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Operator: Good day, and welcome to Phillips Edison & Company's third quarter 2025 earnings call. Please note that this call is being recorded. I will now turn the call over to Kimberly Green, Head of Investor Relations. Kimberly, you may begin. Kimberly Green: Thank you. I am joined today by our Chairman and Chief Executive Officer, Jeffrey S. Edison, President Robert F. Myers, and Chief Financial Officer John P. Caulfield. Following our prepared remarks, we will open the call to Q&A. After today's call, an archived version will be published on our Investor Relations website. Today's discussion may contain forward-looking statements about the company's view of future business and financial performance, including forward earnings guidance and future market conditions. These are based on management's current beliefs and expectations and are subject to various risks and uncertainties as described in our SEC filings, specifically in our most recent Form 10-Ks and 10-Q. In our discussion today, we will reference certain non-GAAP financial measures. Information regarding our use of these measures and reconciliations of these measures to our GAAP results are available in our earnings press release and supplemental information packet, which have been posted on our website. Please note, we have also posted a presentation with additional information. Our caution on forward-looking statements also applies to these materials. Now, I would like to turn the call over to Jeffrey S. Edison. Jeff? Jeffrey S. Edison: Thank you, Kim, and thank you, everyone, for joining us today. The PECO team is pleased to deliver another quarter of solid growth. Given the continued strength of our business, we are pleased to increase our guidance for NAREIT and core FFO per share. The midpoints of our increased full-year 2025 NAREIT and core FFO per share guidance represent a 6.8% growth and a 6.6% growth, respectively. I would like to thank our PECO associates for their hard work in maintaining our unique competitive advantages and driving value at the property level. The market continues to focus on tariffs and U.S. economic stability. As it relates to PECO's grocers and neighbors, we continue to feel very good about our portfolio. PECO has the highest ownership percentage of grocer-anchored neighborhood shopping centers within our peer group. 70% of our ABR comes from necessity-based goods and services. This provides predictable, high-quality cash flows and downside protection quarter after quarter. This also limits our exposure to discretionary goods, which we believe are at risk of greater impact from tariffs. PECO continues to deliver strong internal growth. Our neighbors benefit from their location in the neighborhood, where our top grocers drive strong foot traffic to our centers. We have high retention and strong leasing demand from retailers wanting to be located at our neighborhood centers. And we continue to see a healthy pipeline for development and redevelopment. In addition, the PECO team continues to find smart, accretive acquisitions that add long-term value to our portfolio. Including assets and land acquired subsequent to quarter-end, this brings our year-to-date gross acquisitions at PECO share to $376 million. A few shout-outs for the quarter: The operating environment and PECO's ability to deliver growth continues as it has for the past several years. Our leasing activity and occupancy remained very strong. We continue to operate from a position of strength and stability. Moving to the transactions market, activity for grocery-anchored shopping centers remains competitive. The strength of our activity in the first half of the year allowed us to be more selective in the second half. We remain committed to our unlevered return targets, and we remain confident about our ability to deliver on our full-year acquisition guidance. Including acquisitions closed after the quarter-end, we acquired $96 million of assets at PECO's share since June 30. This activity includes two unanchored centers. These centers offer reliable fundamentals similar to our core grocery-anchored properties with a stronger long-term growth profile. They are located in the same trade areas as our grocery-anchored centers, growing suburban markets with strong demographics. With a focus on everyday retail, neighbors located at these centers are delivering necessity-based goods and services within their respective communities. We will share more details on why we believe these everyday retail centers are a natural complement to PECO's long-term growth strategy during our upcoming virtual business update. This webcast is planned for December 17. We also continue to make great progress with our joint ventures. During the third quarter, our JV with Lafayette Square and Northwestern Mutual acquired The Village at Sand Hill. This is a grocery-anchored shopping center located in a Columbia, South Carolina suburb. Our pipeline for the fourth quarter and 2026 also includes additional assets for our JVs. Lastly, we are actively expanding our development and redevelopment pipeline. We build in our parking lots and acquire adjacent land to our centers. And this quarter, we acquired 34 acres of land in Ocala, Florida. While it is too early to share details of this project, we are working with partners to build a grocery-anchored retail development. As you know, these take a long time. We will share more details on this project as we are able to update you. We are very pleased with our results for the quarter and our outlook for the balance of 2025. And we are actively growing our leasing and transaction pipelines for 2026. We believe we are the most aggressive operator in the shopping center space. The PECO team is continuously looking for opportunities to grow our business better. We look forward to updating you on our long-term growth plans during our December 17 business update. I will now turn the call over to Bob. Bob? Robert F. Myers: Thank you, Jeff, and thank you for joining us. PECO continues to deliver strong leasing activity driven by our grocery-anchored neighborhood centers and necessity-based neighbor mix. This momentum is clear in our operating results again this quarter. Our neighbor retention remained high at 94% in the third quarter while growing rents at attractive rates. High retention rates result in better economics with less downtime and dramatically lower tenant improvement costs. PECO delivered record-high comparable renewal rent spreads of 23.2% in the third quarter. Comparable new leasing rent spreads for the quarter remained strong at 24.5%. Our continued strong leasing spreads reflect the strength of the retail environment. We expect new and renewal spreads to continue to be strong for the balance of this year and into the foreseeable future. Leasing deals we executed during the third quarter, both new and renewal, achieved average annual rent bumps of 2.6%. This is another important contributor to our long-term growth. Portfolio occupancy remained high and ended the quarter at 97.6% leased. Anchor occupancy remained strong at 99.2%, and same-store inline occupancy ended the quarter at 95%, a sequential increase of 20 basis points. Given our robust leasing pipeline, we expect inline occupancy to remain high throughout the remainder of the year, which is very positive. As it relates to bad debt in the third quarter, we actively monitor the health of our neighbors. Bad debt remains well within our guidance range. We are not concerned about bad debt in the near term, particularly given the strong retailer demand. We continue to have a highly diversified neighbor mix with no meaningful rent concentration outside of our grocers. Turning to development and redevelopment, PECO has 22 projects under