHTC lending business, especially during the typical 2- to 3-year construction phase for many of our LIHTC clients. One strategy includes partnering with third parties in LIHTC construction loan sale transactions, which will enable us to expand our permanent loan LIHTC lending capacity and drive increased Capital Markets revenue. Additionally, LIHTC construction loan sale transaction strengthens our regulatory capital position by reducing risk-weighted assets, resulting in increased total risk-based and common equity Tier 1 capital that improves our capital flexibility and allows us to more effectively deploy capital. LIHTC construction loan sale transactions build on the momentum of our successful LIHTC permanent loan securitizations launched in 2023, which has opened significant growth opportunities for this portion of our business. We remain committed to finding innovative ways to expand our LIHTC lending capacity and support our developer clients who are making a meaningful difference in the lives of those that need affordable housing. Our continued focus on innovation within our LIHTC business will not only strengthen our financial position, but also reinforces our long-term commitment to scalable growth that benefits our shareholders. Our use of LIHTC permanent loan securitizations and construction loan sale transactions enable us to balance concentration risk, asset growth, liquidity and capital levels while generating capital markets revenue that significantly exceeds the impact of the loan sales on net interest income. Although securitizations and LIHTC construction loan sales strategies reduce on-balance sheet growth, they offer greater long-term value to our bottom line. We've consistently grown our LIHTC business both in terms of portfolio size and the capital markets revenue it generates. By freeing up balance sheet capacity, we can accelerate new loan production and unlock additional Capital Markets revenue opportunities. Since 2024, our average quarterly net loan growth has been $160 million, excluding securitization, and we expect this momentum to continue. As a result, even when we securitize loans in a given quarter, the go-forward impact on NII is muted. We rapidly redeploy that capacity into new originations, generating capital markets revenue that exceeds what we would earn by retaining those loans on balance sheet. We continue to manage our LIHTC business with agility and execute on strategies to enhance its sustainability and begin growing this business in order to drive long-term value for our shareholders. As we capitalize on significant growth opportunities, we are also strategically managing our approach to surpassing the $10 billion asset threshold. Our use of LIHTC permanent loan securitizations and the construction loan sale transactions provide meaningful flexibility in navigating this milestone. Our preparation for crossing $10 billion began several years ago, and we have proactively layered the associated costs into our current run rate. As part of our Bank of the Future digital transformation, we've also successfully secured higher interchange revenues and reduced debit card processing costs, helping to partially offset the anticipated Durbin Amendment impact. Thanks to our proactive planning and strategic execution, we are well positioned across the $10 billion asset threshold with confidence and modest financial impact. Moving to asset quality, which improved this quarter with overall credit metrics remaining excellent. Net charge-offs declined compared to the second quarter, and our provision for credit losses was slightly lower than the prior period. Additionally, total criticized loans improved during the quarter and have decreased 9% year-to-date. Between the start of the third quarter and October 20th, we have returned $10 million of capital to shareholders with 129,000 common shares repurchased at opportunistic valuation levels. On October 20, the Board approved a new share repurchase program, authorizing the repurchase of up to 1.7 million shares of outstanding common stock. The new share repurchase program authorization equips us with a flexible capital allocation tool, enabling us to be opportunistic and repurchase shares when it aligns with our strategic and financial objectives, underscoring our ongoing commitment to shareholder value. In summary, QCR Holdings is executing at a high level across all 3 core business lines. We continue to invest in technology, talent and strategic growth initiatives while maintaining disciplined expense management. We remain confident in our ability to sustain top-tier financial performance and deliver long-term value to our shareholders. I will now turn the call over to Nick to provide further details regarding our third quarter results. Nick Anderson: Thank you, Todd. Good morning, everyone. We delivered record quarterly adjusted net income of $37 million or $2.17 per diluted share, driven by strong performance across our core businesses. Capital markets revenue rebounded to $24 million, up $14 million from the prior quarter. Net interest income increased $3 million or 18% annualized, supported by continued net interest margin expansion and exceptional loan growth. Our NIM on a tax equivalent yield basis increased by 5 basis points from the second quarter, exceeding the high end of our guidance range. This expansion was driven by strong growth in both loans and investments, coupled with higher asset yields. By leveraging our liability-sensitive balance sheet and maintaining disciplined deposit rate management, we have achieved deposit betas nearly 2.5x higher than our earning asset betas. We have reduced our cost of funds by 43 basis points since the Fed began cutting rates in 2024. While the most recent rate cut occurred just 2 weeks before quarter end, we expect to realize the full benefit of that rate cut in the fourth quarter of approximately $500,000 of additional net interest income or 2 to 3 basis points of NIM accretion. We also remain well positioned to benefit from any future rate reductions as rate-sensitive liabilities exceed our rate-sensitive assets by $1.1 billion. In the near term, if there are additional Fed rate cuts, we expect 2 to 3 basis points of NIM accretion for every 25 basis point cut in rates. If the yield curve steepens, we'd expect performance at the top end of that range. And if the yield curve remains flat or modestly inverted, then we would expect performance at the lower end of the range. Our NIM TEY has now expanded by 26 basis points over the past 6 quarters. We anticipate continued core margin expansion and are guiding to an increase in fourth quarter NIM TEY ranging from 3 to 7 basis points, assuming no further Federal Reserve rate cuts during the quarter. The NIM TEY guidance range reflects a full quarter benefit from the September rate cut. In addition, we have repricing opportunities on approximately $168 million in fixed rate loans, yielding 5.5%, resetting nearly 100 basis points higher and continued CD repricing in the fourth quarter with maturities of nearly $400 million. These CDs are currently yielding 4.13% and are expected to be retained and repriced at rates between 3.45% to 3.75%. Noninterest income totaled $37 million for the third quarter. driven primarily by $24 million in capital markets revenue. We saw robust LIHTC activity, which led to a $14 million increase in capital markets revenue and exceeded the top end of our guidance range. Our Wealth Management business generated $5 million in revenue for the third quarter, an increase of 8% compared to the second quarter. On a year-over-year basis, Wealth Management revenue has grown by 15% annualized reflecting the strength and momentum of this business. Significant AUM growth across our markets not only strengthens our foundation but also helps mitigate revenue pressure during periods of broader market volatility. Now turning to our expenses. Noninterest expenses grew $7 million for the third quarter, primarily from robust capital markets revenue and loan growth, which drove variable compensation higher. Professional and data processing expenses and occupancy and equipment expenses related to our digital transformation also contributed to the increase in noninterest expense. Our highly incentivized variable compensation structure is designed to enhance operating leverage and provide expense flexibility across changing revenue cycles, rewarding our employees only after value has been delivered to our shareholders. For the third quarter, our efficiency ratio was 55.8%, the lowest in 4 years. Compared to the first 9 months of 2024, we have maintained strong discipline over core noninterest expenses, which are up less than 1% on an annualized basis, while adjusted net income has grown by 9% annualized. We continue to manage our operating expenses with discipline while making strategic investments in technology and automation to further empower our high-performing operations team. These investments are key to enhancing our future operating leverage and supporting the scalability and profitability of our multi-charter community banking model. We are retaining our quarterly noninterest expense guidance, which is projected to be in the range of $52 million to $55 million for the fourth quarter. This includes costs for our digital transformation, including the successful completion of our first core operating system conversion in the fourth quarter. It also reflects assumptions that both capital markets revenue and loan growth are within our guided ranges. Moving to our balance sheet. During the quarter, total loans grew by $254 million or 15% annualized. When adding back the impact from the planned runoff of the M2 equipment portfolio, total loans grew by $286 million or 17% annualized. Since 2023, loan securitizations have played a key role in supporting the continued success of our LIHTC business, which remains a significant driver of capital markets revenue. Year-to-date, core deposits have increased by $410 million or 8% annualized. We continue to generate strong deposit growth across our markets. These results reflect the success of our relationship-driven strategy of growing core deposits, providing a solid funding base that supports future growth. Turning to our asset quality, which remains excellent. Total criticized loans decreased $6 million or 15 basis points to 2.01% of total loans and leases. Net charge-offs decreased by $2 million from the second quarter, driven by lower charge-offs from our M2 equipment portfolio. Our total NPAs to total asset ratio declined 1 basis point to 0.45%, which is the lowest level since September of 2024, and approximately half of our 20-year historical average. Total provision for credit losses of $4 million was up slightly from the previous quarter and was due to loan growth, partially offset by improved credit quality of the loan portfolio. The allowance for credit losses to total loans held for investment was 1.24%. We continue to closely monitor our asset quality across all business lines as part of our historically strong credit culture. As we have passed the 1-year mark since announcing our exit from the equipment financing business, we are pleased to report that the runoff of this portfolio is progressing as planned. The portfolio has declined by nearly 40% and is on track to fall below $200 million or less than 3% of our total loan portfolio by year-end. Credit loss expenses for this business are down 45% or $4 million year-over-year. NPAs are also down 29% year-over-year, reflecting both the runoff of the higher-risk assets and the improved seasoning of the remaining portfolio. These positive trends support our expectation for continued softening in future charge-offs from this portfolio and enable us to redeploy capital into our core traditional and LIHTC lending businesses. Our tangible common equity to tangible assets ratio rose by 5 basis points to 9.97% at quarter end, driven by record earnings and improved AOCI as interest rates declined, partially offset by exceptional loan growth and share repurchases. Our common equity Tier 1 ratio decreased 9 basis points to 10.34% and our total risk-based capital ratio decreased 23 basis points to 14.03%, due to our strong earnings growth that was overpowered by our exceptional 15% loan growth and opportunistic share repurchases. We remain committed to maintaining strong regulatory capital and consistently assess our capital structure to support our business model and growth objectives. Our goal is to maximize capital flexibility while benchmarking against industry peers. In September, we successfully completed the replacement of $70 million of subordinated debt originally issued in 2020 that became callable. The new issuance for the same amount was structured in 2 privately placed tranches at highly competitive rates. This transaction further supports our Tier 2 capital levels. Additionally, in August, we secured a new source of funding, which will further enhance our available sources of liquidity to support our growth. We pledged a portion of our held-to-maturity nonrated municipal bonds in exchange for term borrowings of $134 million at a rate of 4.05%, which will reprice in 3 years. Our nearly $1 billion investment portfolio of HTM municipal bonds is a differentiator for us and is a strong high-quality earning asset with tax equivalent yields near 6%, and new bond issuances in the mid-7% range. This recent transaction highlights our ability to strategically unlock liquidity from long-term investments to support growth. We delivered another quarter of exceptional growth in tangible book value per share, which rose $2.50, approaching nearly $56 per share, reflecting 19% annualized growth for the quarter. Over the past 5 years, TBV has grown at a compound annual rate of 12%, highlighting our continued financial performance and long-term focus on creating shareholder value. Finally, our effective tax rate for the quarter was 9.5%, up from 5% in the prior quarter. The linked quarter increase is primarily due to $10 million in higher pretax income that increased the mix of our taxable income relative to our tax-exempt income. Our tax-exempt loan and bond portfolios have consistently supported a low tax liability. Given a mix of revenue in line with our guidance range, we expect our effective tax rate to be in the range of 7% to 8% for the fourth quarter of 2025. With that added context on our third quarter results, let's open the call for your questions. Operator, we are ready for our first question. Operator: [Operator Instructions] The first question today comes from Damon DelMonte with KBW. Damon Del Monte: Congrats on a really nice quarter. I just wanted to start with the margin in the guidance. I think you're calling for 3 to 7 basis points of expansion. That does not include any rate cuts. Is that correct? Nick Anderson: Yes, that's right, Damon. Damon Del Monte: And you had said for each 25 basis points, you could see another 2 to 3 basis point increase on the margin? Nick Anderson: Yes. So when we set that guidance range for Q4, 3 to 7, 2 to 3 basis points of that is coming from a full quarter's worth of the September Fed rate cut. We've got a fair amount of fixed rate loan repricing and CD repricing in the fourth quarter in addition to some additional municipal bond purchases that we have in our pipeline. So a combination of all that gives us some confidence in that 3 to 7 range. Damon Del Monte: Got it. Okay. That's helpful. And then I guess my second question here would be on the buyback. Just given the growing capital levels and given the activity in the third quarter, is it fair to assume that you guys will remain active in that regard? Todd Gipple: Yes. Damon, thank you for the question. Regarding future buybacks, I'd say this, we're very profitable with higher earnings per share, less expected net organic growth as we start using other partners' balance sheets and capital rather than ours to drive higher earnings. So that's going to reduce our need to retain more capital for organic growth. While we're open to M&A and we continue to look for partners, it would be a great fit strategically and financially, it's really not a priority for us right now as we have the ability to grow TBV and EPS at a faster clip than our peers. So this really reduces our need to retain capital for M&A. As you know, we have a modest dividend. Historically, that's because we were prioritizing organic growth and M&A. So that leaves us with a significant amount of capital available for repurchases and that's why we got started in Q3. We are growing TCE near the upper end of our preferred range. We became comfortable we are going to be executing some LIHTC offtake and freeing up more capital. So we could be opportunistic in buying shares at what we believe are unreasonably low valuations. And so we expect to continue to be opportunistic, really no algebraic formula for when or how much and at what price. As you know, it's more art than science, but we would intend to be opportunistic with buybacks based on valuation. Operator: The next question comes from Nathan Race with Piper Sandler. Nathan Race: Congrats on a great quarter. Todd, I'm not sure if you touched on it in your prepared remarks, and I apologize if you did. But in terms of the appetite for additional securitizations and the timing of which you would expect to complete the larger one that we've discussed in the past, would love maybe if you could just update us on that front? Todd Gipple: Sure. We are anticipating doing a large permanent loan securitization in the first half of next year. We've delayed that a bit to really build a bigger inventory. We have found -- we've done 4 of them. This would be our fifth. We are finding it as significantly more beneficial to have a larger securitization the order of magnitude really does matter in profitability. So we're building a bigger portfolio by waiting a bit. It takes some time to get through all the machinations that Fannie and Freddie to get this done. But next year sometime, we're targeting something around $350 million. And that will, again, just like the construction loan sales we're contemplating here a little sooner, it frees us up to continue to grow the business and go a little more quickly in LIHTC. So that's really our game plan there. Nathan Race: Okay. Great. And how should we think about the NII impact from the construction loan sales and the larger permanent loan securitizations that you're contemplating for next year? I mean is it a meaningful NII give up just given the lower balances on the sheet? Or just any thoughts along those lines would be appreciated. Todd Gipple: Sure. And Nate, I understand it's a bit difficult as we're not being real precise on the construction loan sales. We're not being very precise on timing or amount. We'll have a lot more detail for all of you in the January call. So to be candid, I'd stick with using our guide on NIM and loan growth, the gross loan growth to model NII for Q4. We'll have a lot more precision in January in terms of NII impact of construction loan sales or offtake and the perm loan securitization. So we can be a little bit more precise likely in January. So I do apologize. It's a little harder for you guys to navigate. What I would say is that we are incredibly pleased to be on the verge of finding partners to buy our construction loan portfolio and not all of it certainly, but to get started. What it really does is it frees us up to do more perm financing which is where we make our capital markets revenue. And any give up in NII, I would expect more than that to be replaced by improved capital markets revenue. That's really the game plan here is to grow revenue by using other folks' balance sheet and capital and not our own. And maybe the other data point I'd give around this we can get into more detail offline with any of you that want to do the math more distinctly. But we've got about $2.5 billion in LIHTC on the balance sheet. And that's still well within our policy limits, internal policy limits, our percentage of capital and other limits that we have self-imposed. So we certainly have room, but what I would tell you is nearly $1 billion of that is construction. In construction, we are doing to accommodate our clients. They love our program, they love our people, they love our say-do ratio. So they often want us to do both. But that construction lending burns up capital even when it's not funded yet as unfunded commitments. So it really constrained how often we can say yes to clients, and we want to say yes to clients more often. So the way all of you should think about it is not necessarily a big drag on our total LIHTC portfolio. It's more -- we want to change the mix over time. We want to have the ability to offtake construction, so we can say yes to clients and free up more capacity to do perm financing where we make the capital markets revenue. So I know that's a very long answer to a short question, but that's really what we're shooting for here. Once we get these sales completed, we'll have a lot more data in January to talk about the impact on both NII and capital markets revenue. Nathan Race: That's really helpful, add sorry, go ahead Nick. Nick Anderson: Nate, I might add a few things here, too, just from the client perspective, while we say loan sale, these really are going to be accounted for as a loan sale but a participation, loan participation, if you will, where the client really is not necessarily affected or impacted. And that's honestly preferred by them. They appreciate, as Todd said, the say-do ratio that our SFG team delivers. And so really a transparent event for them. Nathan Race: Okay. That's really helpful. And I appreciate all the dynamics at play that make kind of the NII outlook a bit opaque. I suppose if we were to exclude loan sales and securitizations from the outlook. I mean how do you guys kind of think about the loan growth prospects next year? I know you're targeting 10% to 15% in 4Q, but just given the partners that you've added on the LIHTC side of things recently, curious if you can kind of just like frame up any loan growth expectations on a gross basis into next year? Todd Gipple: Yes. Sure, Nate, I appreciate the question. I'm probably going to be a little less transparent here, as we'll have a lot more in January. But I would tell you that based on the pipelines we see in both traditional bank and LIHTC, I do think our growth rate is going to be more in the double digits. It was a bit softer, certainly first half of this year. We do not expect that to be a problem going forward. I think this 10% to 15% guide in Q4 in January, we'll be more accurate about it. But I would expect double digits going forward. Operator: The next question comes from Daniel Tamayo with Raymond James. Daniel Tamayo: Maybe starting on the conversions and on the expense side. Just curious how much onetime costs or costs that are specifically related to the conversions are going to be happening in the fourth quarter. I think you called out that those are included in the $52 million to $55 million guidance. And then as we think about '26 expenses, if you're expecting savings from those conversions or how we can kind of think about the jumping off point for the run rate next year? Todd Gipple: Sure, Danny. I'll tee it up a little bit with some of the strategy and higher-level stuff. Nick will have a little bit more for you on NIE. Multiyear projects started in '23 with evaluation selection, setting our digital transformation strategy. We have accomplished a lot here in this year, '25. We converted all 4 banks to a new online banking platform with Q2. That went very well. We've been using Q2 for commercial online banking and treasury management for some time. We love their software, so do our clients, very good feedback from clients on the consumer platform as well and NPS, Net Promoter Scores are actually up post conversion. So we feel good about all that. So we did our first core conversion at the bank in Southwest Missouri, Guarantee Bank. It went incredibly well. Basically on day 1 had really no system issues. Call volumes were at normal levels. So our strategy of doing the consumer online banking platform first, which is what clients really see the bank through was a good strategy. Just got a couple of things to share, and then I'll let Nick talk a little bit about the expenses. But I want to share this because I'm very excited about it. I probably came through a bit in our prepared comments, but I just want to share 2 stories about the impact long term of our digital transformation because while we talk about expenses, getting it in place, the offset opportunity in the future is significant. We actually had 1 of our staff e-mail the CEO of the bank on Monday morning and said he booked a new business client and that in the old system used to take them around 40 minutes. He got it done in 16, the very first time he used the system. So we are very high on the new core. The second one is maybe a bit more funny. One of the staff said it was like going from Pong on Atari to the newest version of Xbox. So just a little bit of color around why we are doing this. We're leaving an antiquated Fischer core going to Jack Henry SilverLake. It's going to be at a much lower cost, far more efficient. To your bigger question, Danny, of how soon we're going to see that. We still have 2 conversions to go in April and October of '26. Our final one will be in April of '27. So it's really going to be the back half of '27 and beyond that we're going to see these efficiencies. And we've been managing this investment effectively. We really don't expect to fall outside those guardrails on NIE of 5% growth. So with that, I'll step back and I'll let Nick talk about the numbers a little more deeply. Nick Anderson: Yes. Danny, so significant team effort on this project, and they're doing a fantastic job of keeping us on schedule. And as Todd quoted some examples, creating those efficiencies with each of these conversions. So certainly, in 2025 here, there's some overlap in the cost component of these. I'm going to borrow a quote from Larry Helling, he would often say "We're paying for the bank of the future while we're still paying for the bank of the past." So we're experiencing some of that here today. Much of the expenses are centered around specifically the decommissioning and termination costs associated with our legacy core and some data conversions. So this year, we're laying the foundation for Bank of the Future, standardizing those configurations. And so this requires several other conversions of secondary applications, and all of this is a little bit front loaded, if you will, in 2025. So it's about a range of $4 million to $5 million of expense -- NIE expense here in 2025. We'd expect to see that come down into a range of $3 million to $4 million next year. And then as Todd mentioned in '27, we would expect to see some real efficiencies come to the bottom line, creating that operating leverage that we're looking for. Daniel Tamayo: Great. That's really helpful color. Maybe one on credit here. So you've had reserves come down the last couple of quarters. I think you called out some specific reserves that came out this quarter. You've got this strategy to push some construction loans off the balance sheet. You're going to still have the lower loss [indiscernible] coming on. Is it safe to assume that I guess, all else equal from a macro perspective, we might see reserves continue to trend down as a percentage of loans over the next several quarters? Todd Gipple: Yes, Danny, I don't think we expect that 124 basis points and necessarily keep dropping. We have dropped at about 6 basis points over the last several quarters. And I would tell you, it's really for good reasons. Our charge-offs from M2, which at times were 80% to 100% of the charge-offs we were having in the business over the last several years. We were really pleased to see that fall off pretty significantly in the third quarter. Our projections indicate the velocity of NPAs and charge-offs from M2 are slowing and we expect that to continue next year. So that and the fact we did get one NPA resolved in Q3 and that charge-off was around $1.2 million less than we had reserves. So we actually freed up some reserve on a really good outcome on getting on NPA off the book. So I guess what I'm trying to say is a lot of the reduction in the reserve level has been -- we've been resolving NPAs and sometimes with great outcomes, sometimes with just charge-offs in the M2 portfolio, but it's really been that we've been using that reserve for what it's intended to clean up deals, clean up the portfolio. So when we do have LIHTC construction loans come off, will free up some reserves, but we expect to rebuild that portfolio quite quickly. So I don't know that I have any expectations. Our coverage ratio is really going to drop much more. Operator: The next question comes from Jeff Rulis with D.A. Davidson. Jeff Rulis: Todd, I wanted to circle back to your maybe initial view of growth in '26, maybe not something you wanted to chat on. But you kind of referenced it more of a double-digit pace. I wanted to see if that's -- is that net of securitizations and construction sales? Todd Gipple: No, Jeff, I appreciate the ability to clarify that. That 10% to 15% range continuing into '26 would be gross production. And then in January on the fourth quarter call, I think we're going to be able to have a lot more color for you and everyone else in terms of what we're expecting net. Jeff Rulis: Got you. Okay. And then the follow-on is just to further -- as you talk about the partnerships on the securitization side, would that sort of replace you talked about the $350 million potentially targeted. Does that -- is the partnerships that are developing, does that make it less lumpy, more like kind of a fluid channel of LIHTC loan sales real time? Is that where we're headed in a sense? Todd Gipple: Yes, Jeff, what you're talking about is really, I think, called a forward flow arrangement where it's almost real time where those loans are getting moved to someone else's balance sheet. We're not really interested in that for a couple of reasons. One, it's a little difficult for operations to handle versus these participations that Nick mentioned. And the other is we really want to retain the flexibility. We want to be able to use this as a very effective tool to manage our LIHTC business, to grow that business, to improve capital markets revenue pull-through and to manage concentration and capital and everything else. So we really want it to be something that we can use as a tool when the time is right. So that, again makes it more lumpy. I know that makes your job and everyone else's more difficult. We will do our best to be as transparent as possible when we know we're doing those things, and we know that they are coming. But ultimately, the straightforward answer is, Jeff, we want the flexibility to manage it the best we know how for our shareholders. Operator: The next question comes from Brian Martin with Janney Montgomery. Brian Martin: Congrats on the quarter. Just the -- maybe, Nick, just 1 question on the margin. Just for the fixed rate loans that are repricing in '26, can you just give an idea on how much is there and then what -- kind of what the rate is on those? I think you gave forth. Nick Anderson: Yes. Brian, as we look into 2026, we've got about $560 million of fixed rate loans. They're currently yielding about $5.90. And so in today's rates, we're seeing new pricing coming in at like $6.25 to $6.50 range. So we'll have some positive uptick there. Brian Martin: Okay. And then just in terms of just deposit growth kind of funding maybe a bit stronger loan growth going forward? And I guess, just trying to think about how to think about deposit growth and some of that, I guess, is be dependent on the sales and the securitization, but just the general outlook on deposit growth here and level of borrowings is kind of how we think about that going forward? Nick Anderson: Yes. So Brian, I was looking the other day, we've added 1,500 new accounts year-to-date. And certainly, in Q4, we tend to have some seasonality with some public deposits from property tax payments in our area. But what I'm most impressed with is every quarter when I get the updated list of new accounts added and the relationships, I'm always very impressed. Its our private bankers, our treasury management teams, our senior leadership teams. They're out pounding the pavement in their markets, our markets. And it's something we don't often see from the bigger banks or some of our competition. So I think in some cases, I was discussing with one of our bank CEOs, we're chasing some of these larger clients that may not necessarily be borrowing clients. So they may not be on everybody's radar. And we're working those relationships over 15 years at times, and he shared a few opportunities that he's landed this quarter that were just that very long sales cycles, but they see our involvement in the community. They see our market presence and leadership in the community. And so yes, we continue to just drive new relationships that lead to new deposits. And so yes, but you also mentioned too, we have some opportunity with some of the construction loan sales and/or securitization that help take care of some of our funding needs, too. Brian Martin: Yes. Okay. Stay tuned for the January call. And just in terms of -- on the capital, is there kind of a target when we think about how much capacity you have to do these buybacks, where you kind of want to maintain the capital? I mean you talked about it's gotten to a level and it's going to continue to build quickly. But is there kind of a base to think about if we model in some buybacks where you think capital -- where you want to maintain kind of a minimum level or target level? Todd Gipple: Yes, Brian, I appreciate the question. I'm reluctant to give any guidance on just how many shares we might buy and when. But I understand that it does have a very positive impact on EPS when we can do it at the right valuation levels from that perspective. What I would tell you is we're at TCE at 10%, basically even with some buyback activity this past quarter. So we do have capacity. And what I would tell you is the key word I would use is opportunistic that at current valuation levels, we feel like it's attractive to the company and our shareholders for us to use this maybe even excess capital to repurchase shares. So we intend to continue to be opportunistic when it comes to that. But we're going to have to balance the other needs for capital as well. My long answer to the shorter question early on repurchases the 4 uses of that capital right now, buybacks are probably our highest and best use. Operator: [Operator Instructions] There are no further questions at this time, which concludes our question-and-answer session. I would like to turn the conference back over to Todd Gipple for any closing remarks. Todd Gipple: Thanks to all of you for joining our call today. We appreciate your interest in our company. Have a great day, and we look forward to connecting with you sometime soon. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Maria Caneman: Good morning, and thank you for dialing in this morning. I am Maria Caneman, Head of Investor Relations here at Swedbank. Welcome to our third quarter results presentation. With me today is our CEO, Jens Henriksson; and our CFO, Jon Lidefelt. Jens and Jon will start with the presentation, and then there will be an opportunity to ask questions. Jens, I hand over to you. Jens Henriksson: Thank you, Maria. Swedbank has once again delivered a strong result in uncertain times. The geopolitical situation, continued uncertainty about tariffs and trade and the increasing concerns about weak public finances across the world are slowing down global growth. Twice a year, the world's economic policy decision-makers meet at the IMF. The starting point for their discussions is the world economic outlook, which was published a week ago with the headline, "Global economy in flux, prospects remain dim." With that said, our four home markets have healthy fundamentals, strong public finances, low government debt, innovative companies, profitable banks and low interest rates. In Sweden, we see signs of improvement. Our economists forecast growth of 2% next year, while the Swedish government is more optimistic and projects 3%. In Estonia, economic development is still subdued, and we are seeing some recovery in Latvia and the development in Lithuania continues to be strong. In these uncertain times, Swedbank stands strong and is well positioned for sustainable growth and profitability. We can today report a return on equity of 16% and earnings per share of SEK 7.53 for the third quarter. During the quarter, income increased while cost decreased. Our cost-to-income ratio was 0.35. Strict cost control is producing results. We have a conservative and thorough lending process and, during the quarter, we saw credit impairment reversals. We have a robust ability to generate capital, and we have a very strong capital and liquidity position. During the quarter, Standard & Poor's upgraded Swedbank's credit rating. In their decision, they highlight the bank's improved governance, regulatory compliance and risk management. Furthermore, during the quarter, the U.S. authority, SEC, ended its investigation into the bank's historical shortcomings without enforcement. We are delivering according to our plan, Swedbank 15/27. And as you know, it focuses on three areas: strengthen customer interactions, grow volumes and increase efficiency. Our customer focus is producing results. We have further improved our availability during the quarter, and now 70% of incoming calls in Sweden are answered within 3 minutes, and we are thereby getting closer to our target of at least 80%. We consistently work to improve our digital offerings, and we see that more and more customers do their everyday banking through our app or the Internet bank. We have also increased our efficiency. Our employees can spend more time meeting customers and less time on administration using new AI tools, and the number of advisory sessions per employee has increased. During the quarter, we lowered mortgage rates due to lower policy and market rates. Mortgage loans increased by SEK 5.2 billion, and mortgages in Sweden distributed through our own channels accounted for SEK 4.2 billion. Deposits from private customers are stable, and we continue to be close to our customers and give them advice. Strengthening their financial health is an important task for the bank. Savings and pensions continued to develop positively. Swedbank Robur saw a net inflow of SEK 9 billion in our four home markets. As announced in August, we want to acquire the remaining part of Entercard, thereby, Swedbank will have the largest card business in the Nordic-Baltic region. This will develop our business and strengthen our customer offering. In Lithuania, the business climate remains strong. In Sweden, Estonia and Latvia, economic activity is improving, but from low levels. During the quarter, corporate lending increased by SEK 7 billion. Our customers are showing a high demand for sustainable investments. 