active construction. Our total investment in these projects is estimated to be $75.9 million, with average estimated yields between 9-12%. Year-to-date, 14 projects stabilized through September 30. This represents over 222,000 square feet of space delivered to our neighbors and incremental NOI of approximately $4.3 million annually. As Jeff mentioned, we continue to grow our pipeline of development and redevelopment projects. This activity remains an important driver of our growth. I will now turn the call over to John. John? John P. Caulfield: Thank you, Bob, and good morning and good afternoon, everyone. Our third quarter results demonstrate what we have built at PECO, a high-performing grocery-anchored and necessity-based portfolio that generates reliable, high-quality cash flows. As Jeff said, the PECO team continues to operate from a position of strength and stability. Third quarter NAREIT FFO increased to $89.3 million or $0.64 per diluted share, which reflects year-over-year per share growth of 6.7%. Third quarter core FFO increased to $90.6 million or $0.65 per diluted share, which reflects year-over-year per share growth of 4.8%. Turning to the balance sheet, we have approximately $977 million of liquidity to support our acquisition plans. We have no meaningful maturities until 2027. Our net debt to trailing twelve-month annualized adjusted EBITDAR was 5.3 times as of 09/30/2025. This was 5.1 times on the last quarter annualized basis. As Jeff mentioned, we are pleased to update our '25 guidance. We are reaffirming our guidance range for 2025 same-center NOI growth. This reflects solid full-year growth of 3.35% at the midpoint. As we have said previously, the timing of our same-center NOI growth in 2024 presents difficult comparisons to 2025. Specifically, the recoveries in 2024 were weighted to the fourth quarter, whereas they are more even quarter to quarter in 2025. Our current forecast for 2025 reflects same-center NOI growth between 1-2%. We estimate this growth rate would have been closer to 3% if the recoveries in 2024 were more evenly distributed. While we are not providing 2026 guidance at this time, I will remind everyone that we believe this portfolio can deliver same-center NOI growth between 3-4% annually on a long-term basis. As Jeff mentioned, our increased guidance for 2025 NAREIT FFO per share reflects a 6.8% increase over 2024 at the midpoint, and our increased guidance for 2025 core FFO per share represents 6.6% year-over-year growth at the midpoint. Our guidance for the remainder of 2025 does not assume any equity issuance. Importantly, our FFO per share growth is a function of both internal and external growth. PECO is not dependent on access to the equity capital markets to drive our strong growth. As it relates to dispositions, the PECO team plans to sell $50 million to $100 million of assets in 2025. Year-to-date, including activities subsequent to quarter-end, we sold $44 million of assets at PECO share. The private markets are more appropriately valuing anchored shopping centers than the public markets. This gives us an opportunity to lean into portfolio recycling. We have an active pipeline for the fourth quarter, and we have plans to do even more in 2026. We plan to share more details during our December 17 business update. Long-term, the PECO team is focused on recycling lower IRR properties into higher IRR properties to help drive strong earnings growth. We believe that performance over time and consistent earnings growth should be rewarded in the capital markets. We also reaffirmed our 2025 full-year gross acquisitions guidance. We believe our low leverage gives us the financial capacity to meet our growth targets. We have diverse sources of capital that we can use to grow and match fund our investment activity. Match funding our capital sources with our investments is an important component of our investment strategy. We continue to believe the PECO platform is well-positioned to deliver mid to high single-digit core FFO per share growth on an annual basis. We also believe that our long-term AFFO growth can be higher as more of our leasing mix is weighted towards renewal activity. We believe our targets for growth in core FFO and AFFO will allow PECO to outperform the growth of our shopping center peers on a long-term basis. We look forward to updating you on our long-term growth plans during our December 17 business update. In addition to what Jeff mentioned, we plan to share preliminary 2026 guidance. We also plan to share new analysis and insights related to our unanchored investments or everyday retail centers. We look forward to updating you on our internal and external growth plans. With that, we will open the line for questions. Operator? Operator: Thank you. For any additional questions, please re-queue. And your first question comes from the line of Andrew Reel with Bank of America. Please go ahead. Andrew Reel: Good afternoon. Thanks for taking my questions. First, can you just share more on your thinking around acquiring development land at this point in the cycle? Why is right now the right time to pursue opportunities like this? And are you evaluating other ground-up development sites at this point in time? Jeffrey S. Edison: Well, Andrew, thank you for the question. Bob, you want to talk a little bit about this specific project? Robert F. Myers: Yes, absolutely. Thanks, Jeff and Andrew. Thank you for the question. We are really excited about this opportunity. We had a nice partnership with a national grocer that was interested in the growth aspects of Southern Ocala, 10,000 new homes in residential opportunities coming into the market over the next five years, a lot of positive growth. It's going to be a 34-acre site. And we will end up selling part of it to the grocer, and then we will have seven outparks available for us to continue to do what we do year over year. I mean, we have developed 51 out parcels in our portfolio over the last five years. And we will either do ground leases or build to suit. So this is kind of a one-off scenario. Will we continue to look for sites in the future? Yes, if it makes sense. In this particular asset, we are going to deliver about a 10.5% unlevered return. So we feel really good about not only being some of the landlord's largest of the retailers' largest landlords, but this is a great opportunity for us to step in, in the right market. Andrew Reel: Okay. Thank you. That's helpful color. And then if I could just ask a follow-up. Could you maybe just provide more detail on the makeup of your current acquisition pipeline and just how much more incremental volume could you potentially close before year-end? I know Jeff, you had mentioned you're being a little more selective in the second half now. So just curious on where we might shake out relative to the acquisition range. Thank you. Jeffrey S. Edison: Yes. I'll give you and Bob follow-up as well. The way we're looking at it, kind of given you guidance. We're pretty comfortable. We're going to meet the bottom end since we're already about $25 million above the bottom end of the raise that we've given. And we continue to see good product and we're continuing to see a volume of product that we feel comfortable will be in good shape, but in terms of our ability to buy. As you know, going quarter by quarter is a little bit difficult because stuff moves month or two and that's just the closing process. So it's always a little bumpy. Feel really good about the products we bought. We had a really great first half. It's a little slower, but I would tell you that we feel good about what we're getting. And we bought $400 million the midpoint is about $400 million this year. It was $300 million last year. Pretty good that's a pretty good increase. And we see that continuing to happen. So Bob, anything else on the Robert F. Myers: Yes. I would like to add that we've acquired 18 assets this year for $376 million and we do have deals that have been awarded and under contract to close before year-end. So we feel really good about we're going to be well within the range. The other thing I would mention is just we're delivering unlevered returns above a nine in all these categories. So we feel real good about the acquisitions. The other thing I would mention is these blend to like a 91.5%, 92% occupancy going in. And when you look at our portfolio at 97.7 this continues to give us internal growth in the future for same-center NOI growth. So it is it's a dual path in terms of growing earnings and NOI. We're really excited about what we've acquired so far and early indications would suggest that we're operating them extremely well and we're getting continued leasing momentum. Andrew Reel: Okay. Thank you very much. Jeffrey S. Edison: Thanks, Andrew. Operator: Your next question comes from the line of Caitlin Burrows with Goldman Sachs. Please go ahead. Caitlin Burrows: Hi, everyone. Maybe sticking on the acquisition side. So looking at leverage now, it's at 5.1 times, which say is totally reasonable. But I guess it sounds like going forward, you might be in or willing to increase leverage. So wondering if you could discuss for a little bit what the kind of upper level is on leverage and how you think about that as a funding source? Jeffrey S. Edison: Yeah. Caitlin, I'll I'll give you an John follow-up as well. What we've said and continue to believe is we want to be in that 5.5% or below range debt to EBITDA on a long-term basis. And we are we'd be willing to move around that if we had a clear vision of bringing it back down into that sort of mid to the mid-5s to lower 5s. And we're very happy with where we are. We've got good capacity to continue to grow our acquisition. Program. And so it's it's nice to be where we are right now. And if the opportunities come, as as you know, we're prepared to take advantage of them if we can. Anything else John? Nope. I think that's good. Operator: And then just, as the other kind of source of funds, it sounds like you might lean more into dispositions. And so if we look at the you guys have done historically, you do give great disclosure on the cap rates of the acquisitions versus dispositions. Historically, the dispose have been at higher cap rate. So I was wondering going forward, are there assets that you would be, I don't know, maybe newly looking to sell that would make that process accretive? Or how are you thinking about that acquisition disposition cap rate and kind of the types of properties you'd be looking to sell and who the buyers are and what they're willing to pay for them? Jeffrey S. Edison: Yeah. John, you wanna talk about them? John P. Caulfield: Sure. Thanks, Caitlin. So I think the dilution or accretion on their cycling of assets is going to depend on the mix of assets sold and acquired. I mean, as you know, we are IRR buyers and sellers. So we believe that right cycling will be beneficial to our earnings per share over time. And as owners of about 8% of the company, that's really important to us. So I I think as we look at it in terms of we are achieving victory on a lot of these. We've already sold some some properties this year, and we're gonna look to do that. But ultimately, mean, repeat, we believe we can do mid to high single digit FFO per share growth. And although we're not giving guidance until December, I think that is going to be true in 2026 as well. So not exactly answering your question because it's gonna depend upon the mix of the timing of the closing, but but we're managing that very closely. And the relationship you're describing has been true historically, I think it's gonna tighten and improve as we look forward, but it again, it depends upon the mix. Caitlin Burrows: Thank you. And Caitlin, would just add, I mean, I think the way we think about it is we're going to be trading out of lower growth for higher growth properties and that is the strategy of the disposition program. There is some derisking in that, but mostly it's going to be trading to areas where we can get more growth. Operator: Your next question comes from the line of Haendel St. Juste with Mizuho. Please go ahead. Ravi Vaidya: Hi there. This is Ravi Vaidya on the line for Haendel. Hope you guys are doing well. I wanted to ask about redevelopment here and broader redevelopment pipeline. What's your target size for this to be? And how should we consider funding? Is this need primarily through free cash flow or through further dispositions? Thanks. Jeffrey S. Edison: Okay. Ravi, when talking about that, are you talking about all of our redevelopment, including the outlawed stuff that we're doing? Or is that what you're you're focused on there? Ravi Vaidya: Yeah. Both ground up new development and redevelopment of existing pads or any k. Outlook kinda work. Great. Okay. Jeffrey S. Edison: Bob, you wanna take that? Robert F. Myers: Yeah. No. Absolutely. I appreciate the question. So over the last three or four years, we've generated between $40 million and $55 million in our ground-up redevelopment bucket. And those years we were solving for between a 9-12%. We find that this is a wonderful complement to our same NOI growth and we are hopeful to get 100 to 125 basis points towards it through this pipeline. We have a nice pipeline out for the next three years that would be consistent of approximately $50 million to $60 million a year. To contribute to that. So we don't see anything slowing down on the development side or redevelopment side, and we've seen a lot of success with generating solid returns. Got it. That's helpful. And maybe just one on the on the bad debt Would you say that this quarter's, you know, bad debt expense in the current tenant credit landscape is that appropriate to consider as a a run rate going forward into fourth quarter and into '26? Thanks. Jeffrey S. Edison: John, you want to take that? John P. Caulfield: Sure. Thanks, Ravi. So I would say that, yes, I think that, when you look it, whether it be on the same store, total portfolio, we've been between, let's say, seventy five and eighty basis points. I do know that the midpoint of our guidance range is 90 basis points. And it's more just giving ourselves a little bit of the elbow room. I will say for the '25 and for '26, we don't actually see the environment materially changing. So we think that, you know, this 70 to 80 basis points in the range that we have is pretty reasonable. I do think that, you know, again, when you look at at PECO's demographics at $92,000, we are 15% above The US median, and our retailers continue to be very, very successful. So our watch list is lower than, anyone else's and very consistent with historical around 2%. And so we feel really good about it, but I think, you know, this is a good run rate as we look forward. Ravi Vaidya: Got it. Thank you so much. Operator: Your next question comes from the line of Ronald Kamden with Morgan Stanley. Please go ahead. Ronald Kamden: Hey, thanks so much. Just going back to sort of the occupancy and more of the inline occupancy here. You're getting good retention rates. You're you're pushing rents. Remind us what the message is to the team, how much more occupancy upside you sort of think that is there? Is there? And just strategically, how are you guys messaging sort of pushing rents here? At the expense of retention rates? Thanks. Jeffrey S. Edison: Sure. Bob, you want to grab that one? Yeah, absolutely. So thank you for the question. So currently, we're at like 94.7%. And we believe that we can generate another 125 to 150 basis of inline occupancy. The demand and the retailer interest that we're seeing in all the