36% of the bonds arranged by Swedbank during the quarter were classified as sustainable, and our Sustainable Asset Register has now surpassed SEK 150 billion. We now own 20% of the investment bank, SB1 Markets. And during the quarter, they started up in Sweden. It's an important step in further developing our offering to corporate customers. In addition, our customers will get access to an expanded range of equity research. In the Baltic market, we launched the card payment feature, Click to Pay, a secure and convenient service that simplify payments. Jon, it's your turn now to deep dive into the financials. Jon Lidefelt: Thank you, Jens. We delivered a strong result in the third quarter with volume growth across markets and increasing income. We have continued our work with focus on long-term shareholder value through business growth and cost efficiency. Cost-to-income ratio was 35% and return on equity, 16%. Lending volumes grew in the quarter and the increase came mainly from Baltic Banking, where we continue to see solid growth on both the private and corporate side. Mortgage volumes in Sweden sold through our own channels increased by SEK 4.2 billion, while the savings banks reduced their mortgage volumes on our balance sheet by SEK 1.6 billion. We see continued result of our increased efforts on customer interactions and availability as we're capturing a larger share of the market. In August, our front book market share through owned channels was 16.4%, still below the back book market share of 17.8%, but the development continued in the right direction. Also for the corporate business in Sweden, the positive development continued with increasing volumes, though somewhat offset by repayments related to a couple of larger exposures. Customer deposit volumes were stable in the quarter. In Sweden, private deposits decreased somewhat from a high level as the second quarter was impacted by seasonal inflow of tax returns. In Baltic Banking, deposit volumes were overall stable. Net interest income decreased by 0.9% compared to the previous quarter, driven mainly by lower mortgage rates. Lower deposit rates impacted NII in Q3 with a full quarter effect, while lower rates on the lending side were gradually rolled in during the quarter. Higher business volumes had a positive impact of SEK 94 million in the quarter. Wholesale funding costs continued to decrease in the quarter. Liquidity was, however, reallocated from the markets business increasing liability volumes, but also positively impacted Central Bank placements. and, hence, had an overall neutral NII effect. Day count and FX effects impacted NII positively in the quarter. The Swedish Central Bank cut policy rates effective as of the 1st of October and ECB cut rates effectively as of the 11th of June. Hence, there are further repricing dynamics in play. Reminding you that the positive effect on the funding side materialized ahead of the negative effect on the asset side, furthermore, that it takes approximately 3 months in Sweden for a rate cut to roll in and 6 months in the Baltics. We will continue with our pricing strategy on both sides of the balance sheet and maintain focus on the balance between volumes and long-term profitability. Net commission income increased in the quarter, driven mainly by strong asset management commissions. Mutual funds had a net inflow of SEK 9 billion and combined with the positive stock market performance, increased asset under management to SEK 2,471 billion. Card commissions were seasonally higher in the quarter following higher spending abroad during the summer months, while brokerage and corporate finance commissions were seasonally lower. In addition, we saw positive development in commissions from insurance products. Net gains and losses remained at a high level in the quarter and amounted to SEK 847 million. Income was strong, driven by high business activity, mainly within fixed income. Positive revaluations supported the treasury result. Other income increased by 2.7%. Net insurance decreased driven by both normalized levels of claims compared to the low levels we saw in the second quarter and the effects from revaluations of future cash flows. One-off transfer, in connection with the establishment of SB1 Markets on the 1st of September, also contributed. The results from partly owned companies supported as well as increased income from services to the savings banks. As a reminder, our collaboration with the savings banks include cost sharing for IT development and administrative services. The savings banks' share of the cost is included in Swedbank's total cost, and you can see the corresponding income as services to the savings banks here under other income. Total expenses were 1.4% lower. Fewer employees, together with seasonally lower staff costs, IT maintenance and consultancy costs contributed. As announced in conjunction to the Q2 presentation, a VAT recovery of SEK 197 million related to the year 2016 was received in the beginning of the third quarter. In line with previous patterns, costs will be seasonally higher towards the end of the year. Costs for the full year 2025 is expected to be around SEK 25.3 billion at current exchange rates. This includes the already received VAT recoveries related to the year 2016, '17 and '18 amounting to SEK 576 million. It also includes SEK 200 million lower temporary investments this year and an estimated SEK 300 million lower costs due to FX. Asset quality is solid. During the quarter, there were reversals of credit impairments amounting to SEK 398 million, which corresponds to an impairment ratio of minus 8 basis points. The reversals are mainly driven by improved macro scenarios, and we have continued to reduce the post-model adjustment, which now stand at SEK 364 million. Individual assessments resulted in a SEK 568 million increase, driven by a few larger corporate exposures. At the same time, repayments and reversals of previously written-off exposures resulted in a release of SEK 451 million. I feel comfortable with our strict origination standards and the solid collaterals that secure our lending. Our CET1 capital ratio was stable at 19.7%. In the 2025 SREP, our Pillar 2 requirement was lowered by 40 basis points, and our CET1 capital requirement now stands at 14.8%, meaning we have a buffer of around 480 basis points above the requirement. The reduction by the Swedish FSA stems from two parts. Firstly, 20 basis points are related to the new CRR3 risk weights for standardized credit risks. This has an impact on the Pillar 2 add-on that we shall hold until the new Swedish IRB models are approved. Thereby, approximately 20 basis points of the expected capital relief of at least 50 basis points from the new IRB models has now materialized. We continue to expect most of the remaining impact from the IRB model updates to materialize during next year. The Swedish FSA also approved parts of our nonmaturing deposit model, resulting in 20 basis points lower capital requirement for interest rate risk in the banking book. To conclude, we continue to focus on growth and efficiency. We deliver strong profitability while maintaining prudent underwriting standards, strong liquidity and capital positions. Back to you, Jens. Jens Henriksson: So let me now sum up the quarter. Swedbank once again delivered a strong result in uncertain times. Income increased, cost decreased, and we saw credit impairment reversals. Return on equity for the third quarter amounts to 16%, cost-to-income to 0.35. Our credit quality is solid and our capital buffer is very strong at 4.8 percentage points. Swedbank is well positioned for continued sustainable growth and profitability, and we continue to deliver according to our plan, Swedbank 15/27, with a focus on strengthening customer interactions, growing volumes and increasing efficiency. We create value for our customers and our shareholders, and our customers' future is our focus. With that said, back to you, Maria. Maria Caneman: Thank you both very much. We will now begin the Q&A session. A kind reminder to please limit yourself to two questions per turn. Operator, please go ahead. Operator: [Operator Instructions] We have the first question from Martin Ekstedt, Handelsbanken. Martin Ekstedt: Can you hear me? Jens Henriksson: Yes, we can. Martin Ekstedt: Excellent. So could you just give us a bit more on the SB1 Markets initiative? You mentioned it launched in Sweden in the quarter. Is it now fully staffed up on the Swedish side? And are all the business lines up and running? That's the first one. Jens Henriksson: To be honest, I don't know if it's really fully staffed up. A lot of persons have gone over and I think they're doing some great jobs. So I think they're fully running. And the key point is that this is a partnership that offer our corporate customers a strength and offer through access to a larger set of investment banking services and sector expertise. And both corporate and private customers can also benefit from access to a broader range of equity research. So this is great. Martin Ekstedt: Okay, okay. And then second question, if I may then. I'm looking at your NII sensitivity on Page 20 of the presentation deck. So in the past, the NII elasticity, so to speak, or rate shifts have been balanced around plus/minus side. But your calculation example is now tilted towards seeing a larger impact if rates come down than if they go up. And I just wanted to confirm, this is due to some deposit rates now having reached 0 and therefore, are not able -- at least commercially able to go any lower, right, i.e., it's the floor of 0% rates that you mentioned on the page coming into effect. Is that correct? Jon Lidefelt: You're perfectly correct, Martin. That is the reason. Operator: The next question from Magnus Andersson, ABG. Magnus Andersson: My first question is how you view the prospects of potentially being able to increase the thin household mortgage margins in Sweden now that short-term rates are no longer expected to fall? And related to that, what market growth rate you think is necessary for this household mortgage margin pressure to ease? And secondly, just how -- you have lending growth now 4% quarter-on-quarter in the Baltics FX adjusted. How you view the sustainability of lending growth in the Baltics now that the deleveraging that's been going on for nearly 20 years finally seems to be over? And related to that, how you tame the inflationary tendencies, the impact on the cost base there? Jens Henriksson: Thank you for that. Two good questions. First one is, let me say a few words of the overall situation in the mortgage market, and reminding you that we are the market leader in all four home markets. And first, just me repeat that in the Baltics, we see continued strong growth in mortgage volumes. In Sweden, we've seen that the housing market remains muted, although we see some gradual increasing mortgage market growth during 2025 and you see that we're now picking up some momentum. And the reason for that is that we are more active. We have shorter waiting times and quicker to resolve questions. There is a strong competition out there, and we want to grow. And when that competition abates, we do not know. I don't think the competition will go down. I think it will be continued competition there. Then when you move over to the Baltics, we have seen quite a large volume growth in that. Reminding you that these are steady and stable economies, and we now expect Estonia and Latvia to pick off as well, while Lithuania has been doing very good. Magnus Andersson: Okay. So are you saying that you think the household mortgage margins we have in Sweden currently are here to stay? My question was whether you think there will be a potential to increase them going forward and what the trigger would be able to drive how you would be able to achieve that. Because I think it's a concern to all of us. Jens Henriksson: Well, I won't do any forecast on that. There is a tough competition. But I think when you see higher volumes, I think that we can grow in that environment. Magnus Andersson: Okay. And the inflationary impact on costs, in the Baltics? Jon Lidefelt: Magnus, I think as we've talked about before, I mean, in the Baltic Banking, we have lived with higher inflation for many, many years, even before the inflationary shock. So that is something that we are constantly working with to make sure that we can increase our efficiency to mitigate that. If you look at the societies as a whole, then I mean, our concern, as we have been talking about, generally, it's very stable and healthy. But of course, if the salary inflation continues, then that will eventually lead to a problem since it's going to be hard to pick up on the productivity in line with the current salary levels', increased levels. Operator: The next question from Andreas Hakansson, SEB. Andreas Hakansson: So first question on costs. You mentioned the three VAT refunds you had during this year. Could you tell us how many years have we got outstanding? And just to confirm that you don't assume one of those reversals to appear in the fourth quarter. Jon Lidefelt: You're correct. We have assumed no VAT recovery in the SEK 25.3 billion guidance that I gave you. If that will come, it will come as a one-off extraordinary thing that we will not take into account when we run our ordinary business. So no further VAT in the SEK 25.3 billion. We have, as I think I mentioned in the previous quarterly presentation, requested VAT return recovery for year 2019 up until 2023. It's in the hands of the tax authorities, and I have no visibility in the numbers, and we'll not speculate if and when we would get anything more back there. Andreas Hakansson: Are the cases similar? Or I mean, it seems like you won three cases. So are the other cases different? Or wouldn't the outcome be likely to be the same or... Jon Lidefelt: Sorry, I said '19 to '23. I should have said '19 to '24. But it depends a lot on the interest rate levels since this is sort of depending on the turnover that we have in the parts of our business that is non-VAT related and the one that there is VAT, i.e., mainly the leasing business. So it depends a lot on the interest rate levels for the years, and that's why I don't want to speculate in any numbers or if we would get it back before we have the answer from the tax authorities. Andreas Hakansson: All right. That's fine. Then on the Baltic NII, I mean, you talked about the 6 months' time lag. But could you just confirm that when you talk about that NII should trough 6 months after the loss rate cut, that's with a static balance sheet. And we saw already that NII grew Q3 with Q2 on the back of very strong volume. So if volumes continue at the current pace and, if anything, it seems to be picking up. Is there any reason why the NII shouldn't continue to grow even though you have that underlying pressure driven by interest rates? Jon Lidefelt: First of all, yes, you're correct. When I talk about the 3 and 6 months, then I mean the same margins, the same volumes, and then you'll have to make your own assumptions on that as well as some further central bank rate cuts. When it comes to the NII development in the Baltics, it's impacted by FX in this quarter. So underlying, the NII in the Baltics is stable quarter-over-quarter. Andreas Hakansson: With 3% volume growth, right? So those are the two components there, margin pressure and the volume growth. That's up to 0 in this quarter. Jon Lidefelt: Yes. Operator: The next question is from Gulnara Saitkulova, Morgan Stanley. Gulnara Saitkulova: So on capital, given your solid capital buffer, could you remind us of your latest thinking on how to deploy the excess capital between ordinary dividends, special dividends, buybacks or potential M&A? And how should we think about your approach to excess capital in a theoretical scenario where the AML resolution is still delayed by several years? Would you still aim to be around the midpoint of your targeted management buffer range? Or would you adopt a more cautious stance in that case? And if you were to pursue M&A opportunities, which areas or markets would be of the greatest strategic interest for you for potential acquisitions? Jens Henriksson: Well, thank you for that question. Let me be very short here. And that is that we have a capital buffer range between 100 and 300 basis points. In our 15/27 plan, we target the middle of it, i.e., 200 basis points. We now have a buffer of 480 basis points with a dividend policy of 60% to 70%. And the timing of further capital release continues to be a judgment call depending on the many uncertainties, where the long-running U.S. investigations is the largest one. And we have no intention to hold more capital than necessary. When you look into M&A activity, reminding you that we've had seen quite a lot of M&A activity during the last quarter. We want to acquire Stabelo. We want to acquire the remaining part of Entercard, and both those two are still subject to approvals. And then we've gone into SB1 Markets, which was the first question. As a CEO, I always need to look out for new opportunities. Operator: The next question is from Markus Sandgren, Kepler. Markus Sandgren: I was just going to follow up on Gulnara's question when it comes to Entercard. Can you just give some more flavor of your thinking about the acquisition? And what do you think or what's your planning in terms of asset quality for that company? Jens Henriksson: Well, straightforward, we've had a business cooperation with Barclays, and we own roughly 50-50 each. And they wanted to sell it, and we wanted to acquire it. It's that simple. And the reason we want to do that is that we want to become the largest card business in the Nordic-Baltic region with scale benefits and, of course, benefits also from increased efficiency. And I think Jon will get back later when we have more information when that's fulfilled and tell you the effects on the bank at large. What we will do is we'll do a strategic overview. And when we look on Entercard, we've seen that we think that the risk level is a bit too high, and we wanted to reduce it a bit more to a more appropriate level for Swedbank. Markus Sandgren: And what does that reduction mean? Is it getting rid of loans? Or how do you plan to do it? Jens Henriksson: We -- let us get back to that when hopefully, this goes through all the sort of processes. Operator: The next question from Shrey Srivastava, Citi. Shrey Srivastava: It's actually on the 20 basis points benefit to your sort of capital requirements that you've got from being able to model the contractual maturity of nonmaturing deposits. My question is twofold. The first is, is this all we can expect to see in terms of benefit? And secondly, does this open up the possibility of you sort of investing these nonmaturing deposits in potentially sort of high-yielding, long-dated assets going forward? Jon Lidefelt: Thank you, Shrey. First of all, we have gotten a partial approval for our modeling of nonmaturing deposits. So all things equal, if we would get the full approval, that would be a little bit more to come. When it comes to our NII -- or sorry, non-NMD hedging, I have said in previous quarters on questions from you and your colleagues that we have had some hedges. It's been an important tool for us to have in the toolbox. So we wanted to test it and try it out. But it is and has been immaterial from an NII perspective so that you can discard the impact of the hedges that we have in place when you forecast our NII. The approval that we have gotten, it still means, to make it simple, that our liability side is still shorter than our asset side. So if we would add further hedges to prolong our asset side, which is what we want to do in order to smoothen out NII when the timing is right, it would still mean that our capital for IRRBB, our Pillar 2 charge, will go up even with this approval. It might go up a bit smaller than before, but there still will be an increase. We will come back should we do more or should our hedges be material to make sure that we are transparent should that be in the future. Shrey Srivastava: And a very brief follow-up. You said you received partial approval. Should you receive full approval, what sort of capital benefit can we expect there? Jon Lidefelt: Unfortunately, as long as the Swedish FSA do not change their view on this, even a full approval will lead to the same thing, that if we prolong our asset side, our capital charge will still go up. There is a difference between the Swedish FSA's view and the view that banks under ECB supervision have. They can do this hedging much more efficiently than we can do. Shrey Srivastava: And a final one for me. Have you noticed a sort of softening of the Swedish FSA's view? Because it seems sort of that way, looking at the partial approval you received. Or is that inaccurate? Jon Lidefelt: No, I have not. Operator: The next question from Namita Samtani, Barclays. Namita Samtani: My first one, I just wondered what measures you're taking in the Baltics to bulletproof your ROE of above 20%. I saw an announcement that Revolut is now offering mortgage loans or something similar to that in Lithuania. And in time, that will probably become a full offering. And clearly, the deposit rates they offer better than banks. So what initiatives is Swedbank taking to protect itself from competitive threats? And then secondly, I appreciate the 2025 updated cost guidance. But we're almost through 2025. Could you please qualitatively talk us through the main moving parts of costs going forward or what we should think about going into 2026? Jens Henriksson: Well, the key thing about Estonia, Latvia, Lithuania, these are growing economies, and when compared to Sweden, they will grow with, let's say, 1%, 1.5% more. So it's a very attractive market. And it's also a market that doesn't have the same financial inclusion as there is in Sweden. So that means that we see many possibilities. And I think we went through very much this when we had Swedbank 15/27. In the end, it's about being close to our customers. We are the most loved brand in the Baltic region for the seventh year in a row. We want to grow volumes, continue to grow with the countries. We want to increase financial inclusion. We want to be -- have more customer interactions and want to make sure that we keep costs contained and work in an efficient way. So in that sense, it's not different from the other markets. Is the competition tough? Yes, it is tough. Will it be tougher? Yes. But that's life. Keep on and be close to your customers. Do you want to say a few things about the costs? Jon Lidefelt: I think your question was about 2026 costs, and we will come back in conjunction to the Q4 presentation on that. But principally, we tried to explain how we work with cost efficiency with the headwind and investment and so forth when we had the 15/25 presentation. But more details, I'll come back with when we present the Q4 results. Operator: The next question is from Tarik El Mejjad, Bank of America. Tarik El Mejjad: Just quick two questions, please. First, on costs. I mean you had quite impressive, good cost control here with cost/income really at very low levels. I just questioning the strategy of sustained hiring freeze, which -- how long that you can be sustained and especially in the context of potentially a recovery of growth. But also, we just had a call with one of your competitors and the approach is this hiring freeze or control could be sustained as long as we invest in AI and technology and be able to question each time, can we replace or hire or invest in some technologies that would be more cost efficient? Where are you in this thinking and these investments in AI and technology? And the second question is on the U.S. on money laundering litigation. I mean I've been following those with the German, French banks and so on in the past with the OFAC. How the conclusion from the SEC, you think are correlated to what would come for DOJ? Or is it -- because usually it's bundled within one decision. How do you read that? Are you more optimistic about the outcome? Jens Henriksson: Well, thank you. Two important questions. The first one when it comes to the personnel, we steer the bank on costs, not on FTEs. But what happened a year ago was that we saw that FTEs increased too much due to change of churn. And what we did then was that we implemented an external hiring freeze but sort of possibility for people to make exceptions. I gave quite a few exceptions but it worked. And then last quarter, we decided to take that away. And we now have a process where Jon take that sort of those kind of decisions together with the Head of HR. So we do not have a hiring freeze anymore. That's the first thing to say. The other thing is to say that we see quite a lot of use of AI. We work it both on the individual level and on a structure level. We work with AI for a very long time. And what we want to do is we want to decrease administration so that we can see more time with our customers. So to give you an example is that right now, we are seeing that the waiting lines or sort of the time waiting, if you call into a Swedish customer center, it's much shorter than before. So we've reached 70% of the call answered within 3 minutes. Why? New technology. And then we can use call summary, so that means you can have more time to meet the customers rather to do the administration, and we can do more things like that. When it comes to the U.S. investigation, first thing to say is that when it came to OFAC, that was closed quite a while ago. And as I said in my introduction, during the quarter, SEC decided to close their investigation without any further actions. That said, still have two other investigations by U.S. authorities. And now I need to sort of repeat myself. But I've told you many times when I was new as CEO, I met and called around and talked with colleagues that have been in similar circumstances. And they told me that a process like this usually takes 3 to 5 years. Now more than 6 years have passed, but the time line is fully owned by the U.S. authorities. I can just repeat what I say, and that is I still do not know whether we will get any fines. And if we do get the fines, I cannot estimate the size of those. And we've been as transparent as possible during this long-running process. And when something material happens, we'll continue to adhere to that principle. Thank you. Operator: The next question is from Nicolas McBeath, DNB Carnegie. Nicolas McBeath: I had a question on the deposit volumes. So after the most recent rate cut in Sweden, your deposit rates on some of your most popular savings account like eSavings have been cut to 0. So I was wondering how are deposit volumes behaving on these accounts. Have you seen any increased tendency of withdrawals since the rates were introduced, either to your own Swedbank players or migrations to competitors' deposits with above 0 rates? That's my first question. Jon Lidefelt: Well, thank you, Nicolas. The volume or the mix has been stable in that sense. So we have not seen any mix shift. And over time, the deposit beta has been around 1 on accounts with interest rate and where the sort of distance to 0 has been enough to reduce it. So then as we have talked about before, sometimes, we have for business reasons, taking a little bit of time lag between doing different rate changes. But over time, it has been one, and we have not seen mix shifts lately. Nicolas McBeath: All right. And then I had a question on levies for next year. What's your expectation there? And could you confirm whether the cost for interest-free deposits at Riksbank, will those be taken on the levies line or reduced NII? Jens Henriksson: Well, let me start with saying that if you see overall loan demand in Sweden from both corporate and private customers is subdued. In the Baltic, demand is stronger. And just to be blunt here, but we have an appetite for healthy loan growth while sticking to our conservative lending standards and focusing on profitability. You want to follow up, Jon? Jon Lidefelt: On your question on the Swedish Riksbank, we will have to deposit SEK 6 billion for which we will not get an interest rate for now for 9 months, I think it is. I think the jury is still somewhat out on exactly how to account for that. But my assumption or belief is that, yes, it will be under the bank tax row. And then the discussion is will it be a one-off now in Q4 or will it be spread out for the period? But most likely under the bank tax rule. Yes, I think that was the answer, right? Nicolas McBeath: Yes. And then just also if you could comment what your expectations for bank taxes are for 2026? Jens Henriksson: Bank taxes, don't get me started. But let me say a few words. And then as always, I want you to remind you that banks are an important part of our societies. What we do is we channel our customers' hard-earned deposits to lending, thus empowering people and businesses to create a sustainable future. And to do that, we need to be profitable. And a sustainable bank is a profitable bank. And we are proud taxpayers that contribute to the financing of welfare and security in our home markets. What we do not like are sector-specific taxes, retroactive measures and an unpredictable regulatory environment. What we do like is equal treatment, a rule-based system and an investment climate that fosters growth, financial stability and sustainable transformation. With that said, I need to say that. Then let me do a quick tour across our four home markets. First, Estonia, general corporate taxes are increasing as we see, but there is a political debate on that. In Lithuania, corporate taxes are also up. And then remind you that on top of this, since 2020, there is a 5% extra tax on banks, and the extra investor tax on NII further on top will be phased out during the year. In Latvia, we will have 3 years with a similar investor tax. There are some discussions on excluding new lending from the tax. If that would materialize, it would be positive for the Latvian economy. In Sweden, the government has proposed a base deduction to the bank tax while delivering the same tax revenues. And the tax rate is therefore proposed to be raised from 6 to 7 basis points in 2026. And now there is a government inquiry of some kind that will look into the specifics. And then as Jon talked about, let's call it what it is, it's another tax on the banking system, is that the Riksbank has decided that credit institutions from the end of October this year will need to place an interest-free deposit with them. And as Jon said, it amounts to around SEK 6 billion that will earn 0 interest. Operator: The next question from Sofie Peterzens, Goldman Sachs. Sofie Caroline Peterzens: Here is Sofie from Goldman Sachs. So my first question would be on net interest income. When do you expect net interest income to trough? One of your competitors this morning said that it will be 3 to 6 months after the last rate cut? Do you think that's kind of fair? Or do you have a different view to this? And then my second question would be on the VAT refund that you continue to get. It was SEK 197 million now in third quarter and SEK 174 million, sorry, in the previous quarter. Like when should we expect these VAT refunds to come to an end? Or should we expect still some VAT recoveries in 2026? Jon Lidefelt: Thank you, Sofie. If I start with the NII, then if we assume no further rate cuts, to make it a bit simple, then ECB did their last one. It was effective on the 11th of June; and the Swedish Riksbank, it was effective as of 1st of October. And then if you take 3 months roughly in Sweden and 6 months roughly in the Baltics, that means that around year-end these rate cuts will be priced in, and the first quarter next year then will be the first quarter where you have a full quarter effect. Then as I've said before, you'll have to add your own assumptions on potential further rate cuts from the central banks, volume growth and margin development. When it comes to the VAT, then I don't know. There is a discussion from the Swedish government to change the VAT legislation. And everything around the VAT recoveries is due to that there has been a clash between the Swedish VAT law and the European regulation around that. So I would expect in a couple of years that there will be a new Swedish law in place. I don't know how fast or when it will come or what it will mean. So I don't -- we don't know. We'll have to see what happens. But we have so far then asked back for '19 to '23. Now it's clear '23, I've been a bit back and forth on it. But '19 to '23, we have asked recoveries for. And then let's see for the years after how things play out. Operator: [Operator Instructions] The next question from Riccardo Rovere, Mediobanca. Riccardo Rovere: Just a quick follow-up, again, on NII. Do you think that the pickup in lending volumes in general, and also deposits could somehow offset the last leg of pricing that you've just mentioned, 3 months in Sweden, 6 months in the Baltics. It should be visible by the end of the year, the same volumes can offset that? Jens Henriksson: We lost you. But thank you, Riccardo. Riccardo Rovere: Can you hear me? Jens Henriksson: Okay. Sorry. Now we can. Do you want to... Riccardo Rovere: Can you hear me now? Jon Lidefelt: Yes. Jens Henriksson: Yes. We hear you. Okay, please repeat. Riccardo Rovere: Okay, fine. Just wondering whether you think the volume growth, deposits and loans could somehow offset the last legacy repricing that you've just mentioned, 3 months in Sweden, 6 months in the Baltics, so to say that the last cuts done should be visible by the end of the year because that is the margin part of the equation in NII. I was wondering whether the volume side of the equation can somehow offset it. Jon Lidefelt: Thank you, Riccardo. Yes, I mean you're perfectly right, but I do not sort of forecast the NII. So I can leave that to you to do your own assumptions on volume growth, margin development and so forth. But of course, there is an offsetting effect on this. I said that in this quarter, higher volumes has had a positive impact of SEK 94 million on the NII. So of course, growth do offset. But I'll leave you to do your own assumptions on how that will develop going further. Operator: This was the last question. I would like to turn the conference back over to Maria Caneman for any closing remarks. Jens Henriksson: Well, I'll take that, Maria, if it's okay with you. So thank you for calling in, and thank you for always asking tough and knowledgeable questions. I now look forward to meeting you and many of your colleagues in our dialogue on Swedbank. Thank you for calling in. Bye.
Operator: Good day, and welcome to the Core Laboratories Q3 2025 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Larry Bruno, Chairman and CEO. Please go ahead. Lawrence Bruno: Thanks, Danielle. Good morning in the Americas, good afternoon in Europe, Africa and the Middle East, and good evening in Asia Pacific. We'd like to welcome all of our shareholders, analysts and most importantly, our employees to Core Laboratories Third Quarter 2025 Earnings Call. This morning, I'm joined by Chris Hill, Core's Chief Financial Officer; and Gwen Gresham, Core's Senior Vice President and Head of Investor Relations. The call will be divided into 6 segments. Gwen will start by making remarks regarding forward-looking statements. We'll then have some opening comments, including a high-level review of important factors in Core's Q3 performance. In addition, we'll review Core's strategies and the 3 financial tenets that Core employs to build long-term shareholder value. Chris will then give a detailed financial overview and have additional comments regarding shareholder value. Following Chris, Gwen will provide some comments on the company's outlook and guidance. I'll then review Core's 2 operating segments, detailing our progress and discussing the continued successful introduction and deployment of Core Lab's technologies as well as highlighting some of Core's operations, recent client interactions and major projects worldwide. Then we'll open the phones for a Q&A session. I'll now turn the call over to Gwen for remarks on forward-looking statements. Gwendolyn Schreffler: Before we start the conference this morning, I'll mention that some of the statements that we make during this call may include projections, estimates and other forward-looking information. This would include any discussion of the company's business outlook. These types of forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to materially differ from our forward-looking statements. These risks and uncertainties are discussed in our most recent annual report on Form 10-K as well as other reports and registration statements filed by us with the SEC. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Our comments also include non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measures is included in the press release announcing our third quarter results. Those non-GAAP measures can also be found on our website. With that said, I'll pass the discussion back to Larry. Lawrence Bruno: Thanks, Gwen. Moving now to some high-level comments about our third quarter 2025 results. Core continued to execute its strategic plan of technology investments targeted to both solve client problems and capitalize on Core's technical and geographic opportunities. Third quarter 2025 revenue was up over 3% compared to Q2 and Core achieved nice sequential improvement in operating income, operating margins and earnings per share. Looking at Reservoir Description in more detail, revenue in the third quarter was up over 2% compared to Q2. For the third quarter, ex items, operating margins in Reservoir Description were 13%. The segment's financial performance in the third quarter reflects continued demand for rock and fluid analysis across the company's global laboratory network. Demand for laboratory services tied to the assay of crude oil and derived products remained steady as trading patterns somewhat improved following disruptions caused by sanctions. There is still uncertainty in the demand for these assay services due to ongoing international geopolitical conflicts and evolving sanctions. In addition, pending tariffs and supply-demand balance concerns continue to generate volatility in commodity prices. In Production Enhancement, third quarter revenue was up 6% compared to Q2. Ex items, third quarter 2025 operating margins were 11%, up from 9% in Q2. This sequential improvement in margins reflects continued demand for completion diagnostic services, both onshore and offshore, along with improved international product sales. In addition to our quarterly dividend, Core Lab returned excess free cash to our shareholders by repurchasing more than 462,000 shares of company stock during the third quarter, equating to approximately 1% of Core's outstanding share count and representing a value of $5 million. Looking forward, Core intends to use free cash to fund our quarterly dividend, pursue growth opportunities and improve shareholder value through opportunistic share repurchases. As we look ahead, Core will continue to execute on its key strategic objectives by: one, introducing new product and service offerings in key geographic markets; two, maintaining a lean and focused organization; and three, maintaining our commitments to returning excess free cash to our shareholders and strengthening the company's balance sheet. Now to review Core Lab's strategies and the financial tenets that the company has used to build shareholder value over our nearly 30-year history as a publicly traded company. The interest of our shareholders, clients and employees will always be well served by Core Lab's resilient culture, which relies on innovation, leveraging technology to solve problems and dedicated customer service. I'll talk more about some of our latest innovations in the operational review section of this call. While we continue to pursue growth opportunities, the company will remain focused on its 3 long-standing, long-term financial tenets, those being to maximize free cash flow, maximize return on invested capital and returning excess free cash to our shareholders. I'll now turn it over to Chris for the detailed financial review. Chris Hill: Thanks, Larry. Before we review the financial performance for the quarter, the guidance we gave on our last call and past calls specifically excluded the impact of any FX gains or losses and assumed an effective tax rate of 25%. So accordingly, our discussion today excludes any foreign exchange gain or loss for current and prior periods. Additionally, adjustments, which net to a gain of $4.6 million have been excluded from today's discussion of the third quarter 2025 financial results. You can find a summary of those items in the tables attached to our press release for the third quarter of 2025. Now looking at the income statement. Revenue was $134.5 million in the third quarter, up $4.4 million or over 3% compared to the prior quarter and flat year-over-year. The sequential improvement is primarily associated with increased demand for our laboratory analytical services and completion diagnostic services in international regions. Of this revenue, service revenue, which is more international, was $101.1 million for the quarter, up 5% sequentially and up over 2% year-over-year. As mentioned earlier, sequentially, we saw an increase in international service revenue for both our laboratory analytical services and our completion diagnostic services when compared to the second quarter. For the U.S., service revenue remained flat sequentially and was down almost 4% from last year. Product sales, which is more equally tied to North America and international activity, were $33.4 million for the quarter, down slightly from last quarter and down 6% year-over-year. Our international product sales are typically larger bulk orders and can vary from one quarter to another and were up nicely in the third quarter when compared to the second quarter. However, laboratory instrumentation sales decreased in the third quarter, but coming off a very strong second quarter. Looking at year-over-year, the decrease in product sales was primarily due to the lower levels of completion activity in the U.S. onshore market. Moving on to cost of services, ex items for the quarter was 74% of service revenue, improving from 77% in the prior quarter and from 76% in the same quarter last year. The year-over-year and sequential improvements in cost of services was primarily due to cost efficiencies and reductions in overall compensation costs associated with actions taken earlier this year. Cost of sales ex items in the third quarter was 88% of revenue compared to 85% last quarter and flat compared to last year. The sequential increase was due to higher absorption of fixed costs on a slightly lower revenue base in the quarter as well as an increase in the cost of imported steel due to tariffs. As we continue to focus on cost efficiencies, we anticipate the manufacturing absorption rate in future quarters will be in line with projected product sales. G&A ex items for the quarter was $10.7 million, a slight increase from $10.5 million in the prior quarter and $10 million in the same quarter of the prior year. For 2025, we expect G&A ex items to be approximately $42 million to $44 million. Depreciation and amortization for the quarter was $3.6 million, decreased slightly compared to $3.7 million in the last quarter and the same quarter in the prior year. EBIT ex items for the quarter was $16.6 million, up $2.1 million from $14.5 million last quarter, yielding an EBIT margin over 12% and expanding 120 basis points sequentially. Our EBIT for the quarter on a GAAP basis was $20.9 million, which includes a gain of approximately $5.2 million associated with the final settlement of insurance claim for our U.K. facility that was damaged by fire. Interest expense of $2.7 million remained flat compared to the prior quarter and decreased from $3.1 million last year. The decrease in interest expense from last year is due to a lower average borrowings on the credit facility in 2025. Income tax expense at an effective rate of 25% and ex items was $3.5 million for the quarter. On a GAAP basis, we recorded tax expense of $3.8 million for the quarter at an effective rate of 21%. The effective tax rate will continue to be somewhat sensitive to the geographic mix of earnings across the globe and the impact of items discrete to each quarter. We continue to project the company's effective tax rate to be approximately 25% for 2025. Net income ex items for the quarter was $10.2 million, an increase of over 15% sequentially, but down almost 14% from the same quarter last year. On a GAAP basis, we had net income of $14.2 million for the quarter. Earnings per diluted share ex items was $0.22 for the quarter, an increase from $0.19 in the prior quarter and a decrease from $0.25 last year. On a GAAP basis, EPS was $0.30 for the third quarter of 2025. Turning to the balance sheet. Receivables were $110.3 million and decreased approximately $3.6 million from the prior quarter. Our DSOs for the third quarter improved to 71 days from 75 days last quarter. Inventory at September 30, 2025, was $58.2 million, down $1.5 million from last quarter end. Inventory turns for the quarter improved to 2.0, up from 1.9 in the prior quarter. We continue to focus on managing our inventory to lower levels with improved returns and anticipate inventory turns will gradually improve over time. And now to the liability side of the balance sheet. Our long-term debt was $117 million as of September 30, 2025, and considering cash of $25.6 million, net debt was $91.4 million, which decreased $3.4 million from last quarter. Our leverage ratio was reduced to 1.1 at September 30, down from 1.27 last quarter end. As of September 30, 2025, our debt was comprised of $110 million in senior notes and $7 million outstanding under our bank credit facility. As Larry stated earlier, the company will remain focused on executing its strategic business initiatives while maintaining a healthy balance sheet. Looking at cash flow. For the third quarter of 2025, cash flow from operating activities was approximately $8.5 million. And after paying $2 million of CapEx for operations, our free cash flow for the quarter was $6.5 million. As discussed in prior quarters, the capital expenditures associated with rebuilding our U.K. facility, which was damaged by fire in February 2024, are covered by the company's property and casualty insurance and have been excluded in the calculation of free cash flow. Additionally, we expect CapEx to remain aligned with activity levels. And for the full year 2025, we expect capital expenditures for operations to be in the range of $11 million to $13 million. The forecast for capital expenditures excludes CapEx associated with rebuilding the U.K. facility. Core Lab will continue its strict capital discipline and asset-light business model with capital expenditures primarily targeted at growth opportunities. Core Lab's operational leverage continues to provide the ability to grow revenue and profitability with minimal capital requirements. Capital expenditures have historically ranged from 2.5% to 4% of revenue even during periods of significant growth. That same level of laboratory infrastructure, intellectual property and leverage exists in the business today. We believe evaluating a company's ability to generate free cash flow and free cash flow yield is an important metric for shareholders when comparing and projecting company's financial results, particularly for those shareholders who utilize discounted cash flow models to assess valuations. I will now turn it over to Gwen for an update on our guidance and outlook. Gwendolyn Schreffler: Thank you, Chris. Turning to Core Lab's outlook for the fourth quarter. The IEA, the EIA and OPEC+ continue to forecast growth in crude oil demand between 700,000 and 1.3 million barrels per day in 2025 with a similar level of incremental growth projected for 2026. This growth continues to drive primarily by demand from non-OECD countries, including Asia, India and emerging markets across the Middle East and Africa. As noted in the IEA's report published September 16, 2025, crude oil field data shows the natural decline in existing producing fields is accelerating globally and now represents a major long-term supply risk. Addressing steeper decline rates and bringing new fields online will be central to ensuring energy security and maintaining market stability. As such, according to the IEA, significant annual investment in oil and gas resource development will be required for many years to come. Core Lab's Reservoir Description and Production Enhancement technologies are directly aligned with these investment imperatives. In the near term, potential tariff headwinds, combined with OPEC+ decisions to increase production levels are contributing to market volatility and lower commodity prices. Despite the current softness and long-term crude oil demand fundamentals remain intact. Core Lab maintains its constructive outlook and continues to see steady activity across committed long-cycle projects, including deepwater along the South Atlantic margin, North and West Africa, Norway, the Middle East and certain areas of Asia Pacific. These projects by nature of their scale and planning cycles tend to be less reactive to near-term commodity price fluctuations. Core Lab's revenue opportunity on awarded projects will remain somewhat dependent on our clients' geological success rates. Activity tied to smaller scale short-cycle crude oil development projects are expected to remain more sensitive to changes in commodity prices. As a result, changes in crude oil prices are anticipated to have a more immediate impact on drilling and completion activity in the U.S. onshore market. Geopolitical conflicts, evolving trade and tariff dynamics and volatile commodity prices continue to create uncertainty in demand for laboratory services tied to the maritime transportation and trade of crude oil and derived products. Despite these headwinds, Core Lab projects Reservoir Description's fourth quarter revenue to be up sequentially. The U.S. frac spread count continues to trend lower, and the company anticipates the typical year-end seasonal decline in U.S. onshore completion activity. However, growth in demand for Core's diagnostic services and energetic system product sales in both international and offshore markets may somewhat offset the decline in U.S. onshore activity. As such, Core projects Production Enhancement to be down slightly sequentially. Core believes that the tariff measures under consideration will not apply to the vast majority of service revenue and product sales provided by the company. Core services account for over 75% of the company's total revenue and are currently not subject to tariffs. Core's product sales have been less than 25% of total revenue and are primarily manufactured in the U.S. Tariffs on exported products would not apply to approximately 50% of these product sales as they are consumed in the U.S. drilling and completion market. Certain raw materials imported and consumed in production enhancements, U.S. product manufacturing and service businesses are attracting import tariffs. We continue to take steps to mitigate the impact of tariffs. In summary, Reservoir Description’s production -- Reservoir Description's fourth quarter revenue is projected to range from $88 million to $90 million with operating income of $11 million to $12.3 million. Production Enhancement's fourth quarter revenue is estimated to range from $44 million to $46 million, with operating income of $2.9 million to $3.7 million. Core's fourth quarter 2025 revenue is projected to range from $132 million to $136 million with operating income of $14 million to $16.1 million, yielding operating margins of approximately 11%. EPS for the fourth quarter is expected to range from $0.18 to $0.22. The company's fourth quarter 2025 guidance is based on projections for underlying operations and excludes gains and losses in foreign exchange. Our fourth quarter guidance assumes an effective tax rate of 25%. With that, I'll turn it back over to Larry. Lawrence Bruno: Thanks, Gwen. First, I'd like to thank our global team of employees for providing innovative solutions, integrity and superior service to our clients. The team's collective dedication to servicing our clients is the foundation of Core Lab's success. Looking at the macro, as Gwen mentioned, even after assessing current and near-term economic headwinds, the IEA, EIA and OPEC projections continue to point to growth in global crude oil demand in 2025 and beyond. The various estimates show growth in demand of between 0.7 million barrels per day and 1.3 million barrels per day for 2025 with similar additional demand growth projected for 2026. In addition to the forecasted growth in demand, new production will need to be brought online to offset the natural decline from existing producing fields. Combined, these trends will require continued investment in the development of onshore and offshore crude oil fields. U.S. tight oil production has been by far the largest component of non-OPEC oil production growth since 2010. Continued growth in global oil demand, combined with constrained incremental U.S. oil production growth supports the thesis that the balance of future supply growth must increasingly rely on discoveries and field developments outside the U.S. In summary, the current forecast suggests a multiyear cycle in which U.S. onshore production growth slows and future growth in global supply will be driven by capital investment in international conventional offshore fields and unconventional opportunities in the Middle East. These trends support increased demand for Core Lab services across the globe, particularly for Reservoir Description. The most recent EIA short-term energy outlook for U.S. oil production is 13.5 million barrels per day in 2025, and the agency currently projects production to remain essentially flat in 2026 with only nominal growth in U.S. production over this time frame. Of particular note, during the third quarter, the IEA pivoted from earlier projections on the need for investment in new oil and gas production, stating that in addition to continued investment in existing fields, more than 45 million barrels of oil production from new conventional oil fields must be added by 2050 just to maintain current production levels. Any growth in demand would add to that number. The IEA now states that significant annual investment in oil and gas resource development will be required for many years to come as the natural decline in existing producing fields is accelerating globally. The new IEA analysis published in September, the agency's global field-by-field data show that steeper natural declines now dominate supply risk. The IEA quantified this risk, stating that oil output would fall approximately 8% per year from natural decline. Nearly 90% of upstream CapEx since 2019 has gone just to offset declines, not to meet continuing demand growth. Additionally, the IEA sees 20-year average project lead times, and they conclude that delayed or inefficient development of new production will further compound the supply risk. Directionally, these IEA revisions and the need for increased investment in oil and gas projects align with Core Lab's long-standing view that the decline curve never sleeps and always wins. Along with new exploration, appraisal and development programs, disciplined data-driven optimization of existing reservoirs is the fastest, lowest risk path to supply reliability and operator returns, a scenario that Core Lab is uniquely positioned to deliver through its Reservoir Description and Production Enhancement Technologies. With Core Lab's expanding opportunities across international markets, such as with unconventional plays in the Middle East and emerging onshore and offshore deepwater conventional plays in a number of regions, including along the South Atlantic margin, the company continues to enhance its portfolio of innovative offerings for our growing global client base. Now let's review the third quarter performance of our 2 business segments, turning first to Reservoir Description. For the third quarter of 2025, revenue came in at $88.2 million, up over 2% compared to Q2. For Q3, operating income for Reservoir Description ex items was $11.6 million, up from $10.8 million in Q2, yielding operating margins of 13% with incremental margins of 41%. While demand for Reservoir Description lab services remained strong in several regions across our global network, ongoing international geopolitical conflicts, along with sanctions, continue to produce headwinds that impact the demand for laboratory services tied to the trade and transportation of crude oil and derived products. The demand for these services did rebound some in the third quarter as trading patterns continue to realign. Now for some operational highlights from Reservoir Description. In the third quarter of 2025, Core Lab completed phase 1 of a major reservoir fluid study in the Middle East. This analytical program addressed the critical challenge of crude oil stability by determining how natural pressure depletion impacts asphaltene behavior. As pressure drops across producing reservoirs, asphaltene can precipitate from some crude oils. These solid particles can then plug pore-throats, impair permeability and even obstruct production tubulars. Consequently, asphaltene precipitation has significant implications for both production efficiency and infrastructure integrity. As reservoirs mature, a decline in pressure will destabilize the delicate balance of pressure, volume and temperature, or PVT, that governs the thermodynamic behavior of the crude oil. This disruption can cause costly formation damage in the subsurface, leading to reduced production rates and other operational issues. The operator engaged Core Lab to deploy its proprietary full visualization PVT laboratory technologies alongside Core's advanced near infrared and high-pressure microscopy detection techniques. Combined, these technologies enabled precise measurement of asphaltene onset pressures and depositional behaviors under a range of reservoir and production conditions. Concurrently, Core Lab designed and executed advanced laboratory Core flood experiments to quantify permeability impairment as the laboratory system pressure was reduced to below critical asphaltene precipitation thresholds. These laboratory results form the essential hard data inputs into dynamic reservoir models that will allow the client to mitigate risk as they develop pressure maintenance strategies for the field. This project is now progressing into phase 2, which will assess the feasibility of pressure maintenance and solvent injection programs aimed at permeability restoration and reducing formation damage. Throughout the life cycle of oilfields, Core Laboratories measurements and interpretations help our clients maximize hydrocarbon production from their assets. Moving now to Production Enhancement, where Core Lab's technologies continue to help our clients maximize their well completions and improve production. Revenue for Production Enhancement for Q3 came in at $46.3 million, up 6% compared to Q2. Third quarter operating income for Production Enhancement, ex items was $4.9 million, yielding operating margins of 11%, up from 9% in Q2. In the U.S., Diagnostic services benefited from increasing demand as complex U.S. land completion designs like trimulfrac and extended lateral length horizontal wells become more and more common. Core's expansive portfolio of completion products also saw increased demand in international markets. Now for some operational highlights from Production Enhancement. In the third quarter of 2025, a national oil company engaged Core Lab's production enhancement team after experiencing nearly 2 months of costly downtime due to a stuck, heavyweight drill pipe in a well from offshore West Africa. The operator deployed Core's proprietary dual-end severing tool, which is engineered for high-efficiency pipe recovery operations, particularly in scenarios where conventional drill pipe and casing cutters are not up to the task. Core Lab provided the operator with extensive assembly and field application procedures and training and real-time guidance to determine the optimal deployment position within the wellbore for maximum effectiveness. Core's proprietary tool works by using precisely timed energetic events that are sequenced to generate two equal and opposing shock fronts. This technology focuses the energy outward towards the drill string and severs the drill collar. As a result of Core Lab's proprietary technologies and unmatched client service, the drill pipe was successfully recovered and well operations were restored. Also in the third quarter, one of Canada's most active heavy oil operators needed to identify which bore holes in the multilateral wells were contributing the most oil to overall production. This is a key challenge in optimizing completions in low-temperature heavy oil reservoirs. Having successfully used Core Lab's SPECTRACHEM Water Tracers in previous multistage fracturing operations, the operator again turned to Core's engineering team for a solution using chemical tracers to assess oil production from these challenging complex wells. The operator deployed Core's unique FLOWPROFILER Engineered Delivery System, or EDS. These oil tracers were placed into each lateral leg, allowing the operator to monitor produced oil concentrations and generate a precise production contribution profile. The operator found the diagnostic results to be of high value and is now including Core's FLOWPROFILER EDS oil tracers as a standard evaluation technology for future projects. That concludes our operational review. We appreciate your participation, and Danielle will now open the call for questions. Operator: [Operator Instructions] The first question comes from John Daniel from Daniel Energy Partners. John Daniel: Hopefully, you can hear me okay. Well, first question is on the transaction you all just did. If you could elaborate on maybe what some of the opportunities might be for similar sized transactions globally? And this is a sidebar, I thought it was an interesting way you structured the purchase price where a lot of it's on the back end in terms of earnout, it's pretty new way to do that. So just any color on those opportunities. Lawrence Bruno: I'll let Chris fill in a lot of the sort of the details on that, but just a little background there, John. So I think you know, I came to Core Lab now 26 or so years ago through a similar sort of tuck-in technology acquisition. And so have a pretty good model for that. Core Lab did a series of those private company acquisitions. They offer technological advantages. They offer geographic advantages. And as you and some of the other folks have heard us say before, everybody has got hockey stick projections on how their business is going to play out over the next few years. Well, we think it's a good approach to have them participate, in that the need to deliver that hockey stick if they're going to be rewarded for that hockey stick. So yes, so I think that approach make sense. And I think we'll look at -- we're always looking at similar acquisitions. And Chris, any color you might want to add on the Solintec acquisition? Chris Hill: No. I think the way we did structure that may be a little unique from what you normally see. We would love to structure most transactions like that, but it takes two parties to agree on what those terms look like. So we are very happy with the acquisition and then it's kind of a win-win if we end up paying that earn-out, for both the seller and us. Lawrence Bruno: And I think I would add to that, that Solintec has a long multi-decade history in Brazil, and we are really glad to have them part of the Core Lab family. John Daniel: Okay. I guess just my follow-up question, a bit unrelated to the M&A market, but you guys do a really good job of kind of traveling the globe and seeing your customers, and I think you alluded to going to Asia Pac in the third quarter. I'm curious when you sit down and talk with those folks, obviously, don't name me names, but like when they look into their crystal ball, 2 to 3 to 4 years from now, are they suggesting to you higher activity, lower activity? Any color would be appreciated. Lawrence Bruno: Yes, higher activity, and it's across the board. I'd say it's Middle East still leading the pack, South Atlantic margin and West Africa, I would say, are in the second position. And then recently here in Asia Pac, we're seeing some sort of, I'll call it, they've been on the drawing board for a while, but finally getting -- closer to getting kinetic, if you will, on some exploration programs. And with those, for us, there's some work tied to exploration, but we really hope our clients are geologically successful because it's when they get into appraisal and development, that's really kind of the wheelhouse, particularly for Reservoir Description. And then eventually, it's production, and that plays out into our Production Enhancement Group. But it's clearly rising in our perspective here, that activity levels over the next few years should be going up. And I think there's -- we have even more confidence into the trends that we've been describing over the last year or so saying that, "Hey, there is a wave coming of more international investment." And I think it's tied to a realization that the production from U.S. land has largely absorbed the rest of the world from having to bring new production on and that, that phase at 15-year cycle from 2010 to 2025, look, there's still going to be a lot of oil and gas produced in the U.S., but the growth that has covered a lot of the decline around the rest of the world, that's starting to come to an end. John Daniel: Okay. That's very helpful. Thank you for including me. Lawrence Bruno: Yes. Thanks, John. I appreciate the call. Operator: [Operator Instructions] Seeing that there are no further questions, I would like to turn the conference back over to Larry Bruno for closing remarks. Lawrence Bruno: Okay. Thanks, Danielle. We'll wrap up here. I think we've got a pretty busy earnings release morning going on here, so probably a little bit of people juggling phones. In summary, Core's operational leadership continues to position the company for improving client activity levels in the coming quarters and years. We have never been better operationally or technologically positioned to help our global client base optimize their reservoirs and to address their evolving needs. We remain uniquely focused and are the most technologically advanced, client-focused reservoir optimization company in the oilfield service sector. The company will remain focused on maximizing free cash and returns on invested capital. In addition to our quarterly dividend, we'll bring value to our shareholders via growth opportunities, driven by both the introduction of problem-solving technologies and new market penetration. In the near term, Core will continue to use free cash to repurchase shares and strengthen its balance sheet while always investing in growth opportunities and evaluating various methods to increase shareholder value. So in closing, we thank and appreciate all of our shareholders and the analysts that cover Core Lab. The executive management team and the Board of Core Laboratories give a special thanks to our worldwide employees that have made these results possible. We're proud to be associated with their continuing achievements. So thanks for spending time with us, and we look forward to our next update. Goodbye for now. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Odd-Geir Lyngstad: Hello, and good morning, and a very warm welcome to Elkem's Third Quarter Results Presentation. My name is Odd-Geir Lyngstad, and I'm responsible for Investor Relations here in Elkem. In today's presentation, we will go through the highlights for the quarter and give an update on the markets before we go through the outlook for the fourth quarter. CEO, Helge Aasen, will take us through this first part of the presentation before CFO, Morten Viga, will present the third quarter results in more detail. We will open for Q&A after Helge and Morten's presentations. So with that, I give the word to CEO, Helge Aasen. Helge Aasen: Thank you, Odd-Geir, and good morning, everyone. Very nice to see the turn up today. Yes, we seem to be repeating ourselves when it comes to describing the markets we operate in. The story about weak and challenging conditions doesn't seem to go away. And the market does actually remain much the same as it has been for a while now. However, despite challenging macroeconomic environment, Elkem's results are relatively good, but of course, below our financial targets. The EBITDA for the third, I'm sorry, the EBITDA for the third quarter ended at NOK 829 million, which gave an EBITDA margin of 11% for the group. If you exclude silicones, the operating income ended at NOK 4.1 billion with an EBITDA of NOK 586 million, which then represents a margin of 14%. This result is to a great extent, explained by good operational performance and ongoing cost improvements. Silicon Products was impacted by low silicon and ferrosilicon prices in the third quarter. But Specialty segment as Foundry alloys and Microsilica, which is a silica powder, delivered improved results. Carbon Solutions continued to deliver good margins, but the operating income and the following EBITDA is impacted by the lower sales. Silicones has improved on cost and market positions and delivered a higher EBITDA compared to the same period last year. The strategic review is ongoing. We gave an announcement some weeks ago, and I can just confirm that this is moving ahead as planned with an exclusive sales process, and we are still aiming for closing this transaction within the first half of next year. So before we go on to the market update and the results, I'd like to say a few words about our ESG work. It's built on two main pillars: reduce CO2 emissions and to supply the green transition with critical materials. Our aim is to reduce and ultimately remove fossil CO2 emissions from the smelting processes. Elkem supports the green transition through the supply of critical raw materials, and we work systematically to cut emissions and reduce waste throughout the entire value chain. Circularity is also playing an increasingly important role in this world. And we have introduced a new, actually a breakthrough method for recycling silicones through a mechanical recycling. And this then goes back into what used to be waste now is going back into new formulations. Our efforts within ESG are also recognized with strong ratings from EcoVadis and CDP. And in the third quarter, we received a gold rating from EcoVadis, and this puts us among the top 5% of all the companies they are assessing globally. And over the past years, Elkem has consistently received either gold or platinum ratings from EcoVadis, which places us among the top of the companies they are rating. Here, we show a couple of examples from Silicon Products and Carbon Solutions, illustrating some of our strong cost and market positions. I mentioned Microsilica initially. It's SiO2 silica powder, a byproduct from the ferrosilicon and silicon metal smelting processes. And over decades, we have developed this into a portfolio of specialty products, which go into quite a wide range of end applications. To mention some of them, construction, well drilling, cementing, refractories and also polymers. Over the past years, this product area has consistently grown and shown stable high margins. And I think it's a very good excellent example of how we are able to specialize on the basis of commodity production capacity. We're also a leading producer of electrode paste, electrodes and refractory materials coming from Elkem Carbon. This goes into the metallurgical industry. And these products are probably not very familiar to you, but they are critical consumables and lining materials, which are very important for stable operations and lifetime in furnaces and electrolyser cells in the aluminum industry. Also here, we are focusing on product development, and we have developed a more environmentally friendly product. With bio-based binders, which greatly improves working conditions. This solution has a proven performance record, and we have installed the product in more than 15,000 aluminum electrolytic cells. And we are gaining market share. Competitive cost position can, of course, be explained by many factors, operational knowledge, operational excellence, economies of scale, upstream integration, et cetera. However, electric power is another, of course, very important cost factor in the production of most metals. We have long-term supply agreements for renewable hydropower in Norway, Iceland, Canada, Paraguay. And access to long-term competitive energy contracts is a prerequisite for achieving competitiveness and also, of course, predictability in order to plan investments, et cetera. And renewable sourcing of energy also gives us a low carbon footprint, which clearly is, if not gaining or achieving premiums on end products, it gives us a preferential supplier status. CRU, a global business intelligence company, have published their analysis of the 2025 cost curve, which is illustrated on the graph here. This is for silicon 99, silicon metal. And as you can see from the chart, this puts our Salten and Thamshavn plants in Norway among the lowest cost producers in the western part of the world. Then coming to another important frame condition, which is trade barriers. That's affecting several markets and industries these days. And as you know, a highly dynamic and quite unpredictable environment. We are affected by this directly and indirectly. Two relevant examples are EU's ongoing safeguard assessment on silicon and on ferrosilicon and potentially silicon metal and also a U.S. countervailing duties assessment on silicon metal imports. EU safeguard measures could come into effect from November 19th. It's so far unclear how this is going to affect Elkem and how it will be structured. The potential measures will be aimed at raising prices, obviously, and protecting internal production within the EU, but we don't know how Norway and Iceland will be positioned in it. The regulations appear to focus on ferrosilicon and foundry alloys in this round, and there's no clear indication if silicon will be included. But most likely, silicon will be subject to another process at a later stage. The U.S. has imposed countervailing duties on silicon imported from several countries, including Norway with a preliminary rate of 16.87%. The basis for these duties are the CO2 compensation and CO2 quotas that the Norwegian companies receive under EU's carbon schemes. And our position on this is that these policies are a compensation for CO2 tax and do not constitute countervailable subsidies harming the U.S. domestic industry. We have had similar cases in the past. And each time we have been able to document that there was no injury to U.S. industry. So, we don't know the outcome of this round. It's now introduced as a preliminary measure, and then it will be followed by a permanent decision later on. Unclear when, partly because of the shutdown of the U.S. government at the moment. A few more words on the strategic review process. It's underway, as I mentioned, and it is going according to plan. We cannot say much more about the process beyond the status update that we gave during the third quarter. We are in an exclusive sales process with a major industrial player with a significant presence in the global chemical industry. The process is well aligned with the strategic review and represents an important milestone. And in a challenging market environment. But we are confident that the potential transaction will represent the best possible outcome for the silicones division in Elkem. And we're also confident that this process will be the best outcome for the rest of Elkem and as such, benefit to all stakeholders.Subject to further negotiations, final agreement and necessary approvals, the closing of the transaction is, as mentioned, expected to happen during the first half of next year. Now let's have a look at the markets. Automotive continues to be an important sector for Elkem, driving demand for many of our products. The growth in this sector remains weak with the exception of China, where the production is up in 2025. This is mainly the case for electrical vehicles. During the first half of 2025, the overall production in the EU is characterized by weak order intake and consequently low number of new registrations. Forward-looking forecasts have been revised upwards as markets adapt to ongoing trade and structural changes. Europe's outlook is up, supported by improved expected demand in Germany, France, Austria and Turkey. China's forecast has increased due to incentives and export growth. But overcapacity and price competition clearly persist, especially for electrical vehicles. North America is also seeing upgrades driven by tariff relief and higher production. In South America, the gains are so far limited by very high import pressure. So, any improvement in the automotive sector will definitely have a positive impact for Elkem. Several markets have been impacted by weak demand and various trade regulations and governmental initiatives. In the EU, the silicon reference price dropped by approximately 20% in late June. This was mainly due to low import prices from China, which suffer from, I would say, a severe oversupply. Prices in the EU then recovered modestly again in September due to improved market balance. This was a result of capacity being taken out in Europe as well as higher prices in China. U.S. silicon prices have increased in the third quarter. This is expected to continue to rise due to trade regulations. And in China, we have seen some price recovery from very low levels, mainly due to signals that the government will launch initiatives to curb overcapacity. Discussions are ongoing there regarding new energy consumption standards for the industry, which seems to be aimed at reducing overproduction. The ferrosilicon markets have many of the same drivers as silicon. Also here, we have a market impacted by trade regulations and possible safeguard measures in the EU, which have resulted in price fluctuations. The market sentiment is still characterized by weak demand and downward price pressure. However, based on the expected safeguard measures in the EU in August, we saw ferrosilicon prices jump up. This didn't last very long. It dropped back down again when it became clear that no preliminary measures would be announced. Prices in the U.S. increased towards the end of the third quarter. This was mainly driven by trade regulations. And in China, we've also seen some recovery from very low levels, partly due to this government focus on reducing excess production capacity. It's also somewhat linked to higher raw material costs in China. The market for carbon products is much smaller than silicon and ferrosilicon. We don't have reference prices to compare with here. Quite a big difference between regions when it comes to demand. But obviously, the underlying driver is the production of steel, which again triggers ferroalloy demand and then, of course, the aluminum industry. Global steel production in the third quarter remained quite stable compared to the same quarter last year. Europe experienced a 3% decline, whereas North America saw a 3% increase, largely due to tariffs again.The steel and ferroalloys markets continue to face challenges. Carbon Solutions specialized product offering and wide geographic presence is, however, proving to be resilient and creating a stability in earnings. Then moving on to silicones. Also like in silicon metal, overcapacity is significantly hampering any meaningful price recovery in the commodity part of the business. Producers are actively trying to increase the prices, and we've seen quite a lot of fluctuations in China, in particular, during the quarter. DMC prices first rose from a level of around RMB 10,400 per tonne to up to RMB 12,250. This was a result of a fire at one of the bigger players. But due to the overcapacity, that was a very short-lived price uptick and prices subsequently lowered again because other producers are ready to fill the gap quite quickly. So, the current price level is around RMB 11,050 per tonne and quite sensitive to changes in raw material costs, where silicon metal obviously is one of the big input factors. Demand in China continues to be weak, especially in construction. Demand for commodity silicones in the EU and the U.S. is also negatively impacted by changing tariff policies. But I would say, in general, there's quite good and stable demand for specialties. So, coming to the outlook. Silicon Products are still going to face quite challenging conditions and low demand on a historical basis. But as mentioned in the presentation, our leading cost position and good performance in more specialized part of the business are mitigating the negative impact. Carbon Solutions benefits from good cost positions and geographical diversity, and continued weak demand will have some impact on the results. Silicone producers are actively trying to increase prices. But as mentioned, the markets are still hampered by overcapacity. Potential trade regulations and protective measures are expected to impact our markets going forward. And of course, we are very eager to see the safeguard measures in the EU and how that's going to play out. It's not yet concluded, and very hard to say the overall impact on Elkem from this. So I think with that, I'll give the word to you, Morten, and take us through the financials. Morten Viga: Thank you very much, Helge, and good morning, everybody. So it's a pleasure to go through the financial numbers for Q3. Our operating income for the quarter amounted to NOK 7.5 billion, and that's down 7% compared to the third quarter last year. All divisions had a decline in operating income this quarter, mainly explained by lower sales prices. Elkem's EBITDA for the quarter was NOK 829 million. This was also well below the third