meetings in our national account team shows very good momentum. The visibility I have out for the next six months, seven months with our pipeline would suggest that we should move in that direction. So feel very good about moving the needle on inline occupancy. I think in terms of growing rent, on the renewal question, in particular at 94% retention, that's a very solid retention number. And I think last quarter, we spent $0.60 a foot in tenant improvements In this quarter, we spent $1 to generate 23.3% renewal spread. So we feel very good about the retention at 94% and the current spreads we're seeing. So again, I don't see any new supply coming online to compete with that. And I think we'll just keep our neighbors profitable and healthy and look towards the future. I don't see anything slowing down. Great. And then if I could ask a quick follow-up, just on the unanchored centers We talked about it last quarter, but as you're sort of looking at more of the opportunities, just what's the update in terms of the opportunity set and sort of the conviction in that strategy? Thanks. Robert F. Myers: Yes. Another great question. I'm really excited about the strategy. We've acquired eight properties in this category for about $155 million And we've seen very positive momentum operationally. I believe our centers currently from what we paid, were about $300 $3.00 $5 a foot. We are seeing unlevered returns between 10.5-12% early indications. We're seeing new leasing spreads above 45% and renewal spreads above 30%. So again, we're going to continue to define the criteria. You'll hear more about this in our December update. But early indications this is going to be a great complement to growing our same-center NOI in the future. So we're really excited about it. Jeffrey S. Edison: Thank you. Ron, yes, it's a great question. And one thing, I mean, have built a phenomenal team at leasing. This we kind of look at this as just having more neighbors. We have a way of bringing this finding more neighbors that we can put the machine to work on and get these kinds of returns that Bob was talking about. So we're excited about it. Again, it's as you know, it's a small very small piece of the overall portfolio and it's but it's very consistent with our focus on necessity retail and giving the consumer what they want and being locally smart at the property level. So all those pieces are encouraging to us as well as the results Bob talked about. In terms of investment in that product. Ronald Kamden: Really helpful. Thank you. Operator: Your next question comes from the line of Michael Goldsmith with UBS. Please go ahead. Michael Goldsmith: Good afternoon. Thanks a lot for taking my question. My first question, Jeff, is when you said in the prepared remarks about being more selective in the second half. What do you mean by more selective? Are you looking more on price? Is it more on location? Is it more on shopping center formats? Just trying get a sense of of where that selectivity is leading you. Jeffrey S. Edison: I think it's it's it's tougher underwriting. It's not a difference in terms of what we like, what we do. But in terms of underwriting, with the potential risks of the stability of the economy, I think we took a tougher we were tighter on some of our rent spreads. We were tighter on some of our pace of leasing. That's really what I'm saying in terms of volume. And that translates into us offering lower prices than than we would at other times to get to that nine unlevered IRR. And so that's I think that's what slowed down some of our our pace a bit. It's important to know that, I mean, at the midpoint, we're buying $400 million of assets on an individual basis. That's the most I think in the space on an individual basis by far. And we think that that is we that's $100 million more than we bought last year. We're taking our share of the market. And I think we've had it's shows the discipline that we've had for thirty years in this business You've got to be disciplined and you've got to make sure that you're not getting ahead of yourself or too aggressive or not aggressive enough. In the market. And that I think that's what we kind of bring to to the market on that. Michael Goldsmith: Thanks for that. And my follow-up is, right, on the competition, you said it remains competitive. Has gotten any more incrementally competitive in the last quarter? And then just like, if you can provide some color on deals that you don't who are you losing to? Is it is it new yeah. Is it new entrants or or is it kind of the the same folks that are still bidding on I don't yeah, I don't think it's gotten more competitive. I think it's but it's fairly stabilized. I mean, is good demand out there and it is it's the full gamut. I mean, it's some of the REIT peers, it's some of the some institutional players and as well as private players. So you have a pretty wide range of people looking in the space. So that our feeling is that it's kinda it's stabilized at where it is and really has been for the last couple of quarters. And we think that that's kind of going to be is more normalized and probably what we're going to see for the next quarter and certainly or maybe the next few quarters as the and the beauty is with what we've done, we have we look broadly at country and we're looking for that number one or two grocer to buy. And that breadth gives us the ability to find product consistently over, you know, year after year after year. And so we feel comfortable we'll have another good year next year. We're not that's not a concern. It's just it's a little harder shopping to buy than when a lot of others have gotten into the space that we've been in for thirty years. Michael Goldsmith: Thank you very much. Good luck in the fourth quarter. Thanks. Operator: Your next question comes from the line of Omotayo Okusanya with Deutsche Bank. Please go ahead. Omotayo Okusanya: Hi, yes. Good afternoon, everyone. I was wondering if you could just give a view on the outlook for grocers in general. I think, your your sales are going up. But I just but, again, we just gotta hear a lot conflicting noise around you know, more selective consumer, you know, inflation is kind of causing volumes or trips to to grocers to kind of slow down. Just kind of if you just kind of give us an update in general kind of what you're seeing and how you think that space is evolving, we'd appreciate that. Jeffrey S. Edison: Yeah. I I want to take a shot, Bob, to join in as well. From our conversations with the grocers, they continue to see a very resilient customer. And we're not hearing any sort of pullback, any kind of like dramatic concerns. It's kind of business as usual and in some for some of our grocers, see it as really, really positive. I mean, when you talk to publics and HEB and some of the the Trader Joe's, mean, are they are actively growing. And so they see things very positively. And so I would say our feedback overall is that the grocers are thinking long term, they're very positive about what the environment is today and their ability to pass on increases in cost. To the consumer they're always going to be nervous because they're nervous all the time and they should be because it's a tough it's a really tough business. But they're really good at it and they're great partners for us the shopping centers that we have. Omotayo Okusanya: That's helpful. And then how do you think about when we kind of think about sources and uses of capital how does potential stock buybacks kind of fit into the equation at kind of current stock prices? Jeffrey S. Edison: The way we look at it is a tool. Just like selling properties, just like raising public equity. And it's a tool to be used at the right time when you when it's the best investment and the best use of your your free cash flow. So that's the way we think about it. We so it's it's one of the tools and we wouldn't be hesitant to use it at the right time. And But we're not also eager to use it if we particularly environment where we are today where we have really good uses of our capital that we think we can grow significantly. So that's it's a great question and it is one that is part of our sort of regular conversation about where we should be depending on where the stock price is. Omotayo Okusanya: Got you. And then one quick last one for me. How do we think about that position Again, you already had $376 million year to date guidance $350 to $450. I'm just kind of curious whether there's some conservatism in that number or the way 4Q is shaping up. There may not be a lot of deal activity. Jeffrey S. Edison: I would say, $100 million a quarter is pretty decent activity and we'll we that gets us to $400 million for the year. We feel which is the midpoint of the guidance we feel good about that. And I wouldn't be overly feel more a lot more aggressive than that we would we change guidance and we but we don't feel that we won't meet that either. So we're we think the guidance is a pretty good place to be looking at. Operator: Thank you very much. Your next question comes from the line of Todd Thomas with KeyBanc. Please go ahead. Todd Thomas: Hi, thanks. First question, just regarding dispositions. You commented it sounds like next year will be will be higher than this year's $50 million to $100 million target. Is there a segment of the portfolio or kind of a larger portion of the asset base that you ideally would like to recycle out of? Is there any insight around much you might look to sell over time and also whether the plan is to sell assets on a one-off basis or if there could be some larger transactions perhaps given the increased competition that you're saying? Jeffrey S. Edison: John, do you want to take that one? John P. Caulfield: Sure. And then Bob, you can after that. So Todd, I would say that, you know, we're looking at multiple ops because I think we do think that as there is great competition for grocery-anchored shopping centers in the market, there are a lot of them that we've taken to stabilize place. And there are buyers out there that are just interested in more of a completely solved button-up solution. So that is something you're gonna see. I think you will see us sell more next year. It's hard to say because, again, similar to the acquisition timing, it can move quarter to quarter or things like that. I wouldn't say, and this is where Bob will come in, I I wouldn't say we're looking at anything specific on an an individual region or things. It's more the IRRs. It's that if we look at forward and realize that we've taken most of the or achieved most of the growth, in the asset that we will look to sell that. And I think we look to sell it individually or as a portfolio. Bob, anything more? Robert F. Myers: Yeah. I'll just add that I think we'll end up selling between $100 million and $200 million next year. And I believe that it will all be done on one-off basis. So I don't see a portfolio there because we do want to be very surgical being active portfolio managers. So Jeff touched or Jeff and John touched on it, but certainly 100% stabilized assets that when I look at our forward IRRs would generate 6.5-7% returns. We think we can replace those assets with these 9%, 9.5-1 unlevered return deals and pick up 200 basis points in spread over the long term. That's what we're focused on and that will be our strategy. Todd Thomas: Okay. Got it. So so it sounds like little more of an ongoing portfolio sort of asset management process just to you know, the plan is to remain net acquirers just sort of prune the portfolio over time by selling lower growth assets and and upgrading quality. And improving growth. Robert F. Myers: Yeah. It is. I think that makes a lot of sense. Todd Thomas: Yeah. Okay. And then, my last just for for John, real quick. Can you just talk about the drivers behind the interest expense decrease underlying the updated guidance? And are there any updates on the swap expirations in November and December? John P. Caulfield: Sure. So the, with regards to the the guidance and interest rates, I mean, I think part of it was conservatism for us and and then the timing of the acquisitions relative to the guide. I don't think there's anything much much farther than that. With regards to the swaps, you know, we're we're 5% floating today. If those burn off and nothing changes, we can be about 15% floating today. We do have a long-term target of about 90%. Ultimately, those if they went based on where today's rates are and no further cuts, they'd be kind of around 5.3%. You know, we can issue in the long-term debt markets wrong 5%, but I think we are in a position now where interest rates are coming down. Down. At least that is the perspective of the market. And so we were gonna do what we do, which is we are looking opportunistically at extending our balance sheet. We do like the idea of being a repeat issuer in the long-term bond market. And and that's where there'll be capacity. So I think we're comfortable right now with if those expire and we remain floating with that floating rate, but we will be looking to access the bond market out point out we don't have any meaningful maturities until 2027. And we our actions will be consistent with what we've done in the past. Todd Thomas: Thank Operator: Your next question comes from the line of Cooper Clark with Wells Fargo. Please go ahead. Cooper Clark: Great. Thanks for taking the question. Just given the supply backdrop and current strength in the leasing environment, curious how we should think about long-term upside to NOI growth on an occupancy neutral basis as you capture upside on spreads, improve escalators and other lease structures? Jeffrey S. Edison: John, do you want to break I think that's probably best broken down in terms of what we see as the pillars of that growth. John P. Caulfield: Cooper, I think the pieces for us is we're going to look to deliver 3% to 4% on a long-term basis. You know, our our rent bumps are 110 basis points. And and I'll point out that that's up I think, 50 basis points over the last couple of years. So we think that we've got good continued growth there. And our leasing spreads continue to be very strong on both renewal and a new leasing basis. So I think as we look at it, there's a combination of the new leasing, the rent bumps, the development that we're able to do on the outparcels that are already part of our existing properties to really drive that towards that, know, keeping us in that 3% to 4%. I think that we will continue to buy assets that Jeff or Bob referenced earlier, with occupancy availability that'll allow us to kind of continue that momentum move up from there. Bob, I don't know if you have anything you wanna add. Robert F. Myers: I don't have anything to add, John. Cooper Clark: Great. And then you noted, though, you expect that $100 million and $200 million of dispositions next year. Curious how we should think about additional funding sources in your current cost of capital with respect to the $350 million to $450 million annual long-term acquisitions target? John P. Caulfield: Yeah. John, do you want you want to just give the the latter on Sure. As as we had said on the call, I would say, you know, funding sources are gonna be the 100 over a $100 million of free cash flow that we generate and retain after the dividend. Which I would also highlight we just raised almost 6% this quarter. We have the cash flow that we generate. We have the growth in the base. We are levered at 5.1 times in the last quarter annualized. And this disposition is going to allow us to recycle at using management strategies like