quarter last year, but it's slightly higher than Q2 this year. The reported group EBITDA margin for the quarter amounted to 11%, which is somewhat below our long-term target of 15% to 20% EBITDA margin. Having said that, we should also emphasize that the EBITDA margin for the continuous operations, i.e., excluding silicone's was 14%. And it is important to bear in mind that these margins are generated in a situation where sales prices in key markets are at or close to historical low levels. And as such, the EBITDA is not supported by market conditions, but it's held up by good operational performance and a very strong underlying cost position. There were no particular one-offs affecting the EBITDA in the third quarter. As usual, we provide an overview of some of the main financial numbers and ratios. I will not go into detail on all of them, but it's important to note that the Silicones division has been reclassified as discontinued operations and assets held for sale. In this presentation, we mainly focus on the financial numbers, which include silicones. However, the regular financial statements, including the profit and loss statements, reflects Elkem's results excluding silicones. And in the table to the right, you can see the comparable figures for Elkem with and without silicones. Including silicones, the group EBITDA amounted to NOK 829 million. The realized effects from the currency hedging program was minus NOK 16 million reported in the segment Other. Other items amounted to NOK 78 million and the main [Technical Difficulty] of minus NOK 17 million. Net finance expenses were minus NOK 34 million. And here, the main items related to net interest expenses of minus NOK 114 million, which was largely offset by currency gains on NOK 96 million, mainly related to translation effects on our external loans. The income tax was minus NOK 96 million, and this gives a very high effective tax rate of 65%. And the reason for that is that the Silicones division had a loss before income tax, which is rather high, and there is no tax in a major part of that division. Let's then take a look at the divisions and start with the Silicon Products division. So, the silicon and ferrosilicon markets remained difficult, but the division's EBITDA for the third quarter was supported by good operating performance. Total operating income amounted to NOK 3.4 billion, representing an 8% decrease compared to the same quarter in 2024. And the decline in operating income is mainly driven by lower sales prices for the commodity segments in silicon and ferrosilicon. EBITDA amounted to NOK 389 million, representing an EBITDA margin of 12%. The EBITDA is higher than the previous quarter, but significantly lower than Q3 '24, and this is explained by significantly lower sales prices, particularly for silicon. This is partly countered by good and stable results from the specialty segments, particularly foundry alloys. And as I said, in addition, the EBITDA is supported by strong operations and good cost improvements. Sales volume increased by 13% compared to the third quarter last year, mainly due to improved sales of specialty products. So, if we look at the Carbon Solutions, this division is once again presenting a good margin, and it reached an EBITDA margin of 28% in the third quarter despite very challenging market conditions. Total operating income amounted to NOK 822 million, which was down 7% from the third quarter last year. And this decline here is mainly explained by lower sales prices. The EBITDA was NOK 231 million, which represents an EBITDA margin of 28%. The EBITDA margin is in line with the previous quarter, but it's somewhat lower than Q3 '24, mainly explained by lower sales prices and somewhat higher raw material costs. The sales volume for the third quarter was in line with the previous quarter, but is negatively affected by low steel production, particularly in the EU. As mentioned, and very well known, the Silicones division is under strategic review. The division has a good portfolio of specialty products, which provides to a large extent, stable sales and margins. But also, the division's exposure to the commodity market is still very significant. And particularly in China, we have seen strong price pressure hampering our margins. The division has, however, been able to compensate for lower commodity sales prices in the quarter through higher sales volumes and good cost improvements. Total operating income amounted to NOK 3.6 billion, which was down 6% from the third quarter last year. Higher sales volume in the third quarter was more than offset by lower commodity sales prices. The EBITDA amounted to NOK 248 million, representing an EBITDA margin of 7%, and this is in line with the previous quarter, but it is significantly 23% higher than the third quarter last year, mainly driven by cost improvements and better sales volume. Sales volume was up 10% compared to the third quarter last year, mainly due to higher sales volumes in the Asia Pacific region, where we also have introduced a new production line, higher capacity, and significantly stronger underlying cost position. Let's now take a closer look at some of Elkem's key financial ratios. The earnings per share, EPS were quite low also in the third quarter with NOK 0.05 per share, and that brings the EPS year-to-date to minus NOK 0.77 per share. And we are, of course, not satisfied with this, and we are working on further cost reductions and other improvements to mitigate the market situation. The EPS was also this quarter negatively impacted by net losses from the Silicones division, which is under strategic review. And if you exclude the Silicones division, the EPS for the third quarter would have been NOK 0.34 per share plus, and it would have been a positive NOK 0.40 per share year-to-date.The balance sheet remains very solid. Total equity amounts to NOK 24 billion by the end of third quarter, which equals an equity ratio of 50%, very stable level. Elkem's financing position is well managed, and we have a very good and robust maturity profile. However, as you can see, the interest-bearing debt has continued to increase, and the current leverage is above our target level of 1 to 2x EBITDA last 12 months. By the end of the third quarter, our net interest-bearing debt amounted to NOK 11.7 billion, and that's up by NOK 0.3 billion from the previous quarter. And based on the last 12 months EBITDA, the debt leverage ratio is now 3.1. Our target is clearly to bring down the leverage, and Elkem has a plan to deleverage the company after the strategic review process has been concluded, which we plan to achieve during the first half of next year. By the end of the third quarter, Elkem's interest coverage ratio was 6x, which is well within the covenant of 4x, which is the covenant in our loan agreements. The cash flow from operation was NOK 526 million in the third quarter. We have a high emphasis on preserving and generating a good cash flow despite underlying market weaknesses. And this was a clear improvement from the previous quarters. It's explained by lower reinvestments and also positive working capital changes. As already mentioned, the markets are weak, and we will definitely continue to focus on a very disciplined capital spending as long as the weak market conditions prevail. In the third quarter, total investments were down to NOK 312 million and reinvestments were NOK 244 million, which amounted to 39% of depreciation. Strategic investments are very much down and amounted only to NOK 68 million as we have completed all major strategic CapEx projects previously. So let me take the opportunity to wrap up this presentation by summarizing the main headlines and takeaways from the quarter. We will continue to focus on cash generation and a very disciplined capital spending in response to the challenging market conditions. We're very happy to see that Silicon Products has leading cost positions and strong performance within the specialty segments. And I think this is very important to bear in mind when the markets are really, really, really tough out there. Also, Carbon Solutions is in a very good position, and we benefit from good cost positions and a very geographically diverse customer base. Silicones, also a very tough market, but we have improved our cost and market positions based on specialization and also based on new and more modern production lines, both in China and in France. The safeguard measures for ferrosilicon and ferroalloys in the EU and a new trade defense regime for steel in the EU could lead to improved market conditions if these measures are successfully supporting increased industry production in the EU, which is the intention. The strategic review process is progressing as planned with an exclusive sales process ongoing. And as we said, we expect to have the transaction closed within the first half of 2026. So I think that summarizes the presentation, and then I hand back the word toOdd-Geir for the Q&A session. Odd-Geir Lyngstad: Thank you, Helge, and Thank you, Morten. We have a good audience here today. So I think we will start and see if there are any questions from the audience. There is Marcus? Marcus Gavelli: Marcus Gavelli, Pareto Securities. So you talked about the safeguard measures, and clearly, we have no visibility right now. But could you try to provide some color on how you think about potentially worst-case scenario with higher tariffs and with Elkem potentially not being as competitive in the EU market. What sort of flexibility do you see having to redirect volumes and do other sort of measures to fight that? Helge Aasen: I think if we are left on the outside of this and have to compete on the same basis as everybody else, EU is a big net importer of ferrosilicon. And I would claim that Norway and Iceland are among the best position to continue to supply that market. So I don't think we will have to redirect volumes. Obviously, we are very uncertain about how the price protection mechanism will be constructed or put together. But that could, of course, I would say, I don't see a big downside, but there is quite a significant upside if this is done in a way that favors us. Marcus Gavelli: And also just to follow up on the, you mentioned the cost reductions that you're currently looking at. Could you also provide some color on what sort of measures that is? Is it, we've seen some ferrosilicon production now being curtailed? Is it more trying to optimize the production? Or is it actual larger reductions you're looking at? Helge Aasen: This is a wide range of different measures. Obviously focusing on fixed cost reductions continuously, but it's also linked to a lot of optimization in production, producing campaigns where we have the best cost position in different plants and furnaces, and yield improvements. And yes, there's no one particular program that's yielding this, but a very big effort ongoing, and it's giving results over time. Magnus Rasmussen: Magnus Rasmussen, SEB. You have an improvement in the Silicon Products EBITDA Q-on-Q despite lower silicon metal prices, as you said in Q2. Our understanding is that after the decision that you were to be allocated more CO2 quotas, which you reported in early July, you have to purchase less CO2 quotas on a running basis to cover what was previously a deficit. Has that been a positive driver this quarter, and by how much? Helge Aasen: Sounds like a CFO question. Morten Viga: Yes. You're absolutely right. We have got the ruling from the Norwegian Ministry, securing equal treatment with our European competitors. And that's very important. We have not yet received any additional quotas. Such things takes a bit of time, but we are very sure that we will receive a good amount of new quotas. And of course, that will put us in a much better position. There are no particular significant, let's say, CO2 quota P&L elements in our Q3 results. Magnus Rasmussen: When you, on a running basis, start to receive quotas on equal terms as your peers in Europe, then I assume you will not have to purchase quotas to cover that deficit as you've done in the past. Doesn't that imply that you will get a cost saving? Morten Viga: That is correct that in the future, there are 2 important things about this. First of all, equal treatment that's very important as a principle. And certainly, we will have significantly lower CO2 quota costs in the future when we receive those quotas, either late this year or early next year, we assume. So for our long-term competitiveness, it's good news, very good news. Magnus Rasmussen: And also, I see that your net interest-bearing debt in silicones is increasing by about NOK 375 million quarter-on-quarter. And it seems to me like more or less half of that is driven by you repaying what you label as bills payable in your balance sheet, and bills payable has come down by more than half over the past year. So, I'm just wondering why you are repaying that working capital financing ahead of the sale of the division? Morten Viga: No, that is kind of a working capital management done by the Chinese operation. So, I'm not able to give a precise answer to that. But they're managing this position. And as you rightly say, they have decided to repay some of that and reduce some of the bills outstanding. Magnus Rasmussen: Should we expect bills payable to be repaid ahead of the sale? And/or should we look at bills payable as interest-bearing debt when the sales price? Morten Viga: You should not look at bills payable as interest-bearing debt. So, it's part of the working capital management done locally in China. Odd-Geir Lyngstad: Are there any further questions among the audience? If not, I think the questions are quite well covered from what I see here, but one additional question maybe that could, and that is how long you expect curtailments at Rana in Iceland to last, and also if any of our competitors are reducing capacity to the same extent? Helge Aasen: Yes. We had an idle furnace in Rana, and we decided to postpone starting it up again. We are closely monitoring what's happening now. It's obviously inventory management, but it's also in anticipation of what will be the outcome of the safeguard decision in November. And then we have, we're going to stop one furnace in Iceland in mid-November, and that will be idle for 2 months, approximately, and what was the other part of the question? Odd-Geir Lyngstad: Competition. Helge Aasen: Yes, competition. Interestingly enough, Ferroglobe, which is our biggest competitor in silicon products in the conference, I think a couple of weeks ago, announced that they are now stopping all production in Europe. So, it says something about Elkem's competitive position. Odd-Geir Lyngstad: Very good. Thank you very much. And that also concludes our presentation here today. So, thank you very much for attending. Helge Aasen: Thank you.
Operator: Good morning, and welcome to Ladder Capital Corp.'s Earnings Call for the Third Quarter of 2025. As a reminder, today's call is being recorded. This morning, Ladder released its financial results for the quarter ended September 30, 2025. Before the call begins, I'd like to call your attention to the customary safe harbor disclosure in our earnings release regarding forward-looking statements. Today's call may include forward-looking statements and projections, and we refer you to our most recent Form 10-K for important factors that could cause actual results to differ materially from these statements and projections. We do not undertake any obligation to update our forward-looking statements or projections unless required by law. In addition, Ladder will discuss certain non-GAAP financial measures on this call, which management believes are relevant to assessing the company's financial performance. The company's presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. These measures are reconciled to GAAP figures in our earnings supplement presentation, which is available in the Investor Relations section of our website. We also refer you to our Form 10-K and earnings supplement presentation for definitions of certain metrics, which we may cite on today's call. At this time, I'd like to turn the call over to Ladder's President, Pamela McCormack. Pamela McCormack: Good morning. During the third quarter, Ladder generated distributable earnings of $32.1 million or $0.25 per share, delivering a return on equity of 8.3% with modest adjusted leverage of 1.7x. Credit performance remained stable and the quarter was marked by 3 notable developments, a significant acceleration in new loan originations, continued progress in reducing office loan exposure and the successful closing of our inaugural investment-grade bond offering. These results reflect our disciplined business model and conservative balance sheet philosophy, positioning Ladder for continued earnings growth and greater capacity to capitalize on investment opportunities across market cycles. Loan portfolio activity. Origination activity accelerated in the third quarter with $511 million of new loans across 17 transactions at a weighted average spread of 279 basis points, our highest quarterly origination volume in over 3 years. The spread reflects the mix of assets originated, which were predominantly multifamily and industrial, consistent with our focus on stable income-producing collateral. Net of $129 million in paydowns, the loan portfolio grew by approximately $354 million to $1.9 billion, now representing 40% of total assets. Year-to-date, we originated over $1 billion in new loans with an additional $500 million under application and in closing. Notably, the full payoff of our third largest office loan, a $63 million loan secured by an office property in Birmingham, Alabama, reduced office loan exposure to $652 million or 14% of total assets. Approximately 50% of the remaining office loan portfolio consists of 2 well-performing loans secured by the Citigroup Tower in Downtown Miami and the Aventura Corporate Center in Aventura, Florida. Securities portfolio. As of September 30, our securities portfolio totaled $1.9 billion, representing 40% of total assets. During the quarter, we acquired $365 million in AAA-rated securities, received $164 million in paydowns through amortization and sold $257 million of securities, generating a $2 million net gain. Paydowns and sales exceeded purchases, resulting in a modest net reduction in securities holdings this quarter. This reflects our disciplined approach to capital allocation as we did not replace certain securities that ran off, consistent with our view that spreads may widen in the mortgage market given recent volatility and the Federal Reserve's ongoing runoff of mortgage-backed securities. Consistent carry income from our real estate portfolio. Our $960 million real estate portfolio generated $15.1 million in net operating income during the third quarter. The portfolio primarily consists of net lease properties with long-term leases to investment-grade rated tenants and continues to deliver stable, predictable income. Capital structure and liquidity. During the third quarter, we closed our inaugural $500 million 5-year investment-grade unsecured bond offering at a rate of 5.5%, representing 167 basis point spread over the benchmark treasury, the tightest new issuance spread in Ladder's history. The offering was met with strong demand and the bonds have since traded tighter in the secondary market, reaching spreads as low as 120 basis points. This transaction validates the strength of our conservative balance sheet philosophy and disciplined business model. As one of our premier debt capital markets bankers noted, it also firmly planted Ladder's flag in the investment-grade market. The continued tightening of our bonds positions us for lower borrowing costs, stronger execution and improved shareholder returns. As of quarter end, 75% of Ladder's debt consisted of unsecured corporate bonds and 84% of our balance sheet assets remain unencumbered. We maintained $879 million in liquidity, including $49 million in cash and $830 million of undrawn capacity on our unsecured revolver, which provides same-day liquidity at highly competitive rates. Outlook. Ladder's unique investment-grade balance sheet, disciplined use of unsecured debt and robust origination platform positions us to capitalize on investment opportunities, while maintaining prudent credit risk management. We expect fourth quarter loan originations to exceed third quarter production. Recent credit rating upgrades and our successful inaugural investment-grade bond issuance have lowered our cost of debt and expanded our access to a deeper, more stable capital base that remains consistently available across market cycles. Over time, we expect our strong balance sheet, modest leverage and reliable funding profile to position Ladder alongside a broader set of high-quality peers, including equity REITs rather than solely within the commercial mortgage REIT space. As investors increasingly recognize the strength of our senior secured investment strategy and conservative capital structure, we believe our equity valuation will reflect this alignment. Combined with our disciplined credit risk management and ability to deploy capital with speed and certainty, these attributes reinforce our capacity to deliver strong, stable returns for shareholders across market cycles. With that, I'll turn the call over to Paul. Paul Miceli: Thank you, Pamela. In the third quarter of 2025, Ladder generated $32.1 million of distributable earnings or $0.25 per share, achieving a return on average equity of 8.3%. In the third quarter, we closed our inaugural investment-grade bond offering of $500 million 5-year bond at 5.5%. The proceeds were partially used to call the remaining $285 million of bonds that were maturing in October and fund loan originations. As of quarter end, $2.2 billion or 75% of our debt is comprised of unsecured corporate bonds across 4 issuances with a weighted average remaining term of 4 years and a weighted average coupon of 5.3%. Our next corporate bond maturity is now in 2027. The offering strengthened our balance sheet and affirmed our commitment to the investment-grade bond market as our primary source of capital. We're encouraged by the bond's strong trading performance in the secondary market and believe our bonds offer attractive relative value to fixed income investors with [ meat on the bone ] to tighten further as the market continues to recognize Ladder's distinct long-standing investment strategy, anchored by conservative lending attachment points, AAA-rated securities and high-quality real estate equity investments. As of September 30, 2025, Ladder's liquidity was $879 million, comprised of cash and cash equivalents and our undrawn capacity of $850 million unsecured revolver. Total gross leverage was 2.0x as of quarter end, below our target leverage range. Overall, our balance sheet remains strong and primed for continued growth as our investment pipeline continues to build. As of September 30, 2025, our unencumbered asset pool stood at $3.9 billion or 84% of total assets. 88% of this unencumbered asset pool is comprised of first mortgage loans, investment-grade securities and unrestricted cash and cash equivalents. As of September 30, 2025, Ladder's undepreciated book value per share was $13.71, which is net of a $0.41 per share CECL reserve established. In the third quarter of 2025, we repurchased $1.9 million of common stock or 171,000 shares at a weighted average price of $11.04 per share. Year-to-date in 2025, we've repurchased $9.3 million of common stock or 877,000 shares at a weighted average price of $10.60 per share. As of September 30, 2025, $91.5 million remains outstanding on Ladder's stock repurchase program. In the third quarter, Ladder declared a $0.23 per share dividend, which was paid on October 15, 2025. As of today, our dividend yield is approximately 8.5% with a stock price that we believe has been pulled down by the broader market concerns around private credit. We'll note that our dividend remains stable and our asset base continues to turn over into freshly originated loans, AAA securities, high-quality real estate equity investments. With a stable earnings base complemented by our investment-grade capital structure, we believe there's ample room for our dividend yield to tighten, specifically when compared to other investment-grade REITs with similar credit ratings to Ladder. We continue to expand our investor outreach efforts now as an investment-grade company, and we look forward to further educating the market on our story. Building on Pamela's overview of our performance, I'll highlight a few additional insights to how each of our segments fared in the third quarter. As of September 30, 2025, our loan portfolio totaled $1.9 billion with a weighted average yield of approximately 8.2%. As of quarter end, we had 3 loans on non-accrual totaling $123 million or 2.6% of total assets. In the third quarter, we resolved 2 non-accrual loans, first through the payoff at part of a $16 million loan through the sale by a sponsor of 2 mixed-use properties in New York City; and the second be a foreclosure of a loan collateralized by an office property in Maryland with a carrying value of $22.7 million. No new loans were added to non-accrual in the third quarter. Our CECL reserve remained steady at $52 million or $0.41 per share. We believe this reserve is adequate to cover any potential losses in our loan portfolio, including consideration of the ongoing macroeconomic shifts in the U.S. and global economy. As of September 30, 2025, our securities portfolio totaled $1.9 billion with a weighted average yield of 5.7%, of which 99% was investment-grade and 96% was AAA-rated, underscoring the portfolio's high credit quality. As of quarter end, approximately 80% of the portfolio of almost entirely AAA securities were unencumbered and readily financeable, providing an additional source of liquidity, complementing our same-day liquidity of $879 million. In the third quarter, our $960 million real estate segment continued to generate stable net operating income. The portfolio includes 149 net lease properties, primarily investment-grade credits committed to long-term leases with an average lease term of 7 years remaining. For further information on Ladder's third quarter 2025 operating results, refer to our earnings supplement presentation, which is available on our website and our quarterly report on Form 10-Q, which we expect to file in the coming days. With that, I will turn the call over to Brian. Brian Harris: Thanks, Paul. The third quarter was a particularly gratifying one, highlighted by the successful completion of our first corporate unsecured issuance as an investment-grade issuer. We now have access to a much larger investor base in the investment-grade market than the high-yield market where we had issued our prior 7 offerings over the last 13 years. Having access to this larger pool of capital should allow us to further optimize our liability management in the years to come. We believe that by being a regular issuer in the investment-grade corporate bond market, we will be able to lower our overall interest expense to a greater extent than what we could expect in the secured repo and high-yield markets. We prioritized getting to investment-grade ratings several years ago. So having that distinction today from 2 of the 3 major rating agencies is very satisfying, and we plan to maintain or improve our ratings over time. While Ladder has historically been grouped into a peer group of other commercial mortgage REITs, we believe we are more properly comped against other investment-grade rated property REITs who finance their operations like we do, primarily with the use of corporate unsecured debt and large unsecured revolvers. If we succeed in curating an equity investor base that views us more in line with investment-grade property REITs, we think our stock price will start to reflect a lower required dividend yield more in line with how these investment-grade property REITs with lower leverage are valued. In the fourth quarter and beyond, we expect to continue adding to our inventory of higher-yielding balance sheet loans, while staying nimble enough to pivot into securities acquisitions during periods of high volatility when these investments provide extraordinary opportunities to add safer, more liquid investments as market turbulence flares up. We are hopeful that the yield curve will steepen much more next year as the Fed makes good on market predictions of several cuts to the Fed funds rate. This in turn should pave the way for more regular contributions to securitizations. We are always on the lookout for opportunities to own more real estate, but we expect most of the lift to earnings next year to come from organic growth of our loan portfolio. We're expecting to finish this transformational year on a positive note as market conditions do appear to favor our business model as we head into 2026. We can take some questions now. Operator: [Operator Instructions] Our first question comes from the line of Jade Rahmani with KBW. Jade Rahmani: I'm interested to know if you're doing anything differently on the origination side from prior to the IG rating. Perhaps that has opened you up to deals that are closer to stabilization or perhaps larger in size. Clearly, the IG rating might give you a competitive advantage over non-bank lenders. So if you could provide any color on that, it would be helpful. Brian Harris: Sure. Thanks, Jade. Yes, I would say, we're looking at some slightly larger transactions and it's just a lot more stability around it financing it this way. You don't have to go about trying to figure out if an individual lender will see the assets the same way you do. But I wouldn't call it anything wholesale indifference. Slightly larger, yes, everything is a little bit more profitable when your cost of funds go down. But for the most part, the one real change that I see in this part of the cycle versus the last time is the assets on which we're lending are of much, much better quality than the garden apartment buildings and older warehouse properties. So we seem to -- when I take a look at the assets that we're lending on, they're really newly built Class A apartment complexes, resort style almost. And a lot of the industrial portfolios are also quite new as a result of all the onshoring that took place. Jade Rahmani: And on the origination side, I noticed a difference between fundings and commitments upfront that seemed, at least from the outside, a little larger than historically. Were there any construction loans in there or any large CapEx projects in those deals, if you could provide any color? Brian Harris: I wouldn't say as a rule, but we generally don't write construction loans. So there are no construction loans in that portfolio that you're looking at. And as far as heavy CapEx work, I think if you're gravitating towards a slightly wider spread than maybe you're expecting, I don't think it's as a result of a higher construction component or a lot of TI hammer swinging. It really is just -- we're just getting a little bit better. I think the portfolio doesn't look like it's changing meaningfully. Right now, it's most of the assets are industrial and multifamily. I'm not sure it will stay that way. And we haven't been avoiding hotels. We put one under app recently, but we just haven't run across too many of them. And as I said, a lot of the -- we try to focus more importantly rather than property types is on acquisitions where the borrower is buying something usually at a reset basis. Some of these resets are quite remarkable. But as opposed to cash out refinances. The only real cash out refinances that we're doing is if a guy is coming off a construction loan on an apartment building, and he's only 50% leased now. So those oftentimes have 30% or 40% equity in them. And sometimes there's a cash out refi because the property is now complete and half leased. So other than that, it's pretty straight down the middle lending on apartments and industrial properties. Operator: Our next question comes from the line of Steve Delaney with Citizens JMP. Steven Delaney: Congrats on the strong quarter. Curious, let's start with lending. You seem to like the market. You have plenty of capacity. But let's talk about just the $1.9 billion rather than the $5 billion overall portfolio, focusing on the loan portfolio because you appear to be increasingly active there. Do you see -- looking at that portfolio, if we were to look out over the next year, do you see further growth and meaningful growth in that $1.9 billion loan portfolio? And can you give us some idea of a range with your current capital base, how large the loan portfolio might be able to grow? Brian Harris: Sure. Thanks, Steve. let's start with capital first because if you remember, in the second half of 2024, we took in over $1 billion in loan payoffs. And while we began originating loans more frequently, we were not originating at that pace. So what was happening is each quarter, the loan book would get a little bit smaller. This is really the first quarter in a while where we've originated more than has paid off, and we expect that to continue. So the fourth quarter is off to a very good start. I would expect or as I said originally, the organic side of growth will come from just building up the bridge book. I think that's the place where we're focused right now. And we're pretty happy with where spreads are. They're a little bit less competitive than they were really, I would say, just a couple of months ago, which tends to happen after you hit the midpoint of the year. But -- so I would expect that $1.9 billion portfolio to go up by $1 billion in all likelihood. Maybe I would -- if I had to take the over-under on that $1 billion, I would take the over. We're quite active right now and business begets business. So I think that when we had a pretty strong origination quarter, that gets noticed by borrowers as well as brokers and the phone rings a little bit more. As Pamela mentioned, we have over $500 million in loans under application right now. You never really know how many of these are going to close depending on what happens with the volatility sometimes coming out of the political picture as well as the geopolitical side of things. But generally, I would expect that we -- I think we had that loan book up to around $3.4 billion a couple of years ago, and I would like to get back there. And I think that will come from a few places. One, we have a larger revolver that's mostly undrawn. We have a lot of securities. Securities are paying off at a much more rapid clip than loans right now. And I think that's a testimony to the payoffs that have been coming in and the capital markets becoming more welcoming to single asset transactions. So as you pay down those AAAs in a CLO, the financing becomes quite unpopular. So they've been calling a lot of those bonds, and we'll expect that to continue. I think that our securities portfolio will, through attrition pay off, but also we will sell them. As we said in the quarter, we sold a little over $250 million. We own over -- I think we own over $2 billion today. I would expect that number to go down, but I would expect the loan inventory book to go up. Steven Delaney: That's really helpful color, Brian. In terms of [ specialty ] comparison, you mentioned the property REITs and their valuation is something that you would be envious of on a -- whether it's on a PE or a dividend yield. Looking at the ROE at 8.3%, I would say, it kind of strikes me as being solid, but in terms of valuation and where the stock is trading relative to book that some improvement to that, maybe something in the 9% to 10% range might be very beneficial to the stock price, and therefore, your valuation relative to book. Is that improving the ROE in a prudent manner? Is that part of your vision for the next 1 to 2 years? And do you think the strategy you have in place will necessarily take your ROE some higher? Brian Harris: I would say yes to all of those parts of that question. The game plan is to write more loans and we'll get through the cash component of our liquidity. As you remember, we had a lot of T-bills when T-bills were yielding 5.5%, and that kept us away from very tight mortgage loans because if it wasn't at the margin worth sacrificing the liquidity and safety of the securities, we really didn't do it. But now with the Fed cutting rates and promising to cut further, we have a nice mix of floating rate and fixed rate liabilities. So we would expect our cost of funds to be going down. That revolver, I'll remind you, is now priced at SOFR plus 1.25%. So if I am of the opinion the Fed is going to cut rates 100 basis points, usually probably bridging over Powell's last few stance as well as the next Fed official that comes in. And if that happens, you get SOFR down around 3% we can borrow unsecured at 4.25% at that point. So that should all bode well. We've got floors in our bridge loan portfolio up around 6%, 6.25%. And so the loan -- the rates we're able to write loans at these days have actually gone up not down in the last quarter anyway. So we're going to continue doing that. And after we get through the cash component of our liquidity, we'll then begin to sell down or pay down the securities. And the way it comes out on paper, we're hoping to add $1 billion to $2 billion of assets net on the balance sheet and we're hoping to pick up 3% to 4% of profit margin. So if we can take a security that we're earning 5.5% on and get it and pay that loan -- pay the security off and then redistribute, reinvest that money into a loan portfolio that's earning 8.5%, we think that bodes very well for dividend, ROE as well as earnings. So it's not a hard ping-pong ball to follow. That is going to be what we're going to do. It's what we've been saying we're going to do. The one thing that has really masked all the work that we've done has been the very rapid pace of payoffs. And those are high-yielding instruments and we hate to see them go. But when they've been around a little bit past their expiration date, you do want them to pay off, and we've been pretty successful at that. So credit, very stable. We like what we're seeing. The quality is good. The borrowers are good. They've been patient. They're not in difficult financial binds as a result of owning too many over-levered properties. So it looks strong. And you got the stock market at an all-time highs, you got spreads low, rates low, Fed cutting. These are all good conditions on the weather map for a successful lending business at Ladder. Operator: [Operator Instructions] Our next question comes from the line of Tom Catherwood with BTIG. William Catherwood: Brian, I just wanted to go back to something that you said in response to Steve's question, and I want to make sure I heard it right. Did you mention that -- I thought you said rates we can get on loans have gone up, not down. Did I hear that right? Brian Harris: The ones we're looking at, yes. I think -- well, you're seeing -- I mean, I'm not immune to looking at corporate spreads, credit spreads, mortgage spreads. But there's a couple of things going on more recently in the -- literally the last 60 days, I would say. The Fed is letting the mortgage-backed securities portfolio run off. So the agency securities market is actually not as tight as you would think on spread. And the reason why is the Fed is effectively letting $30 billion roll off. I think it's $30 billion. I'm not a Fed watcher. So if I have that wrong, please don't send me a bunch of e-mail. But the other -- after April, when the tariff talk started and now the back and forths that go on, the commercial sector was -- as it always does, and I've said this to you probably several times. In January, every year, we go to a convention down in Miami called CREFC. Everyone is a bull. Everyone comes out, it's going to be its best year ever, and they put a carry trade on until the middle of June. Around the middle of June, they think maybe we paid too much for these things and they start to sell them and they're less aggressive. At Ladder, we have found a nice little theme I think in loan sizes. We traditionally like loans at $25 million to $30 million on middle market lenders by choice. However, we dabbled occasionally in larger loans. The banks are not really writing loans in the $100 million range. That's a little too small for them to put on their balance sheet and then try to securitize. They'll write $1 billion loan with a consortium of banks, but $100 million loan is under their radar and $100 million is probably a little too big for a lot of the CLO issuers that are out there that we mainly compete with. So we're actually very happy in our $50 million to $100 million range right now and we'll try to stay there. And so don't think that we've changed our stripes if we start picking up loans that are a little larger than average. We're still doing plenty of smaller loans, too. But the $100 million type loan is a better asset. It's newer. It's got better financial characteristics to it. And it is higher rate because the competitive landscape is just not as bad as it was. And keep in mind, I'm talking about the last 60 to 90 days. The first half of the year was very, very tight and we were not originating a lot for that reason. In fact, we were buying a lot of securities. Another good proxy, Tom, if you want to take a look at it, is the CLO market. So there's a lot of CLOs coming to market. And they're in the 145, 155, 160 area for AAAs. That's wider than they were just a few months ago. It's not extraordinarily wider. But you're also seeing the VIX tick up. I think it was around 25 the other day after being at 15 for a month. So when you see the VIX ticking up like that and all the volatility around the rhetoric and the political circles, we're able to find things that are pretty attractive. Again, I also think we have a reputation as being very reliable. So as we get to the year-end here, we tend to do -- we always do better in the second half of the year than the first year -- first half of the year when it comes to production. That has been something that has followed me around through my whole career. And I think it has more to do with seasonality and what happens. As you know, insurance companies, they allocate money into fixed income. Usually, by June or July, they're fully invested. So even that competitive force kind of backs off a little bit, too. So we actually prefer to fatten up going into the end of the year. William Catherwood: Got it. Really appreciate that answer, Brian. And then if I think about then sources and uses -- and again, I know you laid it out before, how you think about funding things. But if the spreads and securities are somewhat widening and the revolver is priced at S plus 125, wouldn't it make sense to then just put everything on the revolver and then term it out with unsecured once you get to $400 million, $500 million and just keep wash rents repeat that? Or is -- do you think selling down securities along with using the revolver gives some other benefit? Brian Harris: Well, I think it's almost like we have several companies at Ladder with the products that we dabble in. But on the floating rate side -- I'm sorry, on the securities side, I mean, if you take a look at the rating agency REITs, the agency buyers like AGNC and Annaly and a couple of others, these guys are throwing off dividends of 14%, 15%. And they're levered, I don't know, 7x, 8x in many cases. That's way too hot for us on leverage, but with government-guaranteed paper, with a lot of duration, I think your risk is in the duration side of that. But at where we are, these securities, there -- if we levered them up and easily can, the financing cost is around SOFR plus 50 on a AAA. If we're buying things at 150, you can figure out that there is a pretty good spread in there. So we can lever those up to about 15%, but it's a lot of leverage. And the road we're on is not to just have a low cost of funds so we can lever things up. The game plan is to focus more and more in the years ahead on unsecured debt that we extend. But the game -- the change at Ladder versus before we were IG, we would normally be thinking about issuing another bond here because we're growing rapidly, we're going to need more capital. We've got sources of ability to get capital, but we might think about that. But if you really think the Fed is going to cut rates by 75 or 100 basis points, it would not go out and do a bond deal right now because that revolver is going to get down to a low-4% rate. And that's what we think will happen. It doesn't have to happen. But if it does, that's probably the first thing we'll do is draw that. We don't want to draw all of that because that's not what the agencies and investors want to see on the bond side. So -- but my guess is we'll probably -- I don't think securities were ever meant to be a long-term hold for us. They're kind of a parking spot for us while we're waiting for better opportunities to come by on the loan side. And I think our patience has been rewarded because I think Paul mentioned that our spread on the loans we wrote in the $500 million or so was around $279 million. I think the spread on what's coming in the fourth quarter is going to be wider than that. Operator: Our next question is a follow-up from Jade Rahmani with KBW. Jade Rahmani: Just curious if you would contemplate launching a securities fund, if you can deliver 15% type returns with leverage, you could put the leverage in the fund, not on Ladder's balance sheet and create value for investors looking for that type of return profile. And of course, comparing to residential mortgage securities, commercial has a lot more predictable duration. So you don't have the prepayment volatility that the agency REITs deal with. Brian Harris: Yes. I mean, we've done that before. When we first opened, we ran a few investment portfolios even some individuals that we knew because sometimes securities get cheap, but most people with the first and last name don't know how to go buy them. And so oftentimes, we'll get a call and say, why don't you buy these? So we have an asset that's yielding, as I said, a levered yield of around 15% I think. So that's generally attractive, but it does come with a lot of leverage. We've historically looked -- we've looked at that. We've looked at stapling on a residential mortgage arm of things because we all understand that business also, but haven't done it. And the last thing we've looked at too is possibly spinning off our triple net portfolio because we don't get much for that in valuation. So this is going to be -- 2026 is going to be a year about really fine-tuning the columns and what the right cap rate should be on those things. We have an internal manager that has no value apparently. So there's lots of things we can do now around the edges, but the first step is going to be becoming an investment-grade company. And we still like the -- given where we are in the cycle right now, we like the commercial mortgage business better than the residential side. The residential side could get very interesting though, not from a loan, but from a standpoint of if there's too much supply due to the absence of the Fed. So those are very attractive, but as I said, they do have a lot of duration on them. So -- but we're probably -- we're agnostic as to holding on to things that yield 15% or selling things that make 1 to 2 points and then recycling the money. And I think that, that is an option open to us right now, as you saw in the small sales that we did in the third quarter. Jade Rahmani: And then the New York office equity investment you made, how are you feeling about that? Is that a long-term hold? It looks like it was pretty prescient in terms of timing. But could you also remind us the size of that? Brian Harris: Sure. Our investment -- we're a minority participant in the equity on that. But we may very well get involved in the debt side of that situation later on, but we have a loan from an insurance company for now. But that building, 780 Third Avenue, by the way, if anybody cares, is -- we put in a $13 million or $14 million investment. At the time, the building was about 50% occupied. I don't know where we are on free rent, but I do believe we've now -- the building is leased over 90% in just a short -- under 1.5 years. So we do like that one. Again, that's a very high-quality building. Third Avenue is not known for high-quality buildings, but a lot of the lower quality is becoming residential. And a lot of those poorly occupied office buildings that are becoming residential, those tenants are looking for space. The real benefit we picked up was between JPMorgan and Citadel, Park Avenue is being just gobbled up on space and a lot of those tenants are also moving. So we didn't -- we thought we were going to get Third Avenue tenants looking for an address. We wound up getting Park Avenue tenants that were being displaced by JPMorgan's expansion. So all going well. I wish we had done more of that. And do we like that? We are looking at another situation right now of larger size than the one we did at 780 Third Avenue, and we like it. These transportation hubs in New York City tend to do better. They come out a little bit quicker, especially when people have concerns around safety on mass transportation. I think that situation has largely corrected itself with the return of people. Our offices are full. We haven't ordered anybody to be in 5 days a week, but most of them are. So we generally like pockets of the office market, but we do understand the obsolescence associated with some of the older ones. So yes, we like where we are. We're happy to do more of those investments. And that long-term hold is the last part of your question there. I would say, we're going to hold that for a while, yes. Operator: We have no further questions at this time. Mr. Harris, I'd like to turn the floor back over to you for closing comments. Brian Harris: Thanks, everybody, for listening and those who dialed in afterwards. And good year 2025, we're in the fourth quarter. The reason I say that now is because we're not going to talk again until after the new year comes and we get through the audited financials. But a lot of this is just falling into place the way we largely expected it. The only real surprises were the rapid paydowns that took place in the second half of last year, but we're catching up quickly. We've had an inflection point here in the last quarter where we originated more than paid off, and we think that, that is going to be a consistent theme over the next 4 or 5 quarters. So thank you for tuning in, and we'll catch up with you after the new year. Operator: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
Operator: Good morning, and welcome to the United Rentals Investor Conference Call. Please be advised this call is being recorded. Before we begin, please note that the company's press release, comments made on today's call and responses to your questions contain forward-looking statements. The company's business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control. And consequently, actual results may differ materially from those projected. A summary of these uncertainties is included in the safe harbor statement contained in the company's press release. For a more complete description of these and other possible risks, please refer to the company's annual report on Form 10-K for the year ended December 31, 2024 as well as the subsequent filings with the SEC. You can access these filings on the company's website at www.unitedrentals.com. Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations. You should also note that the company's press release and today's call include references to non-GAAP terms such as free cash flow, adjusted EPS, EBITDA and adjusted EBITDA. Please refer to the back of the company's recent investor presentation to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure. Speaking today for United Rentals is Matt Flannery, President and Chief Executive Officer; and Ted Grace, Chief Financial Officer. I will now turn the call over to Mr. Flannery. Mr. Flannery, you may begin. Matthew Flannery: Thank you, operator, and good morning, everyone. Thanks for joining our call today. I apologize in advance for my voice. As I'm fighting through a little cold here, but I'm sure we'll get through it okay. Yesterday afternoon, we were pleased to report our third quarter results. The hard work of our nearly 28,000 employees enabled record revenue and adjusted EBITDA. The year is playing out better than we originally expected our updated guidance reflects the demand environment we continue to successfully serve. In short, our unique value proposition, experience, and ability to support a broad range of our customers' needs distinguishes us from the competition. Last quarter, I spent a lot of time on the road visiting branches, job sites and meeting with customers. And while this is nothing new. It did make the quarter's results and our subsequent guidance update, no surprise from my perspective. Our branches are very busy, and the team is working hard to serve customer demand. Our people are true differentiators in the rental industry and their professionalism and knowledge, their expertise and their commitment day in and day out shows. We often talk about putting the customer at the center of everything we do as it feeds our flywheel of growth. Without the dedicated United Rentals team members safely executing our customer-centric model, we could not generate the success we continue to deliver. And from where I sit today, I expect this momentum to carry into 2026. In the third quarter specifically, we again saw growth across both our General Rental and Specialty businesses with optimism from the field and our customer confidence index, reinforcing our expectations going forward. The demand for used equipment also remains healthy. Now with that said, let me get into the review of our third quarter results and our updated 2025 guidance. And then Ted will review the financials in detail before we open the line for Q&A. Let's start with the quarter's results. Our total revenue grew by 5.9% year-over-year to $4.2 billion. And within this, rental revenue grew by 5.8% to $3.7 billion, both third quarter records. Fleet productivity increased 2%, contributing to OER growth of 4.7%. Adjusted EBITDA increased to a third quarter record of over $1.9 billion, resulting in a margin of 46%. And finally, adjusted EPS came in at $11.70. Now turning to customer activity. And as I mentioned, we saw growth across both our Gen Rent and Specialty businesses in the quarter. Specialty continues to post double-digit increases with rental revenue up 11% year-over-year driven by growth across all our product offerings and an additional 18 cold starts. Year-to-date, we've opened 47 cold starts as we continue to fill out our specialty footprint. We see this combined with the power of cross-sell and the addition of new products to our portfolio as critical points of competitive differentiation, which benefit our customers while also providing important drivers of long-term growth. By vertical, our construction end markets saw strong growth across both infrastructure and nonresidential construction, while our industrial end markets saw particular strength within power. We continue to see new projects kicking off. And while data centers are certainly 1 area of growth, we also saw new projects across infrastructure, semis, hospitals, LNG facilities and airports to name just a few. Our end market exposure by vertical is intentionally diversified and our equipment is fungible to ensure we can serve demand no matter where it presents itself. Now turning to the used market. We sold $619 million of OEC at a recovery rate of 54%. The demand for used equipment is healthy, and we're on track to sell approximately $2.8 billion of fleet this year. As I mentioned in my opening remarks, the year is playing out better than we initially expected. To meet this demand, we spent nearly $1.5 billion of CapEx in the quarter and now expect to spend over $4 billion on fleet this year. This positions us not only to capitalize on the current environment, but also for the anticipated growth in 2026. Our customers and the field remain optimistic, particularly around large projects and key verticals. And thanks to our go-to-market approach and one-stop shop value proposition, we believe we're well positioned to be the partner of choice for these projects. Year-to-date, we've generated free cash flow of $1.2 billion, with the expectation to generate between $2.1 billion and $2.3 billion for the full year, including the impact of our higher CapEx spend. As a reminder, the combination of our industry-leading profitability, capital efficiency, and the flexibility of our business model enables us to generate meaningful free cash flow throughout the cycle, and in turn, allocate that capital in ways that allow us to create long-term shareholder value. Speaking of capital allocation, we always start with ensuring the balance sheet is in a good place, and it is. We then fund organic growth reflected through our CapEx and complement this with inorganic growth that makes financial and strategic sense. In the remainder, we returned to shareholders. This quarter specifically, we returned over $730 million to shareholders through a combination of share buybacks and our dividend. For the full year, we remain on track to return nearly $2.4 billion to shareholders. Our leverage of less than 1.9x leaves plenty of dry powder to support disciplined M&A, where we continue to pursue opportunities to put capital to work and attractive returns. Our M&A pipeline remains robust within both Gen Rent and Specialty and across the spectrum of deal sizes. And while it's difficult to predict the timing of M&A, this is an important capability we've built over our company's history. And we'll continue to use it to enhance our business and drive shareholder value. As we enter the final months of 2025, we're focused on execution, and delivering the results outlined in our updated guidance, including total revenue growth of 5% or 6% ex use, strong profitability, robust free cash flow and returns above our cost of capital. Although our growth is coming with some additional costs, which Ted will cover in his remarks, we're working through these challenges and are taking proactive measures, including bringing in additional fleet to help mitigate fleet movement costs. I'm very pleased with 2025 and how it's playing out ahead of our initial expectations and see good momentum heading into next year. Based on what we see today, 2026 will be another year of healthy growth. We believe the tailwinds we've discussed throughout this year will carry over and our unrelenting focus on being the partner of choice for our customers, positions us very well to win this business and to outperform the industry. For now, we won't get into the specifics about '26 as we're in the middle of our planning process, but we will share more details in January as we always do. In closing, I'm pleased with the outstanding job the United Rentals team is doing to support our customers. And that's the starting point for everything we do. Not only do we have the scale, technology and value proposition to make us the preferred partner, but we have a history of execution our customers can rely on. By working together with our customers to meet their goals to drive safety, productivity and efficiency, we ensure we build a relationship with trust that positions us to win in the marketplace. Subsequently, our strategy, business model, competitive advantages and capital discipline allow us to generate compelling shareholder returns for the long term. So with that, I'm going to hand the call over to Ted, and then we'll take your questions. Ted, over to you. William Grace: Thanks, Matt, and good morning, everyone. As you just heard, the year continues to progress well with third quarter records across total revenue, rental revenue and EBITDA. More importantly, based both on what we're seeing and hearing from customers, we expect the strong demand to continue, which is supporting our increases in both rental revenue and CapEx guidance. More on that in a minute, but first, let's go through this quarter's numbers. As you saw in our press release, rental revenue increased $202 million year-over-year or 5.8% to a third quarter record of $3.67 billion supported again by growth from large projects and key verticals. Within this, OER increased by $133 million or 4.7% and driven by 4.2% growth in our average fleet size and fleet productivity of 2%, partially offset by some fleet inflation of 1.5%. Also within rental, ancillary and re-rent grew over 10%, adding a combined $69 million of revenue. Consistent with our first half results, third quarter ancillary growth again outpaced OER as we continue to focus on supporting our customers. Moving to used, we generated $333 million of proceeds at an adjusted margin of 45.9% and a 54% recovery rate, while OEC sold set a third quarter record at $619 million. Combined, these results speak to the continued strength and health of the used equipment market. Turning to EBITDA. Adjusted EBITDA increased $42 million year-on-year to an all-time record of $1.95 billion. Within this, a $69 million increase in rental gross profits was partially offset by a $6 million decline in used gross profit dollars. SG&A increased $23 million, which is in line with revenue growth, while other non-rental lines of businesses added $2 million. Looking at profitability. Our third quarter adjusted EBITDA margin was 46.0% implying 170 basis points of compression on an as-reported basis and 150 basis points ex used. At a high level, margin dynamics in the third quarter were similar to what we've discussed the last several quarters. This includes the impact of ancillary, the strategic investments we're making in the business and still relatively elevated inflation. An area I might call out again this quarter was delivery, which was impacted both by higher fleet repositioning costs in support of large projects and our use of third-party outside haul to serve the stronger-than-expected demand seen during our seasonal peak. To try to put this in perspective, our third quarter delivery costs increased 20% year-on-year versus a roughly 6% increase in rental revenue. Simply assuming that these costs increase proportional to revenue. This gap implies over $30 million of additional cost year-on-year and translates to an almost 80 basis points drag in our EBITDA margins. Now I'm sure we'll talk more about this during Q&A. But this provides a great example of the balance we are constantly managing between capital in the form of fleet and costs, both fixed and variable with the goal of serving customers as efficiently as possible. Shifting to CapEx. Third quarter gross rental CapEx was $1.49 billion. I'll speak more to this in a moment, but this included the acceleration of some purchases to help us support the stronger-than-expected demand we are experiencing. Moving to returns and free cash flow. Our return on invested capital of 12% remains comfortably above our weighted average cost of capital, while year-to-date free cash flow was $1.19 billion. Our balance sheet remains very strong with net leverage of 1.86x at the end of September and total liquidity of over $2.45 billion. All note, this was after returning $1.63 billion to shareholders year-to-date including $350 million via dividends and $1.28 billion through repurchases. In total, between dividends and share repurchases, we still plan to return almost $2.4 billion in cash to our shareholders this year. This equates to a little better than $37 per share or a return of capital yield of almost 4%. Now let's shift to the updated guidance we shared last night, which reflects our confidence in delivering another year of solid results. As you've heard us say a few times this morning, we are seeing stronger-than-expected demand. In response, we accelerated the landing of some fleet into Q3 while also raising our full year CapEx guidance by $300 million at midpoint to a range of $4 billion to $4.2 billion. In turn, we are increasing our total revenue guidance by $150 million at midpoint, while narrowing the range to $16 billion to $16.2 billion, implying full year growth of roughly 5% at midpoint. Within this, our used sales guidance is unchanged at around $1.45 billion, which implies total revenue growth ex used of 6% at midpoint. I'll note that the additional CapEx accounts for roughly half of the increase to our revenue guidance, given we'll only realize a partial year of OER benefit with the balance coming from ancillary. On the EBITDA side, we are narrowing our range to $7.325 billion to $7.425 billion while maintaining the midpoint of $7.375 billion. Ahead of Q&A, I'll quickly mention that the lack of implied pull-through from this additional revenue reflects our expectation that, as I just mentioned, a portion of the increase will come from lower-margin ancillary while we also expect to manage through similar cost dynamics in Q4 and especially delivery. Turning to cash flow. We reaffirm the midpoint of our guidance for cash flow from operations at $5.2 billion, while our revised free cash flow guidance of $2.1 billion to $2.3 billion simply reflects the additional investment in CapEx that we plan to make. Importantly, our updated free cash flow guidance does not impact our share repurchase program. I'll remind you that we intend to repurchase $1.9 billion of shares this year, which highlights our strategy of both investing in growth and returning access capital to our shareholders. So to wrap up my prepared remarks, overall, we were pleased with how the quarter played out, especially on the demand side. And while our margins were burdened by the cost mentioned, we remain focused on supporting our customers' growth as efficiently as possible as we lean into their demand. So with that said, let me turn the call over to the operator for Q&A. Operator, please open the line. Operator: [Operator Instructions] We'll take our first question from David Raso with Evercore ISI. David Raso: Obviously, we have the demand positive and the cost negative here. So I just wanted to dive into the demand side first. The cadence of the CapEx, when I think about '26, and the comment you accelerated equipment for the third quarter. But just so we're clear, when you're thinking of the demand profile that you said was better than you expected, is any of this '25 CapEx increase pulling forward 2026. And if not, just thinking about the cadence of sort of the CapEx for '26, obviously, when you bring this much fleet on the third quarter, people wonder how do we go into '26 with a level of fleet just given the seasonal weakness? So that's a demand question. I'll follow up with a quick cost question. Matthew Flannery: Sure, David. I'll take that. This was not a pull forward from 2026. This accelerated CapEx in Q3 was to meet the demand that we were already seeing and to be responsive to specifically some large project wins throughout the year, but that put a little more need for fleet here in the back half. Then we let the Q4 CapEx flow through as normally would. Some of that's seasonal. And to your point about 6 all of this, although not a pull forward, is supported by being very comfortable that we expect 2026 to be a growth year, which is why we felt comfortable raising this full year CapEx. As far as CapEx cadence for next year, we haven't finished our planning process, but you can expect there to be the standard, let's say, we're going to sell $2.8 billion, maybe a little bit more in CapEx next year. The replacement for that is going to be $3 billion, $4 billion plus depending on how much more we sell. And then there'll be growth on top of that. That's the part that we're going to work through in the planning process this year. But to be clear, we certainly expect to have some growth CapEx here in 2026. And then we'll let you know about the cadence of that as we see how the demand plays out. David Raso: Okay. And then on the cost side, I mean, it's easier for me to say, but ancillary revenues are up to close to 18% of total rental revenue. How do we think about pricing for those services? I know -- I appreciate the comment, providing those services is partly why you win more than your fair share, let's say, of the major projects. But it's it went from sort of an afterthought to, again, if you want to throw in a re-rent, it's 20% of rental revenue. So is there a way to rethink that pricing, some kind of annual contracts, something where it doesn't continue to be a drag. And related to that, the fleet productivity number, I know you don't like going into the details, but can you give us some sense of the components of fleet productivity. Were both utilization rate up 1 up, 1 down. Just trying to get a sense of those components as we sort of push against the cost. Matthew Flannery: Yes, I'll take the latter part there, David, on fleet productivity, and then Ted can add some color on the ancillary. But on the ancillary, I do want to remind you that A big portion of this is delivery, which is basically a pass-through fuel, which is not a large markup. So there's just some things there that have historically been. And it's a fair point about the pricing. But as we think about that, and Ted can get into the detail of the math of how that impacts us, there's nothing new other than we're doing more of it as we continue to serve more products and services. And the fleet productivity, as I stayed true to telling you qualitatively. We're very pleased with how rate and time have performed throughout the year and specifically in Q3. I would say the gap, the difference between what you saw in Q2 at 3.3% fleet productivity, and Q3 at 2% was mix. Mix was a good guide for us in Q2 and not in Q3. So we would see that as normal variability. And it's important for us to remind you all that mix is just -- we're catching that. We're not driving that. That's a result of who you rent to, how you went to, what your rent, how long, what geography. So it's not anything that we have any capability to predict, quite frankly, because it's reactive and responsive to where the demand is. And then we just let you know that. But to be clear, rate and time are both up this year, and we feel good about it. William Grace: And on the margin side within ancillary, David, obviously, the thought there is you want to be responsive to the customers all kind of ties back to this concept of being the partner of choice. Frankly, it's hard for us to predict what that mix will look like between something like pickup and delivery or installation breakdown, setup, fueling, et cetera. The margins themselves don't fluctuate a tremendous amount, but they are what they are. So delivery to Matt's point is probably the thinnest of that. That's really kind of just the convention of the industry. Others are certainly not going to have the kind of margins that we have in rental. But as we've said, they're definitely positive and they add GP dollars with very little capital coming along with that. So we think they benefit us both strategically and financially, but it's going to drive kind of variability depending on what that composition looks like. Operator: We'll take our next question from Rob Wertheimer with Melius Research. Robert Wertheimer: You've mentioned a few times across the call solid demand indicators kind of driving some of the CapEx move. Could you talk a little bit qualitatively about what that looks like in the field? Is this mega projects that we all knew about but are probably coming online? Is the share gain as people appreciate? Is this interest rate intensive construction having what's kind of going on? Matthew Flannery: Sure, Rob. As we've talked about really for the past year plus -- there's some feedback there from somebody. But as we talk about large projects are really carrying the ball here. So we feel really good about that. And when we asked, what surprised us, we had a higher win rate than maybe we had originally planned for, and that's what the additional CapEx was for. As far as the local markets, the local markets, we would call flattish. It's very choppy in certain markets. There's a little bit more opportunity than others, but I'd call it net across the network probably flat on the local and really the growth coming from major projects, which are robust and we expect to do well, and I'm glad to see the teams executing on it. Robert Wertheimer: And then the fleet repositioning that's been there this quarter and before, related to that shift in demand. Does that have an end date to it? Where you've kind of got stuff moved around where you want it? Or is that just a new world where projects are bigger and in different places? I'll stop there. Matthew Flannery: So part of that is think about the disbursement of revenue, right? Think about a couple of years ago when we talked about broad-based demand and our network was a real advantage for us because we could just serve more demand out of our same cost basis basically with some variable costs. Now as these major projects are throughout our network, but there are chunks of revenue that we have to move fleet to from certain places. And in many instances, has some additional cost with these mega projects of building an on-site and a support team there. So I'd say that's a dynamic and the part that surprised us the most, and we've been very upfront about this is the delivery of mobilizing that fleet to these sites. Whether they be remote or not, it's -- you're mobilizing it from multiple areas. So that's a little bit different cost that we have to absorb that when we were spreading it throughout the network in the local markets just didn't have that additional cost burden. Outside of that, I wouldn't call out anything different. When you look at these decisions on their own, the math makes sense. They're good decisions. It's just some additional costs that you don't have to incur when you're not so weighted on the large projects. Operator: We'll take our next question from Michael Feniger with Bank of America. Michael Feniger: Matt, just on the local market, it seems like you're signaling 2026 as a growth year. Is that inclusive of the local market? Or is that more on the larger progress? And if we see rate cuts, is that alone get the local markets back. Historically, there's been a delay between rate cuts and construction picking up, but those rate cuts happen in deep recession. So I'm curious if you feel the feedback loop from rate cuts is a little shorter than normal in terms of when that pipeline might fill up. That's more of the second half next year type of event. Matthew Flannery: Yes. We don't pretend to know, right, how that -- and I think if you look at history, there's different outputs. So if you can't even look at history and hope it will repeat itself because it's been different during different cycles. But sentiment feels a little bit better with there being a rate cut and talk of more rate cuts, but you don't take sentiment to the bank. Right now, we call local markets flat. We're going to go through our planning process for the balance of this quarter. That will inform our guidance. And we'll get a little bit closer to the local market as we talk to the branch managers and the district managers that are much closer to that and they'll give us their feedback on what do they think their growth potential is locally, outside of large projects. And then we'll have a better idea, but I agree with the tone of the sentiment. We just got to see does our team think when that's going to manifest and how we're going to capitalize that growth. But we'll be excited for that to happen. We do think it's potential upside, whether that's to '26. The back half, '26, '27, we're not even sure yet. So it's something that we'll communicate when we give out guidance. Michael Feniger: Perfect. And Matt, you mentioned accelerated the CapEx to meet the demand. Did large projects -- did you see anything that got green lit that maybe was on the fence? Or are you seeing your typical win rate starting to inch up versus prior years? And just a tag on that, Ted, if there's any way you could help quantify where you think that power vertical for you guys? How big you think that is today for you guys versus maybe where it was a few years ago? Matthew Flannery: Yes, I would just say it's -- we just had greater success and the customers that rely on us have had greater success in these large projects, and the pipeline is robust. So I would say that's what drove the extra demand. It's really just good execution from the team, and I'll let Ted talk to the power vert. William Grace: Yes, Mike, thanks for the question. So it's currently in low double digits, say, 11%, 12%. It's probably a reasonable area. And if you go back to when we introduced what we called our power vertical strategy. And just to be clear, this is really a focus on investor-owned utilities, whether it's generation, transmission, distribution. At the time in 2016, it was probably 4%. So we're probably coming up on nearly tripling that relative exposure to what we think is, at the time, we thought it would be a very large stable business it's very large. It's obviously seen a lot of investment, and we expect that to certainly continue for the long foreseeable future. So I feel like we're really well positioned there. and we've spent the better part of a decade building what we think is a lot of competitive advantages to serve those customers in that market uniquely. Operator: We'll take our next question from Steven Fisher with UBS. Steven Fisher: I just wanted to ask about the -- come back to the margin dynamics here. Just looking at the Q2 versus Q3 year-over-year specialty going from 220 basis points to 490 basis points headwind. It sounded like qualitatively, the drivers weren't really that different categorically, but just curious what accounts for that difference in year-over-year? Was there sort of faster growth in Yak that was driving more of that delivery impact? Or what just accounts for the 220 versus 490. William Grace: Yes, absolutely, Steve. Thanks for the question. So overall, I would say the cost dynamics within specialty and frankly, the whole business has been pretty consistent across the year. When you look specifically at specialty 2Q versus 3Q, the big difference was the increase in depreciation we had in that, and that spoke to kind of the aggressive investment we're making in Yak more than anything in matting. I mean those assets get depreciated at a far faster pace than any other asset class we have in that business. So when you look at kind of the 490 basis point decline, 200 basis points of that was depreciation, so call it 40%. The other pieces were the same things we've talked about like delivery and really ancillary being the other big piece. Steven Fisher: Okay. That's helpful. And I think you are on track or planning to do 50-ish cold starts this year. I think you're pretty close to that already. Do you think that momentum is likely to kind of continue into the fourth quarter? And any sense of having done 70-plus last year and maybe on track for 50 plus this year, directionally, where you see the cold starts heading for next year? Matthew Flannery: So we haven't finished the planning process yet, as I said earlier, and that's where we'll make those decisions. As far as with the balance of the year, we're in a small period here in Q4. Maybe there'll be another 10 to a dozen in Q4. It really depends on the timing of if the team finds the real estate and the bodies to be able to do it. So as far as '26, stay tuned. They've executed. The teams executed real well on cold starts here in '25, and they'll propose the plans for '26 in the next 6 weeks. Operator: We'll take our next question from Jamie Cook with Trust Securities. Jamie Cook: I guess just 2 questions. The setup for 2026. Obviously, ancillary is just becoming a larger part of the business, it just sounds like structurally, that will be a headwind on margins. But I guess, Matt or Ted, I'm just trying to think about, obviously, you're seeing demand or demand is starting to improve or maybe your share is just improving. But I'm just wondering, the setup in 2026 with a lot of the inflationary pressures in particular with tariffs and Section 232. And you have the ancillary business becoming larger. To what degree do you think we can start to push through higher rental rates. Is the market strong enough that they could absorb that just given some of the cost headwinds that we could see continuing into 2026? William Grace: Yes, good question, Jamie. We don't want to get too far ahead of ourselves. But certainly, if you just take a step back and you decompose what's happened in 2025 as a starting point. A lot of the margin dynamics have been being responsive to customers. You touched on ancillary, but obviously, that is dilutive. And you could ask yourself why are you doing that? And again, it's to really be this partner