Todd just talked about. That is going to be able to drive us and propel us forward in executing our growth plans. Cooper Clark: Great. Thank you. Jeffrey S. Edison: Thanks, Cooper. Operator: Your next question comes from the line of Floris Van Dijkum with Ladenburg. Please go ahead. Floris Van Dijkum: Hey, guys. I've got two two questions. By the way, so you guys had, I think, it 23% almost 23% renewal spreads But if you look at your overall spread, there were only 13% because I think 46% of your leasing activities were options. Can you and obviously, what would the growth have been if you didn't have those options? What would the growth have been in your same store NOI And what are you doing in terms of your you know, new leases where are you limiting, you know, options, etcetera, so that you can, you know, mark to market more rapidly? Jeffrey S. Edison: So, Bob, want to talk about the options? John, do you want to talk about the what Flores was by the way, hello Flores. Good to hear your voice. And the on the options and then John, if you could just kind of walk through what that impact would have been without the so the growth without options. Robert F. Myers: Sure. Floris, good to hear from you. And great question on the options. This is absolutely an area that we're very focused on, on structuring any new renewal or any new lease. Is something that we've approved over time. I know directionally for our team, I give direction that we don't want to give any tenants an option unless there's a 25% increase in the option period. The challenge with it is national retailers are making a large investment in this space So they do want to have options, three, five-year options as an example. And they certainly want to negotiate that number. But as a foundation to our strategy, you know, we're always starting with no options. And, you know, there's a lot of reasons why we say that because as the landlord has nothing to gain from it. So we want to push back hard on that. As as we negotiate options. John P. Caulfield: And with regards to the math, I would say that it's it's tough because the option, the biggest portion is coming from our grocers isn't part of the strategy as we look back at the combined leasing spread of all of it, it was 16% last quarter. It's 13% now. I think as Bob said, we have strategies to do that. But I do think this is where the compliments come in of more neighbors and other ways. But, you know, the new leases was almost 30% over the last twelve months and 21% on renewals or less so in the volume of footage is about the same. So you'd had 25% net growth. Instead of the 13% net growth adding to your NOI. So it's very strong, but I do think the options are something we try to mitigate, but but are still, you know, part of the part of the portfolio. Floris Van Dijkum: Thanks, guys. John, I appreciate that. We've Can I my follow-up question is regarding and maybe I get your view on cap rates? I mean, we hear that cap rates for grocery anchors are very low relative to other retail types. You've been able to acquire an average 6.7% cap rate. Jeff, what is your view on what's going to happen to grocery-anchored cap rates they going to go up or are they going to go down? And then also, what is your appetite for you know, if there is such strong institutional, appetite, maybe maybe doing a larger JV with part of your portfolio. To where you benefit from, you know, getting management fees maybe not for your lowest growing assets, but, you know, to to to free up some more capital and to prove to to the market that your stock is undervalued? Jeffrey S. Edison: Alright. That that Lars, you asked, like, four questions there. So let me let me start with the, you know, the the the supply demand dynamic right now is it's fairly stabilized. We don't see a major compression in cap rates from where we are right now. It will be by segment. And again, when we generalize about cap rates, it's a broad brush you're painting with because it really as you know, it's a market by market event and it's going to be very different in the Midwest than it's going to be in Florida. And you've got a lot of variety to talk about there. But I mean, think generally, would say that the supply demand dynamic is fairly stabilized and the the amount of product coming on the market is taken care of the increase in demand. From some of the primarily institutional players that have sort of come into market and added a additional capital into the market. So that would be the our answer on that. In terms of JVs, I mean, we do have two active JVs that we're growing. We do see that as a way of having growth and getting better returns as you point out through the fee structure and owning less of the overall equity. So that is an opportunity. It's not a major part of our business. But it is an opportunity to continue to find places to put the PECO machine to work and create value. And that's what we do and that I think that will be continued to be something that we look at. And And we'll look at our disposition program too because there are other ways to take assets that are slower growth, but that would be we'd like to own a long-term basis and maybe take a little less equity in those. So those are all things that we're looking at. As opportunities in a market where the values are compressed in our space So we've got a lot of options and we'll continue to use those. Floris Van Dijkum: Thanks, Jeff. Jeffrey S. Edison: Yep. Thanks, Lars. Operator: Your next question comes from the line of Hong Zhang with JPMorgan. Please go ahead. Hong, your line is open. Hong Zhang: Hi. Can you hear me? Jeffrey S. Edison: Yep. Hong Zhang: Yeah. We got you. Oh, cool. Thanks. I guess just just a question on funding your acquisition pipeline from next year. You've traditionally funded your acquisitions through with with majority debt. I I guess what is the thinking around changing that composition to be more with dispositions next year, especially with rates falling where they are. Because correct me if I'm wrong, but once you get more of a spread, if you were to fund fund your acquisitions on debt currently, Jeffrey S. Edison: I'll take the first and then John you can the question. We are we always have been and will continue to be focused on keeping a really good balance sheet so that we can take care of we can take advantage of our opportunities as they arise. That doesn't really change based upon exactly where the rates are. We're really focused on making sure that we have the right depth of capacity. Right now, we have capacity in terms of our target of 5.5. But that's going to be used when we have great opportunity. And that's we are very protective of our balance sheet. So John, do you want go on to talk a little bit about dispose and how we use that? John P. Caulfield: Yeah. Hong, the piece that I would say is that at 5.1 times in the last quarter annualized and a long-term target of 5.5x, We do think we have capacity there in addition to the $100 million of cash flow that we retain. The other piece I would say is that we believe that on a leverage neutral basis, we can buy $250 million to $300 million of assets a year So leaning into disposition gets to what Jeff was saying, which is that in a market where we believe there are great acquisition opportunities, and an opportunity to recycle assets that we have achieved and stabilized the growth plans that we have that's something we're going to do. So when we talk about the dispositions, it is balanced based on the acquisition opportunity. We have a very solid portfolio and nothing that we're you know, that's melting that we're looking to get rid of quickly. So we're gonna be thoughtful and prudent but it's ultimately so that we can recycle into better IRRs and and that kind of balanced balanced plan. Got