of choice and be responsive and frankly, use that as a tool to be a better partner and take share. We think that's absolutely worked out. And while it is dilutive to margins, as we've talked about, there are a lot of benefits to it. So how does that play out next year? Time will tell. We don't think that's a bad business. But we'll have a sense for what that's going to look like over the next 6 weeks as we get through the business planning process. Then you think about things like cold starts and investments, and I don't think anybody would dispute the logic, strategic or financial of the cold starts we're doing in specialty. To your question on inflation, broader inflation, it's still elevated, as I said in my prepared remarks, is it going to subside in '26? Time will tell, but certainly, we are very aggressively managing our costs in any environment, but certainly in this one. So then you come to the delivery piece. And that's obviously been kind of the biggest discrete challenge we faced this year, and that's driven a lot by being responsive to customers. That's what just helped support the demand and the growth you've seen. We're trying to figure out that piece next year, what is the growth? What does it look like from a physical footprint standpoint? And then how do we most effectively serve it. Matt talked about the idea of managing CapEx differently such that you could mitigate some of that incurred cost moving fleet. We're working through that, but that again is being responsive to where demand is and supporting our customers. So all that is to say that we're looking at those things, they will all affect 2026 margins and flow-through. But the focus, as always, is on profitable growth. And from that standpoint, we think the team is managing the business really well. Operator: We'll take our next question from Ken Newman with KeyBanc Capital Markets. Kenneth Newman: So maybe to follow up on that answer, that response now, Ted. I think, Matt, you mentioned growing the fleet for both stronger demand, but also maybe to better address the fleet movements. I know you don't want to talk about '26 yet, but just higher level, how do you think about balancing those 2 dynamics, right, to keep time yet strong into next year? And just how long do you think it takes to tackle some of these cost inefficiencies. And maybe to that point, do you need to accelerate cold starts in order to tackle the movements or the fleet repositioning costs? Matthew Flannery: Yes, it's a great point, Ken. And one that we're talking about. First off, and getting together with our partners, our customers and fleet planning, right, a little more accurately. But to be fair to them, these big jobs are dynamic and all of a sudden, any 50 units that we weren't given a heads up on and they need to make up. So we have a choice to make in that -- to give you that example in that instance. So first, it starts with me challenging our team in the field, hey, let's make sure we're communicating. The earlier we know, the more efficient we could be. And then there is a component of why there are some categories in our desire to drive high time -- high fleet productivity, we've been running hot for a while, for quite a few years. There's certainly some categories that we're going hand to mouth again. And we just got to be careful about that. So we are going to look at that. There's a balance between operational efficiency and that capital efficiency. But both are important. So that's something we'll look at as we're going through the planning process. So these are all, like I said earlier, individually, when you look at the decisions to ship this stuff through third parties, it's the right decision, mathematically. It's just how can we avoid that incremental cost? How can we minimize it as best we can. And that's something that we'll have some learnings from this year, and we'll work on it. But that will all be embedded in our guidance for 2026. Because I don't think the dynamic of big projects carry and evolve is going to change a lot in '26. We'll see if the local market gets some more growth. But big jobs, we already have that visibility. We know that's going to be a big part of the opportunity. Kenneth Newman: Right. No, that makes sense. And then just for my follow-up, I appreciate all the color around the drags on the fleet repositioning costs. When we think about core profitability, ex some of these higher ancillary and delivery mix, is there anything -- is there any reason to think that you can't drive flow-through kind of in line with your more normalized type of margins, right? Because you're kind of signaling a growth year for next year ex some of these more volatile mix impacts. Anything to suggest that you can't kind of get back to that 40% plus type of flow-through ex those items? William Grace: I guess what I'd say is the core profitability of the business, we think, is performing well, right? And we've talked about the impact of delivery this year, which is just a function of serving our customers as efficiently as we can. And to Matt's point, it's balancing operating efficiency with cost efficiency or call it capital efficiency with margin. So we think we're doing those things well, and we think the underlying business is actually performing as expected. In terms of what it looks like going forward, again, we would expect the core to perform well. A lot of this, and I hate to repeat myself, but it is being responsive to what customers ask of us and how demand is evolving. And so when you think about it, that again explains a lot of what we're doing with ancillary, what we're doing with cold starts. And so I come back to what I just said to Jamie, we feel really good about that core profitability, and our goal is always to be as efficient as possible serving demand. That doesn't change. But when you look at kind of what those margins look like when we talk about updated guidance or whatever, we would say that this is really being responsive to the market itself. Operator: We'll take our next question from Tami Zakaria with JPMorgan. Tami Zakaria: I have just 1 question. It sounds like customer demand has accelerated on the large project side. So is it fair to assume your raised equipment purchase plans would be across Gen Rent and Specialty equipment? Or is there -- are there any specific categories where you're seeing better demand? Matthew Flannery: No. I think you raised a good point. It is -- historically, we've been putting a lot more growth into specialty. And you see that in the results. This -- think about these large projects are taking our full portfolio. So the incremental investments would be more broad than maybe our earlier growth expectations of mix. So we know where the high time categories are and we'll continue to make sure that we're running a good balance of capital efficiency and responsiveness in those. So I'd say it's more looks like our overall portfolio. It's what these investments look like. Operator: And we'll take our next question from Sabahat Khan with RBC Capital Markets. Sabahat Khan: So your earlier commentary indicated that the larger project side of the business is continuing to trend well. Some of these really took on as the IIJA really got going. I guess when you look ahead 1, 2 years, 3 years, do you think the business or the industry needs some sort of a renewal to that IIJA program? Or is the industry just generally inflecting towards these larger mega projects, just some thoughts there. William Grace: Yes, absolutely. Certainly, infrastructure broadly has been a very strong market for us. And certainly, the IIJA has helped support that. Our best sense is there's still a healthy amount of that initial or that money left. So that should support it. The thing we've always talked about infrastructure, there's certainly not a lack of demand in the sense of the need to reinvest in infrastructure, we certainly expect that, that will continue, whether it's funded by state initiatives or local initiatives or federal dollars. So we'll see ultimately what that funding looks like. But there's no question that the country on the whole needs to continue investing aggressively in reinvigorating infrastructure. And the other thing we've talked about, just maybe as a corollary to that question is, infrastructure has been a great market for us. It's an important part of our business, but we've got a lot of these tailwinds. And certainly, we're writing a lot more than just 1 wave of infrastructure. When you think about a lot of the onshoring, a lot of the remanufacturing in the U.S. and power and other things in technology, all those come together to give us a really optimistic outlook for the foreseeable future on demand. Sabahat Khan: Great. And then just as a follow-up, I think there's been commentary in the past that it may not necessarily be a larger project, lower margin type of a setup. But as you think about larger projects becoming a bigger part of your mix, and it sounds like you're ramping up that side, you're moving fleet around to meet these large projects. Is there sort of an inflection point that you see in your business at which, look, larger projects are going to be stable at this space and now we'll get operating leverage on the sort of the cost base that we install to perhaps meet that demand that the larger customers looking for? Just any view on how -- as that business grows, is there a view on sort of an inflection point on overall margins and operating leverage? Matthew Flannery: Yes, it's a good point. What we've talked about historically is when you think about large projects versus our base margins, we have always. And still believe, by the way, that although some of those large projects do get some discount as they leverage the bulk spend with us, that we get to serve it more efficiently on site versus spreading that overall. The 1 area that has changed as it's become a bigger part of the portfolio that, quite frankly, we didn't anticipate was the repositioning of the fleet. So it's a little bit of where the jobs are, where you're positioned, and what I said earlier, how well you can plan with the customers to position the fleet, that's going to decide that. Just to put it in context, in the relative scheme of things, we're talking about small numbers, right? You're talking about 1% of your operating costs, but it does make noise within the metrics, which is why we explain it to you all. So even with this extra burden transportation costs, it's still relatively close to the same. It's just the challenges where the fleet is versus where the need is and how you continue to improve that operating efficiency is what will make that decision. But I wouldn't see it as terribly different even in its current environment with these extra costs because in the scheme of a $15 billion company and the cost base we have, it's not a big number. Operator: We'll take our next question from Tim Thein with Raymond James. Timothy Thein: Maybe just the first question is maybe for you, Matt, just in terms of the customer dialogue and what you're hearing from -- in terms of some of the national account customers, it's been a couple of months since we've had the tax reform passed. And if you -- and some of the sentiment readings have kind of been all over the board, but it doesn't seem to be much change in terms of kind of forward-looking CapEx and other growth plans. But I'm just curious, have you detected or seen any change in terms of -- again, just kind of thoughts around big project spending and now that some time has elapsed since the OBBBA has passed? Matthew Flannery: Yes. Our customers remain optimistic. And when we look at our customer confidence index, we get that feedback when we talk to our national account teams which are dealing with the largest contractors in North America, we get positive feedback, and we're getting it from the field as they're asking for more support from a fleet perspective throughout the year. So we don't see any negative trend there at all or any kind of need for a reboot of any kind of spending. And the pipeline that we have visibility to it looks pretty good for '26. And the feedback from our customers and our field teams matches that sentiment. Timothy Thein: Okay. And maybe looking a little bit further out, the 2028 goals that you outlined at the Investor Day back in '23, you obviously wouldn't have kept it in the slides if you didn't think it was still realistic. But the elements of it is, specifically around what the implied flow-through look to be a bit more challenging. Does that -- do those targets maybe rely a bit more on M&A from here? Or maybe just kind of an update as to how we're tracking towards those. Again aspirational -- go ahead. William Grace: Yes, absolutely. So starting with the growth. I mean we feel like we're tracking well, right? We talked about this aspirational goal of $20 billion by '28. And I think if you do the simple math, you need to keep compounding something like 7%. And so we feel like that is still very much in play, I feel good with that. The margins, frankly, will be more challenging to hit that kind of roughly implied margin and the corollary to flow-through. But when we look at kind of why, there are a few things that we point to. You mentioned about acquisitions. Frankly, acquisitions tend to pull us in the opposite direction to getting there. We've long talked about this Tim, you and I have talked about this and probably Matt and I have talked to the entire investment community about this, but acquisitions tend to be dilutive to our margins. And that's why we take the time to explain what that margin profile looks like, but we really talk about the returns and most specifically, those cash-on-cash returns because that's how we think about allocating capital. But if you look at the acquisitions we've done since '22, they've virtually all been dilutive. That doesn't mean they weren't good deals. We would say strategically, they were all 10s, and I'd say financially, they've all been 10s but they're going to have that dilutive effect. So just to put some numbers around that, I've looked at the math. The acquisitions probably account for 70 or 80 basis points of margin dilution since 2022 in isolation. I think if Matt and I could go back in time, we would have done every one of those deals. And frankly, we probably would have done -- we would have loved to do twice as many deals if they had the same financial profile. But the margins are also impacted by the ancillary. This is -- if you think about that evolution of being responsive to customers and how ancillary has grown from, let's say, 15% of our rental revenue mix to now approaching the very high teens. That's probably not something we would have anticipated back then. It's had this dilutive effect. We've talked about it today. We've talked about it for a while. But again, these are really beneficial things we're doing to take care of customers to frankly use its competitive advantages over incumbents, and they've helped support the growth you've seen us achieve. So there, again, like we would not go back and do things any differently with ancillary. And certainly, I would just say the broader inflationary environment has been worse than probably anybody expected since '22. That being said, we feel like we've managed it really well on an underlying basis. And so again, the margins, it will be a stretch. I'll say that. I don't think that surprises anybody. That doesn't mean we're not going to keep pushing for it. And it doesn't mean we're not incredibly focused on driving better core profitability of the business. So Matt, I don't know if you'd add anything. Matthew Flannery: I think that's right. It was an aspirational plan, and I think it was the right one. There's been some dynamics that have changed in the construct of the business. And we'll keep informing everybody as it goes along. So -- but we do feel good about basically the core profitability of this. Operator: We'll take our next question from Scott Schneeberger with Oppenheimer. Scott Schneeberger: A couple from me. First one is just if you could speak to -- I know it's early and you're not giving guidance for next year. But your conversations right now, it's that time of year where you're speaking with the OEMs on pricing looking forward. Just with tariffs hovering, what are the conversations like is it's going to be anticipated as a normal pace of rate increases for the upcoming year? Or might there be something that could surprise us? Matthew Flannery: Yes, Scott. As I said before, we try not to share information with our partners and suppliers on open mic, but we feel like we're in a good position. The consistency of the scale of spend that we've shown just to support our partners with, I think it's valued as much today as it ever has been, specifically in this past year. And we think we'll be in pretty good shape for purchases in '26, both from a cost perspective and from being able to support perspective. And our partners have done a really good job when you go back a few years ago when supply chain disruption. Getting back to normalized expectations, and we're very pleased with how they've responded. Scott Schneeberger: Thanks, Matt. And then on the theme of the day, just want to ask the question kind of in a different way. If you have a strong demand, the seasonal uptick next year, which it looks like you are expecting with the elevated level of re-rent, ancillary and large projects and need for probably still delivery, you're addressing it with some CapEx. But -- and it's -- you guys have mentioned on these earlier questions, hey, we're going to look and see what we can do to improve. But are there some ideas with regard to relationships with transportation providers on the outside, maybe where you can get some bulk pricing? Are there operational execution initiatives that you're looking at, is one part of this question. And then the second part of the question is, you haven't done -- obviously, H&E stepped away, but haven't done an acquisition in a while. What is the appetite there? I just heard Ted's response to Tim's question, but curious on where that may be applicable on this issue or just general appetite for M&A overall? Matthew Flannery: Sure. So on the outsourcing, we obviously already do a lot of outsourcing. And we do have some partnerships within that spend. It is something we look about -- look at, whether it's in-sourcing or outsourcing more for that flexibility. I think we lean more towards -- we seem to do things more efficiently when we can in-source, but that's a little bit harder when you're talking about some of these longer hauls. So that is something that we're wrestling with, and it's a great point, something that we're talking to people about in the space. As far as M&A, listen, we've built a great capability throughout our history as good purchasers and good integrators. And we do feel one of our mantras is can we make this business better, when we make that decision. So we continue to work a pretty robust pipeline. We just haven't found the right deals yet. I think we did $20 million of M&A this year. We did 1 small deal. We don't predict forecast or even planned M&A because I think that's how people end up doing bad deals. So we talk about our organic growth and we look at M&A as opportunistic. But to be clear, if we are always work in the pipeline, both in Specialty and Gen Rent, and if we find something that fills out our footprint better or a new product that our customers can rely on us for, like we've done in the last couple of big deals, matting and mobile storage, we're going to lean in. It's just a matter of finding that right deal where the -- where it meets all 3 legs of that stool we talk about of cultural, strategic and most importantly, financial. Operator: And there are no further questions on the line. I'll turn the program back to Matt Flannery for any additional or closing remarks. Matthew Flannery: Thank you, operator. And to everyone on the call, I appreciate your time. I'm glad you could join us today. Our Q3 investor deck has the latest updates. And as always, Elizabeth is available to answer your questions. So until we speak again in January. I hope you all have a safe and happy holiday season and a happy new year, and we'll talk soon. Take care. Operator, you can now end the call. Operator: Thank you. This does conclude today's program. We appreciate your patience. We appreciate your attendance. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Atlantic Union Bankshares Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker today, Bill Cimino, Senior Vice President of Investor Relations. Please go ahead. William Cimino: Thank you, Daniel, and good morning, everyone. I have Atlantic Union Bankshares' President and CEO, John Asbury; and Executive Vice President and CFO, Rob Gorman, with me today. We also have other members of our executive management team with us for the question-and-answer period. Please note that today's earnings release and the accompanying slide presentation we are going through on this webcast are available to download on our investor website, investors.atlanticunionbank.com. During today's call, we will comment on our financial performance using both GAAP metrics and non-GAAP financial measures. Important information about these non-GAAP financial measures, including reconciliations to comparable GAAP measures, is included in the appendix to our slide presentation and our earnings release for the third quarter of 2025. In our remarks on today's call, we will also make forward-looking statements, which are not statements of historical fact and are subject to risks and uncertainties. There can be no assurance that actual performance will not differ materially from any future expectations or results expressed or implied by these forward-looking statements. We undertake no obligation to publicly revise or update any forward-looking statements except as required by law. Please refer to our earnings release and the slide presentation issued today and our other SEC filings for further discussion of the company's risk factors and other important information regarding our forward-looking statements, including factors that could cause actual results to differ from those expressed or implied in the forward-looking statement. All comments made during today's call are subject to that safe harbor statement. And at the end of the call, we'll take questions from the research analyst community. Now I'll turn the call over to John. John Asbury: Thank you, Bill. Good morning, everyone, and thank you for joining us today. Atlantic Union Bankshares delivered a solid third quarter, while maintaining our focus on execution and integration of the Sandy Spring acquisition. Our quarterly operating results illustrate the earnings potential of the company we envisioned. While merger-related costs continued to create a noisy quarter, we believe we are on a path to deliver on the expectations related to the acquisition of Sandy Spring for adjusted operating return on assets, return on tangible common equity and efficiency ratio. The Sandy Spring integration is progressing smoothly. Over the weekend of October 11, we successfully completed our core systems conversion and closed 5 overlapping branches as planned. We are experienced acquirers, and I want to recognize our outstanding and dedicated team for their commitment and diligence in executing this complex process. We have now unified Sandy Spring Bank under the Atlantic Union Bank brand and operate as one integrated team. While some merger-related impacts will persist in our fourth quarter results, we expect to enter 2026 having achieved our cost savings targets from the acquisition and with our enhanced earnings power visible on a reported basis. Our commitment to creating shareholder value remains unwavering. We believe Atlantic Union is well positioned to deliver sustainable growth, top-tier financial performance and long-term value for our shareholders. The strategic advantages gained from the Sandy Spring acquisition, combined with continued organic growth opportunities, reinforce our status as the premier regional bank headquartered in the lower Mid-Atlantic. We have a robust presence in attractive markets, providing us with further growth opportunities. I will now summarize the key highlights from our third quarter performance and share insights into current market conditions before turning the call over to Rob for a detailed financial review. Here are the highlights from our third quarter. Quarterly loan growth was approximately 0.5% annualized in the typically seasonally slower third quarter. Notably, lending production increased modestly versus the second quarter. However, in the latter part of the quarter, an uptick in loan paydowns had a decline in revolving credit utilization from 44% to 41% offset some of the increased production. Average loan growth quarter-over-quarter was a good story at 4.3% annualized. Our pipelines indicate we should have loan growth consistent with the seasonally strong fourth quarter. While forecasting loan growth remains challenging and the still uncertain economic environment, we currently expect year-end loan balances to range between $27.7 billion and $28 billion, inclusive of the negative impact of the fair value loan marks. We paid down approximately $116 million in broker deposits during the quarter and continued to reduce higher cost nonrelationship deposits from the Sandy Spring portfolio. By moving quickly to lower our deposit rates, we anticipate further improvement in our cost of deposits in the fourth quarter. We were pleased to see approximately 4% annualized growth in noninterest-bearing deposits in the third quarter. Our reported FTE net interest margin remained steady at 3.83%, reflecting a modest decrease in accretion income quarter-over-quarter. As a reminder, some quarterly fluctuation in accretion income is to be expected. Importantly, if you exclude the impact of accretion income, our net interest margin improved compared to last quarter. I'd also like to point out the strength we saw in fee income, especially with interest rate swaps and in wealth management. Opportunities in both lines were augmented by the Sandy Spring acquisition. And during the quarter, approximately $1 million of swap income is attributed to the former Sandy Spring Bank. Sandy Spring did not offer interest rate swaps for the acquisition, and we believe that will provide upside to the combined entity going forward. Overall, credit quality improved despite an increase in charge-offs largely driven by 2 commercial and industrial loans that have been partially reserved for in prior quarters. One was the larger credit first disclosed in the fourth quarter of 2024 involving a borrowing base misrepresentation. Ongoing uncertainty in its resolution led us to charge off the remaining balance of approximately $15 million in addition to the previously incurred specific reserve of $14 million. Leading asset quality indicators are encouraging. Third quarter nonperforming assets as a percentage of loans held for investment remained low at 0.49%. Past dues remained low and criticized asset levels improved by more than $250 million or 16%, which brings criticized loans as a percentage of total loans down to 4.9% at the end of the third quarter from 5.9% at the end of the second quarter. As typical, we'll present more details in our third quarter 10-Q filing. We do remain confident in our asset quality and reaffirm our forecast for the full year 2025 net charge-off ratio to be between 15 and 20 basis points, in line with prior guidance. In the Greater Washington, D.C. region, recent headlines have focused on government employment reductions and the government shutdown. However, we believe both our economic data and on-the-ground observations indicate resilience in the market. Atlantic Union maintains a well-diversified portfolio with approximately 23% of total loans of the Washington metro area and the remaining 77% across our broader footprint. The exposures that prompt the most inquiries are government contractors and office buildings in the Washington metro area. Updated disclosures on these segments can be found on Pages 21 through 23 of our supplemental presentation, and these portfolios are performing well. Our government contractor finance portfolio is predominantly focused on national security and defense. We believe these businesses are well positioned, supported by a record high defense budget and ongoing defense modernization efforts. Government shutdowns are not new to us. With more than 15 years in this specialty, we have seen many. Most contractors we finance provide essential services and have historically continued to operate during shutdowns, typically drawing on lines of credit to maintain payroll and repaying those lines when government funding resumes. We are certainly monitoring the shutdown and its duration. More broadly, August unemployment rates for Maryland and Virginia stood at 3.6%, well below the national average of 4.3% and among the lowest for states with larger populations. Official government September data is not yet available due to the shutdown. While we anticipate some increases in unemployment rates across our markets, we expect this to remain manageable and below the national average, consistent with the current Moody's state level forecast. With the Sandy Spring systems conversion now behind us, strong pipelines and expanded footprint in attractive markets, specialty lines and increased investment in North Carolina, we believe we are well positioned for continued organic growth. In summary, it was a good quarter as we continued our focus on disciplined execution and the integration of Sandy Spring. This quarter also marks my ninth year with the company. Over this time, we have intentionally and carefully built the distinctive and uniquely valuable franchise that we envisioned in our strategic plan and have consistently communicated for years. We have done what we said we do in establishing the banking platform we set out to create. With this foundation in place, we believe we are well positioned to capitalize on the expanded markets gained through the Sandy Spring acquisition, continue our growth in Virginia and pursue new organic growth opportunities in North Carolina and across our specialty lines. We are set up well to demonstrate the organic earnings power of the franchise we have worked so hard to build on a reported basis, absent merger-related noise in 2026, and that's what we intend to do. Looking ahead, our focus remains on delivering sustainable top quarter performance relative to our peers and creating long-term value for our shareholders. With that, I'll turn the call over to Rob for a detailed review of our quarterly results before opening the call for questions. Rob? Robert Gorman: Well, thank you, John, and good morning, everyone. I'll now take a few minutes to provide you with some details of Atlantic Union's financial results for the third quarter. A commentary today will primarily address Atlantic Union's third quarter financial results presented on a non-GAAP adjusted operating basis, which excludes $34.8 million in pretax merger-related costs from the Sandy Spring acquisition and a $4.8 million pretax loss recorded in the third quarter for the final CRE loan settlement related to the approximately $2 billion of Sandy Spring acquired CRE loans that we sold in the second quarter. As a result, the final net pretax gain from the CRE sale transaction was $10.9 million. That said, in the third quarter, reported net income available to common shareholders was $89.2 million, and earnings per common share were $0.63. Adjusted operating earnings available to common shareholders for $119.7 million or $0.84 per common share for the third quarter, resulting in an adjusted operating return on tangible common equity of 20.1% and adjusted operating return on assets of 1.3% and an adjusted operating efficiency ratio of 48.8% in the third quarter. Turning to credit loss reserves. At the end of the third quarter, the total allowance for credit losses was $320 million, which is a decrease of approximately $22.4 million from the second quarter, primarily driven by the net charge-off of two individually assessed commercial and industrial loans that were partially reserved for in the prior quarter, as John noted. As a result, the total allowance for credit losses as a percentage of total loans held for investment decreased to 117 basis points at the end of the third quarter, down from 125 basis points at the end of the prior quarter. Net charge-offs increased to $38.6 million or 56 basis points annualized in the third quarter from $666,000, only 1 basis point annualized in the second quarter, primarily due to the net charge-off of the two commercial industrial loans that we've discussed. This brought the annualized year-to-date net charge-off ratio through the third quarter to 23 basis points although we are maintaining our full year net charge-off ratio guidance to be in the 15 to 20 basis point range. Now turning to the pretax pre-provision components of the income statement for the third quarter, tax equivalent net interest income was $323.6 million. That's a decrease of $2.1 million from the second quarter, primarily driven by lower interest income on loans held for sale due to the impacts of the CLO approximately $2 billion of performing CRE loans at the end of the second quarter and lower net accretion income, partially offset by lower borrowing costs and higher investment income as we used proceeds from the CRE loan sale to pay down short-term borrowings and broker deposits and to purchase additional investment securities in the third quarter. As John noted, the third quarter's tax equivalent net interest margin remained at 3.83% as lower earning asset yields were fully offset by declines in the cost of funds. Earning asset yields for the third quarter declined by 5 basis points to 6% compared to the second quarter due primarily to lower accretion income and the impacts from the CRE loan sale, which resulted in a decrease in average loans held for sale balances and an increase in lower-yielding cash and investment average balances. The cost of funds declined by 5 basis points in the third quarter to 2.17%, primarily due to the impact of the 4 basis point drop in the cost of interest-bearing liabilities to 2.93% from 2.97% in the second quarter driven by lower average short-term borrowings and broker deposit balances as well as lower customer time deposit rates. Noninterest income decreased $29.7 million to $51.8 million for the third quarter, primarily driven by the $15.7 million preliminary pretax gain on the CRE loan sale in the prior quarter compared to a $4.8 million pretax loss in the third quarter of 2025, related to the final CRE loan sale settlement accounting, as well as by the $14.3 million pretax gain on the sale of our equity interest in Cary Street Partners which was recorded in the second quarter. Adjusted operating noninterest income, which excludes the pretax loss and gain on the CRE loan sale in both quarters, the pretax gain on the sale of our equity interest in Care Street Partners in the second quarter and pretax gains on sales of securities in both quarters increased $5.1 million from the second quarter to $56.6 million, primarily due to a $4.2 million increase in loan-related interest rate swap fees due to higher transaction volumes and a $1.2 million increase in other operating income primarily due to an increase in equity method investment income. These increases were partially offset by a $2.2 million decrease in bank-owned life insurance income due to debt benefits of $2.4 million that was received in the second quarter. Reported noninterest expense decreased $41.3 million to $238.4 million for the third quarter, primarily driven by a $44.1 million decline in merger-related costs associated with the Sandy Spring acquisition. Adjusted operating noninterest expense, which excludes merger-related cost in the second and third quarters and the amortization of intangible assets in both quarters increased $3.1 million to $185.5 million for the third quarter, primarily due to a $1.3 million increase in marketing and advertising expense, a $966,000 increase in professional services expenses related to strategic projects, $874,000 increase in other expenses, primarily due to an increase in other real estate owned and credit-related expenses and an $800,000 increase in occupancy expense. These increases were partially offset by a $1.6 million decrease in salaries and benefits expense, primarily driven by reductions in full-time equivalent employees and lower group insurance expenses which was partially offset by an increase in variable incentive compensation expenses. At September 30, loans held for investments, net of deferred fees and costs were $27.4 billion, that was an increase of $32.8 million from the prior quarter, while average loans held for investment increased $291.8 million or 4.3% annualized from the prior quarter. At September 30, total deposits stood at $30.7 billion, a decrease of $306.9 million or 3.9% annualized from the prior quarter, primarily due to declines of $256.3 million in interest-bearing customer deposits and $116.1 million in broker deposits. This was partially offset by an increase of $65.5 million in demand deposits. At the end of the third quarter, Atlantic Union Bankshares and Atlantic Union Bank's regulatory capital ratios were comfortably above well-capitalized levels. In addition, on an adjusted basis, we remain well capitalized, as of the end of the third quarter, if you include the negative impact of AOCI and held-to-maturity securities unrealized losses in the calculation of the regulatory capital ratios. During the third quarter, the company paid a common stock dividend of $0.34 per share, which was an increase of 6.3% from the previous year's third quarter dividend amount. As noted on Slide 16, we've updated our full year 2025 financial outlook for AUB and have also provided our financial outlook for the fourth quarter. Please note that the final outlook for 2025 and the fourth quarter include preliminary estimates of purchase accounting adjustments with respect to the Sandy Spring acquisition that are subject to change. We now expect loan balances to end the year between $27.7 billion to $28 billion while year-end deposit balances are projected to be between $30.8 billion and $31 billion, driven by mid-single-digit annualized growth in loans and low single-digit annualized growth in deposits in the fourth quarter. Fully tax equivalent with net interest income for the full year is projected to come in between $1.160 billion and $1.165 billion that we are targeting the fourth quarter fully tax equivalent net interest income run rate to fall between $325 million and $330 million. As a result, we are projecting that the full year fully tax equivalent net interest margin will fall in a range between 3.75% and 3.8% for the full year and between 3.85% and 3.9% in the fourth quarter driven by our baseline assumption that the Federal Reserve Bank will cut the Fed funds rate by 25 basis points in October and December, and that term rates remain stable. In addition, the projected fully tax equivalent net interest margin ranges include the impact of our estimate of the net accretion income from the Sandy Spring acquisition, which are volatile and subject to change. On a full year basis, adjusted operating noninterest income is expected to be between $185 million and $190 million, and we're targeting the fourth quarter adjusted operating noninterest income run rate to fall between $50 million and $55 million. Adjusted operating noninterest expenses for the full year are estimated to fall in a range of $675 million to $680 million, while the fourth quarter adjusted operating noninterest expense run rate is expected to be between $183 million and $188 million. Based on these projections, we expect to produce financial returns that will place us within the top quartile of our peer group on an operating basis and meet our objective of delivering top-tier financial performance for our shareholders. In summary, Atlantic Union delivered solid operating financial results in the third quarter. We continue to be on track and confident that we will achieve the anticipated financial benefits of the combination with Sandy Spring. As a result, we believe we are well positioned to continue to generate sustainable, profitable growth and to build long-term value for our shareholders in 2025 and beyond. I'll now turn the call over to Bill to see if there are any questions from our research analyst community. William Cimino: Thanks, Rob. And Daniel, we're ready for our first caller, please. Operator: [Operator Instructions] Our first question comes from Russell Gunther with Stephens. Russell Elliott Gunther: First question for me is on the loan growth front. I appreciate your guys' thoughts in terms of what transpired this quarter in the mid-single-digit outlook for next. Wondering, is that mid-single-digit sustainable outcome for 2026 based on where pipelines and investor sentiment stands today? And as you look out, is a high single-digit a possibility on this larger pro forma balance sheet? And I guess an adjacent question, John, I think you mentioned whether it's an increased appetite or expectation for growth within specialty lines. So I'd be curious if you could expand upon that as well. John Asbury: Sure. To answer your questions, we do expect at this point, mid-single-digit loan growth on the total company for next year. Based on past experience, we certainly believe that we're capable of doing high single-digit loan growth. And what I will refer to as a more normalized environment, assuming we see such a thing again, which I think we will eventually, but there's still a lot of uncertainty out there, obviously. And we do see strength in our specialty lines. And as part of our strategic planning process. And as a reminder, we're going to do an Investor Day in early December, and we'll take you into more detail. We continue to look at additional opportunities to further grow and expand our specialty lines such as equipment finance and others. Dave, do you have anything to add to that? David Ring: Yes. I mean we're still seeing production for new client acquisition and growing at a slightly higher rate, 35% of our production this quarter came from new clients. Coming into the bank, that's a great trend and positive momentum. The pipelines at Sandy Spring now that they've been converted here since April 1 have grown dramatically, three or fourfold. And our pipeline within the legacy bank is higher than it normally is as well. So if pull-through is what we expected to be, we think we'll have a good solid fourth quarter. John Asbury: Yes. And so as you saw, loans averaged up 4.3% Q-over-Q, which is good. But what really happened is in the back half of the quarter, we saw paydowns, which are always an issue to some extent. But the line utilization drop was kind of what really hit us towards the end of the quarter, and that should come back over time. Russell Elliott Gunther: I appreciate that. And then just last question for me, switching gears a bit on to the expense outlook. I appreciate the thoughts on where 4Q could shake out. And I believe you guys mentioned cost saves for Sandy Spring will fully be in the run rate in early 2026. So I just wanted to circle back to what was a, I believe, the efficiency guide for the pro forma franchise, about 45%, excluding amortization expense. Is that still on the cards for 2026? And as it relates to the expense side of the house, how are you guys thinking about keeping a lid on the absolute expense base as you organically build out North Carolina over the next few years? Robert Gorman: Yes. Russell, I'll take that one. Yes, we still -- we're, of course, in the middle of our 2026 planning process, but we fully expect to see mid-single -- mid-40s on the efficiency ratio, inclusive of the investments in the North Carolina franchise. Coming out of the -- you see our guide in the fourth quarter is $183 million to $188 million. If you annualize that at some inflation to that and additional costs associated with North Carolina. We should be flat year-over-year to pro forma first quarter. If you include the first quarter run rate for Sandy Spring in 2025, it should be flattish, which would basically be able to provide us with the mid-40s efficiency ratio. So feel good about that. Of course, if we don't see the revenue come in, but the other part of that is revenue growing at high single-digit level going into next year. If we don't see that, we're obviously focused on positive operating leverage. So we would take some actions on the expense side, maybe have to delay some things. But at this point in time, we don't anticipate that happening. Operator: Our next question comes from Stephen Scouten with Piper Sandler. Stephen Scouten: Rob, I wanted to just follow back on that expense messaging you just gave there. So if we're looking at $190 million and then you said add North Carolina, add inflation and then it should be flat from there? Or is there a baseline like of a 1Q '26 kind of all in? I'm assuming all cost saves out kind of run rate you can give us as a starting point? Robert Gorman: Yes. So what I would say is it's probably about the $190 million give or take level would be a good run rate for going forward on excluding any of the related or amortization of intangibles. That's how we're kind of looking at it. So you've got, call it, a $185-ish million run rate at another $5-or-so million annualized that for those items that we talked about inflation, et cetera, so it would be pretty good run rate. Stephen Scouten: Got it. And that 1Q '26 run rate shouldn't calculate all the Sandy Spring cost savings at that point in time, correct -- more or less? Robert Gorman: Yes. We don't see it all in the fourth quarter because there's -- we just finished the conversion, there's cleanup going on. There's some related systems disengagement that's happening. We still got some duplicate costs there. So those will all come up by the end of the fourth quarter. Stephen Scouten: Got it. Got it. Okay. And on the -- John, you noted there were a higher level of paydowns and I think you guys noted in the press release to lower line utilization there at quarter end. Do you have any data in terms of kind of what paydown levels were this quarter maybe versus any prior quarters? And kind of what would lead you to believe that maybe that paydown activity would slow a bit? Or is the better growth not so much about paydown levels slowing but production levels continue to ramp higher? John Asbury: Yes. I think it's probably more about production levels continuing to ramp higher. And let's see, I'll call on Dave Ring here, who leads all our commercial businesses. But -- we've seen for a while higher levels of paydowns. But as I think about Q3 versus Q2, I don't think it was out of line. David Ring: No. No. Production in both quarters was very close. It's a little higher this quarter than last quarter. Paydowns were relatively the same over the quarter. There are just more players right now in our markets, and we're going to see some of the paydown activity that we're seeing today probably throughout the rest of the year and into next year, but we're relying on higher production cost. John Asbury: Yes. And so often on paydowns, you'll see commercial real estate that is sold or refinanced into the institutional non-recourse term markets like some of the Fannie or Freddie programs, for example, for multifamily. And the pullback that we've seen in term yields tends to create more of that. But we feel good about the overall setup. Stephen Scouten: Got it. And then last thing for me, just around the margin, obviously, the low end of that range kind of remained at the 3.75%, but obviously, the range was tightened kind of removing some theoretical upside there. What kind of changed quarter-over-quarter that kind of takes that higher level off the table? Is it just where we ended up here in the third quarter? Or is it more rate cuts being baked in? Or kind of -- any color there to what's leading to that? Robert Gorman: Yes. It's more about where we came out in the third quarter, kind of dialed back some of the impacts of the accretion income in the fourth quarter. That would have been driving -- it could be higher on the higher end. So we dialed that back a bit. But we feel like on the core basis, we should see some expansion. That's why we're guiding to 3.85% to 3.90% in the fourth quarter. So it's a bit higher than when we came in at 3.83% in the third quarter. But that 3.75% to 3.80% is for the full year, Stephen. So that's kind of where we are. So it's going to -- we see it going up, but not quite as much as we had anticipated. We had a 3.75% to 4% coming in this year. But accretion hasn't been coming in as high as we were expecting. John Asbury: Yes. It is somewhat difficult to predict that with great precision because it's influenced, as you know, by payoffs and that sort of thing. And so you'll see a little bit of volatility. And obviously, as we get a few more quarters under our belt, we'll have a better sense for the sort of what to normally expect. But there's always an element of fluctuation in that, be it up or down. Stephen Scouten: Yes, no doubt. All this modeling is a little bit art, a little bit science. So definitely... John Asbury: Correct, Stephen. Operator: Our next question comes from Catherine Mealor with KBW. Catherine Mealor: My question is just back to the margin, maybe just getting into the pieces of it. And on the deposit side, as we think about another couple of rate cuts, I think of you as asset-sensitive, but Sandy Spring lessens that a little bit, right? And so then as we think about on the NIM expansion over the next few quarters even with rate cuts. Can you help us think about, first, on the deposit side, how much room you think you can lower deposit costs to keep the margin kind of in that level? And then secondly, if you could give us just some color on new loan yield rates and kind of where you see -- where you think loan yields go outside of some of the purchase accounting noise? Robert Gorman: Yes. So Catherine, we think we have a lot of room on the deposit cost side as the Fed gives us cover and continues to lower rates, we're expecting. Obviously, we saw a 25 basis point cut in September. We're expecting one in late October and then in December. Just to give you a perspective on that, we had about $13 billion of deposits that reprice pretty quickly, following that cut like an 85 basis -- of that population, about 85% betas. The good news that we're seeing is on the deposit side, we can lower rates pretty quickly. We're talking probably in mid-50s betas on interest-bearing deposits in mid-40s through the cycle on total deposits. If you look at the short-term rate changes we just made, those pretty much offset the variable rate note loan book that we have, which is about $13 billion, $14 billion. So those kind of are offsetting each other in terms of reducing or having the impact of lower yields on the loan side versus lower deposit costs. So the real impact as we go forward here in terms of looking for a core margin expansion is what's happening with term loans and the back book fixed rate and new loans coming on, what rates are those coming on. We think as a result of our average portfolio yields of, call it, [ 5.10 to 5.15 ] on our fixed loan portfolio today, repricing in the, call it, [ 6.10 to 6.20 ] range in the last quarter. We should be able to see a pickup in terms of the core margin, primarily due to lower deposit costs, lower variable rate loan yields offset by higher fixed rate loan yields. Catherine Mealor: Okay. That's awesome. And then my second question is just on credit. I know you were -- you didn't like having these two C&I losses this quarter. Just kind of curious if you could give just a broader perception of any of the credit trends you're seeing within the portfolio. I think there's especially within D.C. and just kind of the health of the Sandy Spring portfolio now that you've got a couple of quarters under your belt with that portfolio. Just any kind of credit -- additional credit commentary would be helpful. Just to try to figure out whether those two are isolated events or if there's anything else we should be aware of happening within the portfolio? John Asbury: Yes. Those are certainly the two that you saw that had specific reserves. One of them was partially reserved and it was just an unusual situation that -- both actually were identified and partial reserves were taken in Q4 of last year. One in the end was fully reserved, actually slightly more than the ultimate resolution. The other just due to ongoing uncertainty, we elected to charge the rest of it off as we work to maximize recovery. So that's totally unrelated. Broadly speaking, the overall credit trends look good. You can see that in our numbers. You can see, obviously, 0.49% nonperforming assets as a percentage of the total loan book is a pretty good number. Past dues down criticized down. And we feel pretty good. Obviously, we're well aware of all the headlines that go on in the greater Washington region, but we're hard-pressed to point to any real problems as a result of that. The client base is actually quite resilient. So we feel pretty good about it. Doug, anything you would add? Douglas Woolley: Now all the leading indicators of those kinds of big problems all look very good and moving in the right direction. Like John said, criticized noticeably lower since the second quarter. Past dues continue to be low. So we all feel very good about where we are. Obviously, we're paying attention to what's going on in and around D.C. with the shutdown. But we just don't see any weakness anywhere, and we'll be prepared for anything supporting customers and whatnot. I was Chief Credit Officer, Doug Woolley. Catherine Mealor: Great. Is it fair to say the D.C. noise is maybe more of a growth issue than a credit issue for that? John Asbury: Yes, I would say so. I do think that it impacts confidence to some extent. But as Dave Ring pointed out, the pipelines are growing. And you've heard me make this point before, don't think of us as a D.C. Bank. About 23% of the total portfolio would be in the broad Greater Washington metro area. But Sandy itself was -- is and always has been the Bank of Maryland. And we are seeing opportunities there. So overall, we think that we're in the right spot. As you know, we do not finance larger office buildings, which definitely could be problematic. And from a government contract finance standpoint, I would expect to see more opportunity there over time since it's mostly focused on national security and defense. And even interestingly, we were talking to the head of government contract finance yesterday, even with the government shutdown because the defense department is still operating, we're seeing contracts awarded like right now. So we do feel pretty good about the opportunity there over time. But yes, it's -- I think it does put a damper on growth, particularly as it relates to commercial real estate investment, but it's very submarket specific as well, even in that Greater Metro D.C. area. Operator: Our next question comes from Janet Lee with TD Cowen. John Asbury: Janet, we're glad. Thank you for picking up coverage on us. Sun Young Lee: Of course. I believe you guys touched on it a little bit. Apologies if I missed it. So are you attributing all of the loan decline that you saw on the C&I side to lower utilization? And basically, are you also referring to the loan growth coming back in that mid-single digits as the utilization picks back up seasonally in the fourth quarter to the mid-single digits range? Or is that more so in a typical environment, you'd be a mid-single digit to high single-digit grower? John Asbury: Yes. I wouldn't say all of it was a result of the reduced line utilization, but that was a material number contributing to that. And I think it's -- Dave Ring, you'll have to weigh in here. From my standpoint, we've got the pipeline right now to support the targets that we laid out, which are roughly mid-single-digit loan growth based on what we're seeing in Q4. So that's not really predicated on a reversal and line utilization, although that would be helpful. Is that accurate? David Ring: Yes. We're -- we have the pipeline to -- it's just pull through. We just have to pull it through. And sometimes it takes longer than others and things creep into other quarters. But we have the pipeline that will -- that implies... John Asbury: Dave makes a good point. We actually had some financings that were slated and expected to have closed in Q3 that did not. And we're seeing that come through now. We're actually off to a pretty good start in Q4. Sun Young Lee: Got it. That's a helpful color. So on a core basis, I guess you're not guiding to 2026, but -- should I think of the core NIM trajectory based on your comment as being able to stay stable as rates come down with an upper bias if the yield curve steepens? Or would it be a sort of board pressure given your asset sensitivity profile? How should I think about that? Robert Gorman: Yes. The way we're thinking about it is we think there's opportunity for core expansion, give or take, in the low single digits per quarter. That's predicated on that the fixed rate loan portfolio back book and new fixed loans coming on are repricing higher, call it, 100 or so basis points higher. So that really depends on where term rates go. So if we do have a steeper curve, that would be very helpful to that projection that goes -- if it increases more, that will be more beneficial. So we are calling for in our baseline for the Fed to cut 2x here in the remainder of this year, 2x next year, but we do expect to see some expansion in the margin, again, not material. If term rates were to drop materially from really looking at, call it, the 5-year term rate, we could see some contraction in that projection that I'm talking about -- either a flat margin or it could be down depending on the term rate structure. John Asbury: And we are certainly less asset sensitive than we used to be. Sandy acts as a bit of a natural hedge. And as you can see on Slide 11 of the supplemental presentation, where we break out the drivers of net interest margin change, to Rob's earlier point, the core net interest margin actually went up Q-over-Q. It was really just fluctuation in accretion that caused the reported net interest margin to be stable. Sun Young Lee: If I could just ask one more question. For those of us including myself, who is newer to the name. So you made it clear that the government contractor finance group is doing fine. I mean, it's more security like national security and defense focus or more protected there. If the government shut down is prolonged, hopefully not. But if it does get extended, like what would you be -- in what way could it -- or could it impact you the most in terms of -- like what would you be most worried about? Is it the consumers in your -- the consumer customers in your market? Or is it just lower commercial activity? Could you just elaborate on what would you be most worried about or maybe not? John Asbury: Yes. Sure. The government contractors should be fine. We have lived through many shutdowns before. The longer shutdown was 35 days in the first Trump administration. We've never had an issue as it relates to government shutdowns. They have to wait to be paid, but most of them are doing essential services. And so they will continue to work, as I indicated. Normally, what we would expect to see them do is they'll draw on their lines as they await payment. It creates a timing difference. To the extent that they -- we have any that are working on nonessential services, what they do, it's a variable cost structure. They would furlough workers. You're already seeing that in some cases up there. So I think broadly, it certainly could sort of, I guess, I would say, further slow things down, we should be fine. The one thing we -- the only thing we can say with certainty is the U.S. government will reopen. That will happen. The question is how long it's going to take? Interestingly, I was just looking at some data. As of the end of the day yesterday, we had 50, 5-0 consumers contact us, wanting to talk about some sort of potential relief because they've been impacted. And the most common thing that you would see might be a payment deferral or a fee deferral. And that's on the consumer side, and we're very happy to work with customers if there's any sort of event weather like this in that region. So we do not have any reason at this point in time to be particularly concerned about it. Operator: Our next question comes from Brian Wilczynski with Morgan Stanley. Brian Wilczynski: Maybe just sticking with the loan growth. I think during your prepared remarks, you talked a little bit about higher competition that you saw in the third quarter across some of your markets. I was wondering if you could give some more detail on that, where it's coming from and just what you're seeing broadly? John Asbury: Yes. We're certainly accustomed to competition. I'm a 38-year commercial banker by background, and I don't ever remember a time when it's not been competitive, at least for the better credits, which is the types of things that we do. We sometimes see other banks kind of turn it on and turned it off, which we've never done. We've always been a consistent provider of capital, and that's part of how we differentiate ourselves in the marketplace. We are definitely in a turn it on environment right now, where some who had pulled back or fully open for business. We see that show up in terms of an element of pricing pressure, not that we've ever been the low-cost provider. But it's -- the banks are eager for business. Dave, anything to add? David Ring: In the first couple of quarters, we were impacted a bit by private credit. John Asbury: Yes, particularly in the government contract space. David Ring: Right. As a competitor in some of the specialty businesses, but that slowed down a little bit, frankly. And it's really the traditional banks coming in back in, turning it on again, like John said. And one of the things we're very proud of is we're consistently in the market. We don't turn it on and turn it off. And -- but we're seeing some of those banks come back in and turn it on. Brian Wilczynski: That's really helpful. And then maybe just on Sandy Spring. You mentioned that the integration is now complete. I was wondering if you could talk a little bit more about some of the revenue-related synergies. I think you mentioned briefly that swap income was higher. But as you look out to Sandy Spring, what are the opportunities that you see on the revenue side that you can lean into a little bit more over the next few quarters? John Asbury: Yes. Sort of moving -- starting at the top of the house, the single best opportunity is simply the fact that they're no longer constrained by commercial real estate concentrations or liquidity issues, which means they are, in fact, fully open for business. So that's good from a lending standpoint. They do pick up additional capabilities. Interest rate hedging is a great example. Other examples that we'll see as it begins to mature, will be foreign exchange, where we have a good offering broadly. They had a good treasury management offering, but we brought additional capabilities to the table as well. Dave, do you want to pick up from their specialty lines? We've already seen equipment finance business up there. David Ring: I mean the biggest probably help over the next, call it, 15 months is just them getting back into the market. We've retained almost all of their bankers. And most of them have stayed on their own as well without us having to work hard to retain them. And they are back to business back and calling. So new client acquisition is going to be a real important thing in that market for us. The things we bring to the table around talking at a higher level to clients, bringing in products like John said, plus loan syndications, asset-based lending and some other things into that market. That's a really good asset-based lending market, for instance, which we will penetrate deeper because of our acquisition of Sandy Spring. So there are a lot of things just -- but I would think of it just holistically as two good banks coming together, combining products and services, they had some that we didn't have. John Asbury: Correct. David Ring: They had some really interesting offerings, some niche treasury management capabilities that we now have. John Asbury: Right. And they've brought some really good leadership to the table as well. And so we really think we're just stronger in that market because of the combination. Operator: Our next question comes from David Bishop with Hovde Group. David Bishop: Staying on that topic in terms of the Sandy Spring opportunity. John and Rob and Dave, as you expand maybe their pure commercial C&I lending capabilities, do you see the opportunity to sort of harvest more deposits behind new loan relationships and maybe what legacy Sandy Spring is bringing to the table? David Ring: Overall, they did a pretty good job gathering deposits. And we've done a pretty good job since April 1 of retaining those and trying to deepen and enhance relationships to get more. But -- they actually brought some products to the table that we're going to leverage in that market around escrow, the title businesses, litigation services, things like that, that will bring pretty chunky, nice big deposits into the bank. But in general, if you acquire a C&I client and you're giving them a line of credit, it comes with the deposits. It comes with the treasury management fees. And so we're really focused on new client acquisition in that market. And we do think we give them the capacity and the ability to do more faster new client acquisition. Like I said earlier, 35% of our production this quarter was from new client acquisition, and we expect that to kind of ramp up with Sandy over time. John Asbury: It's a good team with great leadership, and we complement each other. David Bishop: Got it. And then a follow-up, maybe, John, I think you mentioned the freeable some pretty material movement, I think it was $250 million decline in criticized. Maybe curious any sort of color you can give on where you saw that improvement types of credits, segments, et cetera? John Asbury: Pretty much across the board. Part of what we did in part just a function of the environment, we continue to dig pretty deeply in terms of scrutinizing the portfolio, not that we don't do that in the normal course. We've especially done that with the Sandy Spring portfolio being new to us. And the reality is we call them as we see them. The overall health of our client base is pretty good. And so we've seen it pretty much across the board. Doug Woolley, the Chief Credit Officer is here, is that a fair assessment? Douglas Woolley: Dave, the improvement in credit is at the client level. There are no industries or markets that are of any concern. It's just individual clients that may suffer difficulties. And of course, we work with them all the way through, and that's where the improvement comes from, the improvement of their operations. And we do believe we are conservative risk raters. Operator: Our final question comes from Steve Moss with Raymond James. Stephen Moss: Maybe going back to loan growth here. John, I hear you on the mid-single digits with potential to be doing higher single digits over time here. And obviously, the pipeline has increased. Just curious here with the North Carolina expansion, what kind of contribution could you see next year from that from loan growth, if any, that could be additive? John Asbury: Dave? David Ring: So we're adding bankers in North Carolina. We've actually seen North Carolina turn to positive growth after... John Asbury: Initial America... David Ring: Yes. And there's very positive momentum there. What we like about North Carolina is it is a real active market, and you could drive down any highway and see multiple manufacturing distribution facilities. And -- we have now -- we think we placed a lot of talent in that market to go after that business. We have pretty low market share. So there's a lot of upside in that state. John Asbury: Yes. It's arguably from an economic development standpoint, it's arguably the best of the growth markets where we have a physical presence, which we're expanding. So Steve, that is potential upside. We're being very conservative in terms of how we think about it. We're speaking to loan growth expectations for the entirety of the franchise. But Dave, you and I have a conversation yesterday, you've been here 8 years. And we think about how diversified the bank is now versus what we first saw and all the -- I think you referred to it as the levers that we have to pull now. So this is a very diversified franchise. And so we see opportunities really in all markets, but North Carolina will have the fastest rising tide. David Ring: And we do have roughly 20 bankers now in that market going at it, which is an increase over time. So we're very excited about the opportunity there. We're in Wilmington. We're also in the Triad and Triangle markets, and we have a presence in Charlotte and in South Carolina as well. So we're pretty excited about that. Stephen Moss: Okay. Appreciate that color there. And then one last one for me. Most of my questions have been asked and answered. But I'm not sure if I missed it. Curious, Rob, as to the purchase accounting assumptions for the fourth quarter and for 2026. Robert Gorman: Yes. So in terms of the accretion income, I think you could -- if you take a look at the third quarter, it's kind of what we're anticipating for the fourth quarter, call it about $40 million, $41 million which was down from the third quarter, as we mentioned. It's probably going to continue to decline as we go through next year. But call it about between $35 million and $40 million run rate -- quarterly run rate going throughout next year and continue to come down as we go into '27. John Asbury: And of course, that's being replaced, that cash income has been reinvested. Robert Gorman: Yes, exactly. Turning into core. John Asbury: Since it's mostly interest rate marks. Stephen Moss: Okay. And actually, maybe just one last one for me here. John, with regard to capital return here, profitability, you're talking about -- you're definitely building capital. Just curious, you talked about a buyback as well, how to think about maybe the timing of a buyback starting next year? John Asbury: Yes. We're definitely going to be accreting capital at a good rate. And even more so as we get through Q4 once all of the Sandy Spring related expenses are out. And you can see we have pretty handsome operating metrics right now, which should get better still. So Rob, do you want to talk about how we would think about the -- well, actually, let me say this, clearly, as always, first priority for capital is simply to reinvest in the business and fund lending growth. But what we're guiding for implies that we're going to be accumulating capital faster than we need it. Therefore, capital will continue to rise. Robert Gorman: Yes. Taking into consideration our growth on the balance sheet, the investment and strategic initiatives and things, assuming we've got the capital for that. We're comfortable managing with a CET1 between 10% and 10.5%. So anything beyond, call it, 10.5% would be available for buybacks, excess capital, if you will. Our projection call for that is probably be in that position probably in the second half of next year. So likely we would export for an authorization to repurchase shares sometime in that time frame. William Cimino: Thank you, Steve. And thanks, everyone, for joining us today. We look forward to talking with you at our Investor Day in December. Have a good day. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Linda Hakkila: Hello all, and welcome to follow Konecranes' Q3 2025 Results Webcast. My name is Linda Hakkila. I'm the VP, Investor Relations here at Konecranes. And with me today, as our main speakers, we have our President and CEO, Marko Tulokas; and our CFO, Teo Ottola. Before we proceed, I would like to remind you about the disclaimer as we might be making forward-looking statements. Here, you can see our agenda for today. We will first start with a presentation from our CEO, and he will give us a market update and guide us through the group performance. After that, our CFO, Teo Ottola, will guide us through the business area performance and talk about the balance sheet topics. Before we start with the Q&As, our CEO will still summarize the main points of the quarter. But now, without any further comments, I would like to hand over to our CEO. Marko Tulokas: Thank you very much, Linda. I'd like to start by saying that I'm extremely pleased with our performance in quarter 3 and throughout the year 2025. Konecranes' team delivered a very strong quarter in continuation to our solid half year performance. Under the prevailing market conditions, this is an excellent achievement. This is -- with this kind of market uncertainty, an order intake, a growth of 23% year-on-year is a very good starting -- start for the quarter 3 or is a very good quarter 3. Our demand environment has remained stable despite the market uncertainty and our sales teams have been able to close well despite the timing-related hesitation. Our orders are up now by 23% year-on-year in comparable currencies and our order increased more than 7% -- order book increased, sorry. The order intake increased in all business areas. Our sales amounted to nearly EUR 1 billion in the third quarter. This means a decrease of 5.5% year-on-year in comparable currencies. Despite the decrease in sales, we reached a record high EBITA margin of 16.7%. That is an increase from second quarter level of 14.3%. Our profitability in the third quarter was supported by good execution, as well as some one-off items. We will go through the performance by business area later in this presentation. The next, I will again go through some words to our general market environment. Let's start with our Industrial segment. In general, our demand environment remained good despite somewhat weaker macroeconomical data. The capacity utilization rates are the best macro indicators that describe these conditions for Industrial business area. And from the data, we can see some weakening year-on-year, but still our order intake in Industrial Service and Industrial Equipment grew in quarter 3. That was really driven by good activity in our standard equipment business, as well as some significant modernization and process crane projects. At the same time, within our industrial customers, we have seen somewhat cautious behavior, both in timing of new orders, as well as delay in project delivery acceptance. Our operating environment continues to be impacted by geopolitical tensions and volatility, especially related to tariffs. Now let's then talk about the market environment for Port Solutions. And in Port Solutions markets, we continue to see good activity. The Container Throughput Index, which is the main indicator here, continued at a strong level in the third quarter compared to the historical readings. It is now up by 3% year-on-year. And as we say in our demand outlook, the long-term prospects related to container handling or container traffic remain good overall. Now we will now next take a look at our sales and order intake development. In the third quarter, the group order intake grew by 23% year-on-year in comparable currencies, and that is an increase in all 3 BAs. Looking at geographical markets, we saw some improvement in our order intake in Americas and APAC region, as well as some weakening in EMEA. Our sales in the third quarter decreased both in reported terms and comparable currencies, which was mainly driven by the lower order book in Port Solutions. And in the third quarter, we saw a decrease in net sales for Industrial Service and Port Solutions, but very strong delivery performance in Industrial Equipment after a less strong quarter 2. On a group level, we saw a decrease in net sales in all regions. Moving on to the order book. And our order book reached its highest level since quarter 1 of 2024 and amounted to over EUR 3 billion at the end of the third quarter. We saw an increase in Industrial Equipment and Port Solutions, while there was a decrease in Industrial Service. Our book-to-bill has been positive throughout the year. And looking back to our long-term performance, our order book continues to be on historically good level. And then finally, looking at the EBITA margin development, which reached also a record high level. In the third quarter, we generated EUR 165 million of EBITA. This translates to very strong EBITA margin of 16.7%. And this performance came from really solid execution, as well as some one-off items. And EBITA margin increased year-on-year in all BAs. Industrial Equipment reached its all-time high margin of 14.1% in the third quarter. And Industrial Service and Port Solutions also had very good margins of 22.7% and 11.8%, respectively. Then let's move on to the performance towards our financial targets. Last year was very good for us, and our performance has continued strong also this year. This graph shows the rolling 12 months figures for our sales and EBITA margin and progress towards our long-term financial targets. Our group sales remained flat whilst our comparable EBITA margin increased when comparing the last 12 months to full year 2024. The group profitability in the rolling 12 months, we are at the lower end of our profitability target range of 13% to 16%. Of course, we consistently continue to work towards those targets. While increasing our EBITA margin, we also aim to continue to grow our sales faster than the market. In Industrial Service, our steady progress over the last 5 years continues and the sales in the rolling 12 months remained relatively stable, but our EBITDA margin increased to 21.5%. We are already today well in line with our target range, but naturally still closer to the lower end of the bracket. And in Industrial Equipment, sales in the rolling 12 months remained flat. And also our EBITA margin for the same period decreased compared to full year 2024. That is mainly due to the weaker H1 and particularly the weaker quarter 2. While the quarter 2 performance for Industrial Equipment left room for improvement, our performance in quarter 3 was, in turn, exceptionally strong. Also here, we will continue to work to strengthen the over-the-cycle performance of the Industrial Equipment business. Then moving on to the Port Solutions. We have continuously improved our financial performance during the last 3 years, as you can see from the graph, and we will also continue to so in -- we continue to do so in quarter 3. Our sales increased in the rolling 12 months compared to 2024, which is already a very good year. And our EBITA margin for quarter 3 remained at a high level, which resulted in an EBITA margin of 10.8% for the rolling 12 months. Needless to say that I'm very pleased with this progress. Now, I will hand it over to Teo Ottola, our CFO, for some time, and then I'll return back in a moment. Teo Ottola: Thank you, Marko. And let's move on in the presentation. Actually, before going into the business area numbers, so let's take a look at the comparable EBITA bridge between Q3 of this year and Q3 of last year. As we have seen, the margin improvement is large in a year-on-year comparison. And when we take a look at the euro, so this turns into EUR 22 million improvement. And if we unpack this next a little bit. So first, starting with pricing. So our prices were somewhere between 2% to 3% higher than a year ago, maybe closer to 3% than 2%. But nevertheless, this improvement or increase in prices is somewhat less than what we have been having in the beginning of '25. When we combine this price increase to the fact that our sales declined more than 5% in a year-on-year comparison. So actually, we are looking at quite a significant underlying volume decline in the third quarter in comparison to the situation a year ago. And this, of course, creates a negative operating leverage impacting the profits as well. But there are then several positive things supporting our profits. First of all, net of inflation pricing, so that was slightly positive in a year-on-year comparison, even though the positive impact comes primarily as a result of tariff-related price increases, so we have increased prices in line with the tariffs. But then as a result of the inventory turns being slow, so actually, the benefit comes first and then the cost will be flowing in a little bit later in terms of material consumption. In addition to that one, we had a clearly better mix now than a year ago. But the biggest explanation of all is very good execution that we had. So the performance