it. And then I guess I guess just on thinking about the cap rate on your potential disc dispositions. I mean, you've talked about selling, I guess, stabilized centers. I guess, could you you give a general range of what cap rate those centers would trade out today? Robert F. Myers: Yeah. I'll take that one. Go ahead, So based on some of the assets that we currently have in the market, we believe that the assets will trade anywhere between a 6.3 and a 6.8 Got it. Thank you. Operator: Your next question comes from the line of Paulina Rojas with Green Street. Please go ahead. Paulina Rojas: Good morning. Among your early positions, you you had the sale of Point Loomis, which to my knowledge, included a Kroger store that recently closed And I understand the buyer is a small grocery operator. So when you consider the sale price of that property, how do you think the store's closure impacted value, if at all? Compared to what it might have been had Kroger not closed? Jeffrey S. Edison: Well, Pauline, it's thank you for the question. Bob, do you want to talk about Point Loomis? A great story, actually. Robert F. Myers: Well, it is a good story. I mean, it's an asset that we've owned now for I believe, around eight years. And we ended up doing some redevelopment in the parking lot and build a little small outparcel development. We had a really nice bank, Chase Bank. We had Kohl's as an and then we had Pick n Save. We knew that Pick n Save was struggling for the last I would say five to seven years. So we had worked with them on two-year renewals. And finally came to a point when they announced that they were going to close those 60 stores that this would be on the list. So it wasn't a surprise. The good news is that we did have another grocer lined up who was an owner-operated operator that that purchased it that we've recently closed. So it was time for us to move on from the asset and we did well with it. And I think specifically, Jeff may have a different answer than I do on this, but I think when you lose a grocer like a Kroger, it could certainly impact your cap rate 100 to two fifty basis points. Jeffrey S. Edison: Yes. The only thing I'd add there, Bob, is once you know that the grocer is in trouble, which we've known for seven years, The cap rates already changed. So you're not going to not going to see 200 basis point change in that cap rate the day that they close. It will have already happened. And that's what happened here. That's when we bought the property, we bought it at a cap rate that was very high. And so it was we were we knew we were taking on that risk from the very beginning. That's why we've made a lot of money on that property, even though it didn't it's not very pretty, but we made a lot of money on it. So that is how we you know, the the we think about it. And that's why you've gotta be very you got to be thinking really long term because the the moment there is question about the grocer, that's when the cap rate hits. Paulina Rojas: Yeah. That that makes sense. And somehow related a little bit, but regarding the the new development that you mentioned, I think I heard an IRR of around expected IRR around 10%. And I also believe you mentioned that you plan to sell a portion to the grocer and so I presume you will focus on on small shops mostly in that center. And and my question is, how much would your IRR defer if if you retained ownership of the grocery store rather than selling it to the to the retailer. Right. Jeffrey S. Edison: So, we are going to answer that question December 17 for you We really we can't really answer that. I think we really want to answer that right now. Early and we want to make sure that we're far off on. But your point is well taken. If we had to grow if we kept the grocer the IRR would be less. But we'll get we'll talk more about that in in December. If that's okay. Operator: Your next question comes from the line of Juan Sanabria with BMO Capital Markets. Please go ahead. Juan Sanabria: Hi. Thanks for the time. I'm just curious if the plan for '26 may include moving the acquisition volume or focus more towards that unanchored given presumably higher yield or or if that's not necessarily the case. And and as part of that do the unanchored centers that you're interested in buying also have that previously mentioned occupancy upside? Or is that not part of that particular story? Yeah. Robert F. Myers: No. That's yes. That's a great question. And answer the question, we're going to speak more in December in terms of our guidance next year. But early indications would suggest that we'd be in the same ZIP code of where we were at this year. In terms of the unanchored strategy, we are going to look more aggressively in that category next year we are already seeing great results from it and better returns. So I can't tell you specifically if we'll buy $100 million or $200 million of the product next year, but we are finding there's 65,000 opportunities in the market in that category and given our operating expertise, we feel like this something that we can step into. So we'll be highly selective. We'll be solving for above 10% unlevered returns in the strategy. But again, I just think it's a very solid complement to what we're doing. Juan Sanabria: Okay. And then just the last one for me. G and A went up the guidance there. If you could just provide a little color as to why and how we should think about growth should it '26, is that more in line with inflation? Is there any sort of tech or other type of investment opportunities you're looking at that may seem to increase it higher a bit. Relative to history next year. John P. Caulfield: Sure. It it's primarily related to performance-based incentive compensation. Ultimately, last year, our growth was lower, and and therefore, you know, we have, an environment that we incentivize for results and so you're seeing improvement in that. As well as investments as we talked about in in in technology and resource that are going to allow us to scale as we look forward. So when I I think about going forward, you know, I I would think we would be, you in this range here. I still think that we are quite efficient when we look at it on a variety of metrics. But the key piece for us is gonna be driving that mid to high single digit FFO per share growth. Going forward? Operator: Your next question comes from the line of Richard Hightower with Barclays. Please go ahead. Richard Hightower: Hey. Good afternoon, guys. Thanks for squeezing me in. I think, just one for me, but maybe put a a different twist on Juan's question You know, you you guys have mentioned it a couple of times on the call, so it's strikes me as as something that's fair game. But when you when you acquire assets, with, you know, fairly significant occupancy upside, you know, does that represent sort of a material component to the long-term three to 4% same-store NOI target. And then, you know, is just just so I understand it, is there any sort of qualitative element about the asset in particular or or even in general, you know, where you have sort of low occupancy going in, is there is there anything to read into the quality of the assets or the location, you know, when that circumstance occurs? Thanks. Jeffrey S. Edison: I don't know, Bob, you want to take sort of the qualitative part? And then John, maybe you can talk about the impact on the of the lease up. Robert F. Myers: Yeah. I definitely believe that the strategy is to find assets. And if you look at what we've acquired, the eight so far, we've been anywhere from 82% occupied to about 100%. So it's all over the map. But there's so much criteria that goes in the decision based on our thirty years of experience and then the growth in the market and the criteria around foot traffic configuration and upside. So we