of the business was excellent, particularly in the project execution, which is visible primarily in the ports, but also in the other business areas. When we combine into this one that our fixed costs actually were lower than what they were a year ago, we were able to create this improvement in the EBITA despite lower sales. When we take a look at the performance a little bit more in detail, so we can note that our performance this time was helped by some one-off type of levers, things. One of them was that we actually received an R&D grant in Finland in the amount of roughly EUR 4 million that was booked in the third quarter. This is, of course, visible in the fixed cost, and that is one of the reasons why fixed costs are now lower than what they were a year ago. I already mentioned the tariff-related price increases and the tailwind that we got there. So that was less than EUR 5 million, but several millions anyway. And then we had also some provision releases within the Industrial businesses. And altogether, these are, let's say, roughly EUR 10 million or so. Then the next one I'm going to discuss is not like a one-off topic. It's normal business practice. But as a result of the good project execution within Port Solutions, in particular, we were able to release provisions and that impacted positively our result in the third quarter. So normal business as such, but this quarter was better than average definitely from that point of view. So they are some of the topics explaining the profitability and the profits within the third quarter. Let's then move into the businesses and start with Service, as usual, maybe here worth noting that exactly as in the second quarter, so also here, the FX impact is quite big. So let's more focus on the numbers with the comparable currencies. In Service, order intake grew by almost 9%, 8.7%. This is clearly higher growth than we have had in the first half of '25. This growth was actually supported by some large modernization orders that were already mentioned by Marko as well. But even if we excluded those ones, or the delta as a result of the modernizations, we still would be having growth even if the majority of the growth is created by these modernization orders. When we take a look at the field service, so actually, our order intake declined in a year-on-year comparison. And in parts, it was an increase. Then taking a look at the regions, we had increase in the Americas and EMEA, but a decrease in APAC, and it's worth noting that the modernization deals took place primarily in the Americas. Agreement base continued to grow more than 5% with comparable currencies and order book was slightly lower than what we had a year ago. Net sales grew only by 1.2%. And this is, of course, less than the price increases have been. So the underlying volume actually was lower than what we had a year ago. There, the reason is basically the slowness of order intake in the field service, and we had a decline in sales in field service within the Service. Spare parts were basically stable in a year-on-year comparison. And then from the region point of view, stable in EMEA, whereas decrease in the Americas and Asia Pacific. Comparable EBITA margin improved by more than 1 percentage point to 22.7% despite the somewhat sluggish sales development. This was primarily driven by very good cost management within the Service business, but to some extent, also by pricing, which was partially in relation to these tariff-related price increases and the timing tailwind there. So then Industrial Equipment, very good order intake, close to EUR 350 million. That is as much as 26% growth in external orders when comparable currencies. When we take a look at this by the business units, so we had actually growth in process cranes and components, but we had a decline in standard cranes. And then of the regions, decrease in EMEA, whereas the other 2 regions saw growth. Then the sequential picture, which is important as well. So in comparison to the second quarter, actually, we saw sequentially a significant increase in process crane orders. Components were more or less flat in a sequential comparison and standard cranes declined slightly. Order book is higher, clearly higher than what we had at the same time 1 year ago. Sales grew very nicely, 6.3%, again, with external sales in comparable currencies after a little bit, let's say, lower first half. We had increase in standard crane and component sales, but a decrease in process cranes, which then also, at the same time, meant that the product mix was somewhat better than a year ago. Then when taking a look at the margin, so excellent EBITA margin, 14.1%, a very big improvement in a year-on-year comparison, of course, driven partially by volume. So the underlying volume improved here in Industrial Equipment quite a bit. There were also some of the one-off items that we already discussed. For example, the R&D grant is mostly visible in the Industrial Equipment. But then also good execution otherwise, as well as the optimization program that we have been running has been giving benefits also for this quarter. And the mix also was slightly better than a year ago. Port Solutions, good order intake or excellent order intake here as well, more than EUR 450 million, that is 36% growth in a year-on-year comparison. We had very good order intake in yard cranes. This would mean primarily RTGs and ASCs. If we take a look at the regions, Americas and APAC improvement, EMEA, a decline. And here also, again, taking a look at a little bit of the sequential topic, but also the so-called short-cycle product categories within Port Solutions. So lift trucks, there we had year-on-year growth in the order intake, but sequentially down. And then from the port service point of view, we had growth both year-on-year as well as sequentially. Sales was clearly down by almost 19%. This was, of course, known from the point of view that the order book was lower for the third quarter than a year ago. So order book overall is in good shape, 10% higher than a year ago, but the same thing continues now for the fourth quarter as we had for the third quarter as well. So we have less order book for the fourth quarter now than what we had 1 year ago for the fourth quarter. So the order book is more beyond this year or beyond the current year than what we had the situation 1 year ago. Comparable EBITA margin developed very well, 11.8%, 2.2% improvement. This is, obviously, not driven by volume because the volume declined very much, but primarily because of the very good execution, supported by some of the provision releases, like I said, and then also the product mix, particularly in Port Solutions was clearly better than a year ago. Then next, a couple of comments on the net working capital, cash flow. We actually had net working capital of only EUR 285 million at the end of the third quarter. That's only 6.7% of rolling 12-month sales. This is very well in line with our target of being below 10%. If we take a look at the, let's say, delta to the situation a year ago, it is primarily inventories where the decline has come. And then in sequential comparison, it's maybe more accounts receivable. This net working capital development, together, of course, with the good result meant a very good free cash flow on record levels, this one as well, more than EUR 200 million, which is then, of course, consequently leading to this slide where we now actually, during the third quarter, have moved from being in net debt situation to being in net cash position, not much, but negative gearing anyways at the end of the third quarter. On the right-hand side, we can then see the return on capital employed, which is 21.7%, and this is a comparable number, but also the reported number is more than 20%. We have added actually a slide on the U.S. tariffs as well because that, of course, continues to be a relevant discussion topic. On the right-hand side of the slide, we have the Konecranes exposure. So these are the numbers that we have already given earlier. So the internal volumes from Europe to the U.S. is EUR 180 million or less than EUR 180 million. And then on top of this internal volume, we obviously then also have deliveries of fully assembled port cranes and lift trucks. We are, of course, subject to the normal reciprocal tariffs of 15% in, for example, in the complete cranes. But then many of our components, particularly spare parts are also subject to so-called steel derivatives where we are then subject to a 50% tariff. And also the tariff codes added now to the steel categories in August was impacting us as well so that we have now more components and parts within the 50% category than what the situation was before. What we have done is that, we have increased prices, more or less, in line with the tariffs. We are, of course, monitoring the situation. We are monitoring what the competitors are doing, how the customer demand is developing. We are discussing with the suppliers to be able to define the steel content of the components because, of course, that can help us to, in a way, get the tariff, particularly the steel derivative tariffs on the right level if we can prove that what is the share of actual steel in the components. So all in all, we have been able to manage the pricing well. This most likely will become somewhat more challenging going forward so that maybe not all of the tariff increases are possible to put into the customer prices. We do not expect this to be having any major impact on the margins, but the situation may be in the future, a little bit more tighter than what it has been so far. This actually was the last slide that I had, and now I invite Marko back to the stage. Marko Tulokas: Right. Yes, let's see how this works. So we had some issues with the first slides earlier. So now this should be now working again. So now let's look at our demand environment, demand outlook. So our demand in the industrial customer segment has remained good and continues on a healthy level. However, the demand-related uncertainty and volatility, due to these geopolitical tensions and trade policy tensions remain, particularly in North America. This translates into higher uncertainty, both in the timing of the order, as well as some postponement of maintenance activities within industrial customers or Industrial Service customers that, of course, may impact also the delivery performance or delivery acceptance of customers. Our sales funnel remained on a strong level and funnel development during the quarter was stable. Comparing against the previous quarter, the numbers of new sales cases is slightly down. Then to our port customers, the global container throughput continues on a high level and long-term prospects related to global container handling remain good overall. And our pipeline of orders is good and contains projects of different sizes. And I'll reiterate our financial guidance for this year. Our net sales is expected to remain approximately on the same level in 2025 compared to 2024. And we continue to expect that our comparable EBITA margin is -- to remain approximately on the same level or to improve in 2025 compared to last year. Now, before we start the Q&A, I'd like to go over 3 themes that we are leveraging to build on our strong foundation and to -- continue to drive the long-term profitable growth. Historically, looking at in the long-term -- long run, these have been and are the fundamentals behind our success, and they are the ones that are still very relevant today and will continue to provide us further runway also into the future. First of all, our Konecranes customer base is diverse and global. Our dual channel market approach gives us the most comprehensive access to customers globally and to different segments. Our broad product and service life cycle offering continues to give us an advantage when catering to the customers' wide needs and create stability against customer segments demand volatility and helps us to address specific customer segments within those markets. This approach to the market, our offering and our customer excellence culture is critical, but personally this -- but it's also personally something that I'm passionate about and I want to continue to foster. And then secondly, I would like to emphasize the life cycle approach of Konecranes. Developing a service and life cycle approach over decades has been and is very much in the Konecranes' DNA. We are not only providing equipment to our customers, but also taking care of them during the lifetime. That long-term customer relationship and focus on servicing all makes and moves -- feeds our service -- sales funnel continuously with equipment and service products. That -- this cornerstone in our operating model has served us well, but it continues to provide us further runway for growth and efficiency. The life cycle approach is naturally our way of doing business, but it's also the only sustainable way to operate in today's world. And thirdly, it is the technology leadership. So Konecranes has been the innovator in this market and reinforcing our technological leadership continues to be crucial. So focusing on technology innovation and development allows us to differentiate our offering versus our competitors. It creates more value to our customers and helps us to leverage the life cycle approach even more in the future. So in conclusion, we have a strong foundation and great teams in place to build on our success and drive for expansion and growth. And I thank you very much for your attention. Now we move on to the Q&A. So Linda? Linda Hakkila: Thank you, Marko, for the presentation, and thank you, Teo also. So now we are ready to start the Q&A session, and we will first start taking questions through the conference call lines. So, operator, we are ready to start taking questions. Operator: [Operator Instructions] The next question comes from Daniela Costa from Goldman Sachs. Daniela Costa: I want to ask on 2 things. First, I guess, starting with the growth in Industrial Equipment, given you mentioned sort of like the capacity utilization figures in the beginning, which haven't sort of yet started any big recovery. Can you talk about sort of what drove -- was there any particularly -- particular verticals? Was there some prebuying on the components? Or what has -- or market share gains or something, what has kind of caused really the strength there and how sustainable you see that going forward? That's first. And I'll ask the other one after. Marko Tulokas: Yes. I mean, maybe the key reason there or the main point is to say -- you refer to the segments or the verticals. And, of course, that is -- although the general capacity utilization may not be yet more on the contraction, not reinvestment level, but there are several verticals that are quite strong at the moment and drive demand. I'd just name a few. The obvious one, I guess, on everybody's lips is the defense segment. So that has been, of course, a topic for quite a while already. And in the third quarter, we not only saw more opportunities in the funnel, but we started to also see quite a few actual orders in that segment. That is a clear example. There are other areas where the long-term investment trend for other reasons than just productivity or capacity utilization are strong and maybe aviation is another example of where there's quite a lot of investment activity. And there are a few others. And that, of course, is one of the key reasons why we continue to have a solid order intake there. And then, of course, finally, I would also say similarly in the Port segment, when we talk about larger investments or bigger projects, particularly in the process crane side, they tend to take quite a while to decide and for the customers to make the investment decision and then place the order. And therefore, it is not always exactly easy to forecast or predict. And secondly, not always exactly in line with the macroeconomical indicators. Daniela Costa: And the second one just on Port Solutions. I think in many calls before, you've talked about sort of the opportunity or on the whole STS situation in the U.S. with replacement of Chinese cranes and tariffs there. But the U.S. is just proposing an even bigger scope of what they could be putting in terms of tariffs on China. I know about a year ago, you said that you were building the supply chain domestically there for the STS. Can you talk a little bit about, let's assume, this 100% on STS and the 150% in the remaining port equipment would go through? Where do you stand now in terms of building the capabilities to supply and to get a share of this opportunity domestically? And are there any side effects elsewhere in the world where you're seeing any increase in competition from the Chinese? Just give us a picture of how this has changed given the scope seems to be changing of what will be included there? Marko Tulokas: Maybe I'll start and then you complement in case I forgot some part of the question. First of all, the recent development in those tariffs that was early -- announced in early October, they're, of course, not yet, in our understanding, completely clear on what is the scope of application. And secondly, what is actually how much tariffs are being applied. So there is a certain uncertainty and, of course, what will be the final solution. And that, of course, is for us and also the market, something that needs to be and must be clarified in the end. But that doesn't take away the essence of your question, which was that have we been preparing? And the answer is that, yes, we continue to prepare for the possibility to manufacture in the States. And we have been looking, mainly based on subcontractors and utilization of our own existing facilities and the industrial team that we have in the States, which is more than 2,000 people today in several manufacturing sites. So we have an opportunity to explore that, too. But that is the local U.S.-made scope. There is that, let's say, gradual up parcel or move to that direct -- to that eventual outcome, which means that there are products that would be manufactured in Europe or other parts of Asia. And there, we have even more activities going on and readiness for supplier as it is already today. I recall that your last part of your question is that, do we see increasing activity elsewhere? Then to some extent, might be the right answer, and that is maybe more towards the other parts of Asia as well as in the Southern Hemisphere. Teo Ottola: Yes. Maybe to add on this competition elsewhere topic that, of course, if we talk about the STS', so we will need to remember that the market share for the Chinese competitor is also globally very high. So that this, of course, in a way, it may increase the competition elsewhere, but the market share already is there for the competition also outside of the U.S. And then if one takes a look at the RTGs, so there the situation is that the, let's say, our relative market share in the U.S. is significantly bigger than what it is for STS'. So there, on the other hand... Marko Tulokas: And it would be the same elsewhere also. Teo Ottola: Yes, and would be the same elsewhere. So that these 2 products are from this geographical split point of view, a little bit different. Marko Tulokas: Yes. Operator: The next question comes from Panu Laitinmäki from Danske Bank. Panu Laitinmaki: I have 2. Firstly, on the margin outlook. So, obviously, Q3 was strong and had some one-off positives that you mentioned, and it was above your long-term target. But how should we think about kind of Q4 and going forward, given that you kept the guidance where the low end of having margins at the same level as last year would imply quite, let's say, lower margin for Q4, if I would read it kind of directly? So, yes, could you explain how should we expect margins to develop going forward? Marko Tulokas: Maybe you start with this, Ottola. Teo Ottola: Okay. I can. So, yes, the short answer to the question that do we expect the fourth quarter margin to be equal to the third quarter margin? So no. So we are expecting fourth quarter to be lower than the third quarter. Third quarter was high. And, of course, there are these topics that we were discussing, there is about EUR 10 million or so, let's say, clear one-offs, one can say the product mix was very good. So this is maybe not a one-off, but doesn't necessarily repeat itself as such. And then the productivity or efficiency or execution, whichever word we want to use, was particularly good in the third quarter. So maybe from that point of view, Q3 was a little bit of exceptional. Other than that, of course, unfortunately, other than what we have in the guidance and what now concluded between, let's say, our expectation on Q3 versus Q4, we are not -- or we have -- we do not communicate more on that, unfortunately. Panu Laitinmaki: Okay. Maybe another one is on the order intake outlook. So, I mean, it's a bit mixed if I listen to you, you say that there are less new cases coming to the pipeline and you flagged increased uncertainty in the market. But on the other hand, we saw pretty good orders in Industrial Equipment and you mentioned these strong verticals. So, I mean, what should we expect going forward? So is it kind of driven by these strong verticals better than the macro implies? Or are you seeing some pressure from macro going forward? Marko Tulokas: Yes. Of course, when we look at these new sales case trends and so forth, that tends to fluctuate a bit month after month, so that's maybe something not to put too much attention. But generally speaking, the -- and it's good to remember that we operate in so many customer segments that quite well kind of evens out these fluctuations in the different segments. And now we are held with certain strong segments that are making up for that, let's say, general somewhat more fluid picture. But what can just be simply said that our sales funnels in the industrial side, and I understand you were more referring to that are stable and they are on a good level on average. Teo Ottola: And maybe to build on that one, I mean, like you pointed out, so the sales funnels are basically stable and the number of new cases is slightly down. I mean, if there's nothing major there. But actually, the average size of the case is slightly up. And that's why the funnel as a whole looks fairly stable despite all macro discussion and topics that there are. Operator: The next question comes from Antti Kansanen from SEB. Antti Kansanen: It's Antti from SEB. A couple of questions from me as well, and I'll start with something that Teo, you said on the EBITA bridge that you flagged that you had maybe a temporary benefit from tariff-related price hikes. So I didn't fully understand what you mean by why would you benefit first? And what were you referring then on the cost impact that might come later? So a bit more clarity on that one, please? Teo Ottola: Yes. The reason is that, when we are increasing the prices at the time when we start to import the goods to, for example, in this case, to the U.S. So first of all, we have old inventory in the U.S., which is with the old prices. That's one thing. And then the other thing is that, when you are using average price in the inventory, so it tends to be so that the material consumption comes through at a different time when the sales number actually comes. And this may create a mismatch, which we are here also seeing. So that's good when it works like this. But then the reality is that, as we have not tried to gain anything on the tariffs as such. So, of course, the disadvantage will be coming a little bit later. It can take a while, depending on the component that we are talking about. In Service, it will come quicker. In Equipment, it will come a little bit later, but it will balance itself over time. Antti Kansanen: Okay. But it doesn't sound like this would be a kind of a major driver for any margin fluctuation that we're seeing, for example, on the Industrial Equipment side, which was obviously a big step-up from the second quarter and maybe there will be a bit of a step down, but this is not a massive driver on the margin? Teo Ottola: The overall number, like I said, is less than EUR 5 million, and it is split basically between Industrial Equipment and Service. So from that point of view also, it's not a massive driver. Plus it will not probably vanish in 1 quarter. Marko Tulokas: Right. Teo Ottola: So it will take a little bit -- it's like a rolling in a way, impact because of the average price that we, in practice, have from the inventory management point of view. Antti Kansanen: Okay. And maybe a second kind of clarification, the EUR 10 million or so that you're kind of flagging as say, EBITA one-offs this quarter. That's mainly on Industrial Equipment, impacting mainly the Industrial Equipment division. Am I correct? Teo Ottola: That is correct. So actually, the tariff-related price tailwind that we just discussed is more in Industrial Equipment than in Service, exactly because of this thing that the impact comes through quicker in Service and slower in Industrial Equipment. And the R&D grant, which is the other big topic is primarily within Industrial Equipment. Antti Kansanen: Okay. And then the second question, maybe this is a similar topic, but project execution on the port side. If I remember correctly, I mean, the previous quarter margins on the ports were very good as well compared to the history. I didn't remember that you flagged mix back then, but that was also kind of a good execution and now continues on the port side. Is there something that we should maybe see as kind of a structural improvement, something that we can extrapolate going forward? Or are we still kind of wait and see whether this is sustained? Marko Tulokas: Well, I'll start again then. First of all, in the ports execution, I mean, always one thing that happens, these are big projects. And when you deliver a big project, of course, you make certain provisions for that project risks. And this execution in this particular quarter, some of those provisions were released. And hence, that's also relative to the sales. So the volume impact wasn't as big. It has some mix impact. But the underlying reason is the same that our project execution has been on rather conditions. There isn't or hasn't been recently any significant, let's say, difficult projects. That, of course, in the nature of the business cannot guarantee that that would not happen at all. But I think our project management capabilities already over the last few years have been improving kind of consistently. And in that way, we are kind of confident that we can do that quite well now. But it doesn't remove the fact that, I mean, in that sort of business that there is some risk involved also. Teo Ottola: Yes. The main point from our point of view is, of course, to be able to have this improvement trend so that, of course, every now and then a quarter is better and then maybe also worse. But when the trend is in the right direction from the project execution point of view, so then things are good from our point of view. From the mix point of view, there probably isn't anything structural that would need to be taken into consideration. We have, of course, consistently been saying that we want to grow more in port services than in other areas there. But as long as we have good order intake from the Equipment point of view, so this will not be visible in 1 quarter or maybe even in 1 year so that this is a much longer sort of project to change that structure. Antti Kansanen: Okay. Then last one for me is on the order side. I mean, I guess there was a couple of bigger ones that you flagged both on Industrial Services, on the process crane side, obviously, on the ports as well. Was this a bit of an active quarter in terms of big projects? And is there something explaining the timing? Or am I just reading too much into it? You also mentioned that the average case size is growing. So was this a particularly active big project quarter for some particular reason or just a coincidence? Marko Tulokas: I mean, coincidence is maybe not the word that I would use, of course, it's part of a consistent and continuous work and working on the funnel and the timing of the orders because the customer-related reasons sometimes, of course, happens. It's not entirely under our control for sure. Maybe I'll answer that mainly related to the process crane business, and you see that the process crane business orders particularly was good. And in that case, I'd say that we had, in the same quarter, several quite successful larger projects, whether it is in power or aviation, or to some extent, also elsewhere. So that is maybe a slightly larger than usual quarter, but that doesn't take away that both in the ports and in the industrial process crane side, there are still further opportunities in the funnel also. This is just timing-wise, particularly in process crane good quarter. Teo Ottola: I would say that it would be a little bit difficult to find the connection between the decision-making timing and something that has happened in the world from the macro point of view or even from the macro point of view to us so that coincidence is not the right word, but there is probably not a big scheme behind that would explain this timing. Marko Tulokas: If you find, please least let us know. Antti Kansanen: I'll do that. Operator: [Operator Instructions] The next question comes from Tom Skogman from DNB Carnegie. Tomas Skogman: This is Tom from DNB Carnegie. Sorry for asking about the margin guidance, but I mean, the January to September margin is already 1 percentage point higher than it was 1 year ago. So is there any reason you did not change the guidance in group that we should be aware of as a risk element for Q4? Marko Tulokas: Maybe, Tom, since they asked the previous related question also, you can start on this, too. Teo Ottola: There is -- we are not expecting anything dramatic in the fourth quarter that would be somehow deviating from the normal course of business significantly. I guess that it is rather that we would be saying that the third quarter was a little bit on the higher side because of the topics that we have been discussing. So fourth quarter -- this year's fourth quarter, like many other years' fourth quarters as well. So it is a combination of primarily of mix and then, of course, the underlying volume. And this balance is then, of course, very important from the margin development point of view as well. Tomas Skogman: Okay. If then looking at kind of building blocks for 2026, I would just like to get a bit of clarification when I do my own EBIT bridge. So to my understanding, there is no cost-cutting kind of program ongoing for next year. So what do you -- what would you like to guide when it comes to fixed costs? And this modularization of products, is that kind of rather a negative or a positive next year as you have indicated you have both the new and the old generation of products in manufacturing next year? Marko Tulokas: I didn't quite get the last part, so I'll let Teo answer that. But the first part when it comes to the fixed things, we first -- we don't guide the fixed cost per se, but there is some tail end of this industrial restructuring program also remaining. And, of course, when it comes to fixed cost, we are closely observing the demand environment. And we have also, during this year, made adjustments to the organization as needed based on the demand environment. Teo Ottola: I guess the other question, if I understood Tom correct, was that is the product renewal/launch in Industrial Equipment going to be a positive or a negative for '26 in comparison to '25? Marko Tulokas: Sorry, Tom, I didn't quite get that. So yes, first of all, those launches are now progressing basically to the second launch year. And during this year, the launch has been towards the second half proceeding all the time better. So I mean the amount of products that we are converting is catching up is probably a good way to say it. So that is proceeding quite satisfactorily, I would say. And now we have in all 3 regions, the new viral posts available also. So in that sense, the readiness is there. It is -- as I think I explained also last time when you have a new product, you run in manufacturing for some time, you will run 2 products in parallel. And that, of course, has the tendency to increase manufacturing cost. And secondly, you have some product cost, variable cost-related timing to catch up with the old legacy product that has been in the market for quite a while. In both accounts, we have still next year, some costs on the new product that are higher than the existing product. But we are moving ahead quite well on that, and we are -- we have been kind of preparing for that for the most part. So I wouldn't take that as a very significant consideration. Tomas Skogman: Okay. And then the big tariffs on RTG cranes, I don't understand why we discussed so much the STS cranes. I mean, isn't the RTG crane the big opportunity for you in the U.S. I mean, that is much more high-margin products than STS cranes and the Chinese companies have been very strong there as well. And in that product, you have already set up to deliver quickly basically. Marko Tulokas: Yes, that is true. At the same time, it is -- although we don't exactly comment on the competitors' market share in the region, but the Chinese competition in this case is not as big on the RTGs as it is on the STS. That's maybe the main reason to your -- or the main answer to your questions. Tomas Skogman: But do you expect kind of a clearly increased market share in RTG crane orders in '26 and '27 if the current tariffs are holding up basically? Marko Tulokas: No, I think, like I said, the Chinese competition where this is facing, of course, is not big on RTGs in the same way as they are on STSs. That's probably as much as we can say on that market topic. Tomas Skogman: You don't want to disclose at all what -- I understood that the Chinese have not 50% of the market, but 30%, 40% of the market in the U.S. Isn't that right? Marko Tulokas: Not in the RTGs. Not on the RTGs. Tomas Skogman: Okay. Then finally, on electrification, it's like a big theme. Do you have -- all companies that operate within electrification show pretty good growth at the moment. But what of these ones are big end customers to you that you see that they are expanding and ordering cranes from you? Marko Tulokas: Did you say -- I think the line is a little bit bad. Did you say what are the big customers... Tomas Skogman: Electrification -- just generally, electrification is a very strong sector when we look at the engineering. And you have a lot of sales -- I mean, it could be Hitachi, it could be ABB or Siemens or whatever, but what type of products do you see strong demand? Marko Tulokas: Okay. So you're asking our demand from that segment that benefits from the electrification. Sorry, I misunderstood. I understood our electrification of the products now I heard that, of course. Yes. I mean, of course, that is one demand driver that when the whole world is more moving towards electrification, automation and in that way, more sustainable, then that drives demand in different ways, more directly and indirectly. And this indirect demand that is coming from the investments to the more sustainable machines and so forth is driving also demand in these customer segments. They are, however, generally speaking, not as large or as big crane users as many others. But it is true that we -- you can see that positive demand in also in those segments and in some cases, also quite large pieces of equipment. So, I guess, the answer to your question is that, yes, that is certainly a one demand driver also. Tomas Skogman: And what about gas turbines? They are investing massively at the moment, for instance, the gas turbine manufacturers. Marko Tulokas: Gas turbines is one way, of course, I mean, besides wind and nuclear and hydro and a number of other things are one way of generating the electricity. We have seen it historically also that demand moving from one technology to others. And now it is more maybe on that gas and, of course, the wind and nuclear and so forth. So that is true. But on the other hand, it is then being -- there is a reduction on the other side at the same time in the other technologies. And those are typically the users for those sort of equipment for gas turbines, there are other large pieces of equipment or bigger projects because of the technology involved. Operator: The next question comes from Mikael Doepel from Nordea. Mikael Doepel: Just a follow-up on the order intake here. So, I guess, what you're saying is that you had a few big orders in the quarter across the key segments -- basically across all segments actually. But you're also saying that you have a fairly good pipeline of projects, both in Ports and Industrial. Just trying to get my head around looking at the numbers in Q3, EUR 1.1 billion, how would you describe that? Is that normal in your view? Or is it exceptionally strong? Or how should we think about the level of orders in the quarter and when we think ahead from here? Marko Tulokas: I mean, you're referring to quarter 3 now or the following quarter… Mikael Doepel: Yes. Exactly. Marko Tulokas: Yes. I mean that was the same topic that we discussed a moment ago. So I would maybe reiterate, first of all, the really strong funnel is maybe not what we said earlier. So we have a stable funnel and there are opportunities, large opportunities also in the funnel as there has been on the first half of this year. So that hasn't per se changed. And it's a timing question when those actually realize. That is not something extraordinary. They have always existed there and it's just more -- are kind of timing-related topic that when they actually mature and so forth and now particularly for the industrial side of things. So it is -- it was a good quarter also from a bigger project point of view and hence, the large order intake. But as it was stated by Teo also earlier, we had a rather stable order intake in the other -- very stable order intake in the other areas, broadly speaking, too, and growth in the agreement base and growth in basic service, too, which is in that way, many way, the very important thing also or most important thing. Mikael Doepel: Okay. And on that topic, actually, I missed what Teo said in the beginning on Industrial Equipment when you talked about the sequential order intake increase. If you just could repeat that, please, in Industrial Equipment? Teo Ottola: Yes. Sequentially, we actually had a very big increase in process cranes. So in the heavier side, we were more or less flat on the components. So -- and then the standard cranes were slightly down. So standard cranes were actually down both sequentially and year-on-year, whereas then process cranes this time have done well in the third quarter. So it was up both year-on-year as well as Q-on-Q. Marko Tulokas: With not a very good year last year. Teo Ottola: With -- maybe against easier comparables, that is correct. And components, which is maybe the most important one, taking a look at it from the demand point of view, has been, let's say, up year-on-year and flattish sequentially. So, I mean, very hard to conclude anything significant from that one either. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Linda Hakkila: Thank you very much for all your questions. We have covered a lot of different topics, but I would still have one question left here in the chat. So, can you please talk about the ship-to-shore cranes opportunity? Where can you produce outside of China? And do you need any additional CapEx to start new production? Or is it possible to use the existing plants? Marko Tulokas: Well, for the STS cranes, we have and we have had also the possibility to produce those products also in this time zone in several places. And there are 2 locations in APAC and Southeast Asia, where we have also working on a subcontracting-based model to produce STS cranes. So that is nothing new as such. So that is a typical thing for us that we have to make sure that we have several kind of channels in place all the time. Now because of this situation, we have been, of course, accelerating those activities or those projects to find the subcontractors. Linda Hakkila: Thank you, Marko. I think this concludes our session today. So I want to thank you all for following our webcast, and I want to thank Marko and Teo and wish you all a lovely evening. Thank you. Marko Tulokas: Thank you very much. Teo Ottola: Thank you very much.