certainly right now we're at like a 6.7%, 6.8% cap rate on what we've acquired and we're in the mid-10s on the unlevered return And certainly, our average around 92% occupied on a blended basis will help us get to those returns. I wouldn't say that there's any quality creep or actually the markets that we've acquired in have stronger demographics, than our core portfolio. So we are staying very disciplined disciplined in terms of what we're buying and we feel really good about it. John P. Caulfield: I think as it gets to the NOI growth, one of the pieces that I would highlight is a lot of times you know, that asset class doesn't have the exclusives or option that some of the larger ones do. But ultimately, we look to our forward NOI growth, the I think this gets a little bit to why we we don't often try to talk about cap rates and we're IRR buyers because there's a direct, you know, tie or, you know, between the going in cap rate and ultimately where what the growth in that asset is. I think the other piece that I would say from a quality standpoint is true on all the assets that we acquire. We're looking at inefficiencies in the market. Ultimately, for undermanaged assets, where an experienced operator with the capital to invest in the asset and the platform that has the leasing expertise and the legal expertise to really maximize the value there, that is what is really driving the IRR growth that we have. And so I think these are those and all of the growth rate anchored assets that we acquire are really, you know, just kind of pushing through that that PECO way of of delivering on the growth, and that that's where we excel. Richard Hightower: Okay. Great. Thanks for the color. This concludes our question and answer session. I will now turn the conference back to Jeffrey S. Edison for some closing remarks. Jeffrey S. Edison: Thank you, operator. So in closing, the PECO team continued our solid performance in the third quarter. And we're pleased to increase our full-year 2025 earnings guidance for NAREIT FFO and core FFO per share. Because of our grocer-anchored neighborhood shopping center format, and our unique competitive advantages, we believe PECO is able to deliver mid to high single-digit core FFO per share growth annually on a long-term basis. The PECO team remains focused on delivering on this expectation and driving value at the property level. Given our demonstrated track record through various cycles, we believe an investment in PECO provides shareholders with a favorable balance of quality cash flows, mitigation of downside risk, and strong internal and external growth. In summary, we believe the quality of our cash flows reduces our beta and the strength of our growth increases our alpha. Less beta, more alpha. On behalf of the management team, I'd like to thank our shareholders, PECO associates, and our neighbors for their continued support. Thank you all for your time today. Have a great weekend. Operator: Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation and you may now disconnect.
Operator: Good day, everyone, and thank you for joining us for today's ITW Third Quarter 2025 Earnings Webcast. [Operator Instructions] Also, please be aware that today's session is being recorded. It is now my pleasure to turn the floor over to our host, Erin Linnihan, Vice President of Investor Relations. Welcome. Erin Linnihan: Thank you, Jim. Good morning, and welcome to ITW's Third Quarter 2025 Conference Call. Today, I'm joined by our President and CEO, I'm joined by our President and CEO, Chris O'Herlihy, and Senior Vice President and CFO, Michael Larsen. During today's call, we will discuss ITW's third quarter financial results and provide an update on our outlook for full year 2025. Slide 2 is a reminder that this presentation contains forward-looking statements. We refer you to the company's 2024 Form 10-K and subsequent reports filed with the SEC for more detail about important risks that could cause actual results to differ materially from our expectations. This presentation uses certain non-GAAP measures, and a reconciliation of those measures to the most directly comparable GAAP measures is contained in the press release. Please turn to Slide 3, and it's now my pleasure to turn the call over to our President and CEO, Chris O'Herlihy. Chris? Christopher O'Herlihy: Thank you, Erin, and good morning, everyone. As detailed in our press release this morning, the ITW team continues to perform at a high level, successfully outpacing underlying end market demand and delivering solid operational and financial execution within a stable yet still challenging demand environment. For the third quarter, revenue increased 3%, excluding a 1% reduction related to our ongoing strategic product line simplification efforts. Organic growth was 1%, a solid performance relative to end markets that we estimate declined low single digits and a 1 percentage point improvement from our second quarter growth rate. Favorable foreign currency translation contributed 2% to revenue. Focusing on the bottom line, we achieved GAAP EPS of $2.81, grew operating income by 6% to a record $1.1 billion and significantly improved our operating margin by 90 basis points to 27.4%. We maintained excellent execution in controlling the controllables as enterprise initiatives contributed 140 basis points and effective pricing and supply chain actions more than covered tariff costs and positively impacted both EPS and margins in the quarter. Consistent with our long-term commitment to increasing annual cash returns to shareholders, on August 1, we announced our 62nd consecutive dividend increase, raising our dividend by 7%. Additionally, year-to-date, we have repurchased more than $1.1 billion of our outstanding shares. Furthermore, I'm encouraged by the significant progress on our next phase strategic growth priorities. We remain laser-focused on making above-market organic growth, powered by customer-backed innovation and defining ITW strength. The strategy is working, and we remain firmly on track to deliver on our 2030 performance goals, which include customer-backed innovation yield of 3% plus. As we stated before, ITW is built to outperform in challenging environments. As we look ahead to the balance of the year, we are narrowing our EPS guidance range, confident in our ability to continue leveraging the fundamental strength of the ITW business model, the inherent resilience of our diversified portfolio and the high-quality execution demonstrated every day by our colleagues worldwide. I will now turn the call over to Michael to discuss our third quarter performance and full year 2025 outlook in more detail. Michael? Michael Larsen: Thank you, Chris, and good morning, everyone. Leveraging the strength of the ITW business model and high-quality business portfolio, the ITW team delivered solid operational execution and financial performance in Q3. Starting with the top line, total revenue increased by more than 2%, driven in part by 1% organic growth, an improvement of 1 percentage point from Q2. Geographically, while North America organic revenue was flat and Europe was down 1%, Asia Pacific was a standout performer with a 7% increase, which included 10% growth in China. Consistent with ITW's Do What We Say execution, we continue to demonstrate strong performance on all controllable factors. Our enterprise initiatives were particularly effective this quarter, contributing 140 basis points to record operating margin of 27.4%, which expanded by 90 basis points year-over-year. Furthermore, our pricing and supply chain actions more than covered tariff costs and positively impacted both EPS and margin in Q3. Free cash flow grew 15% to more than $900 million with a conversion rate of 110%. GAAP EPS was $2.81 with an effective tax rate in the quarter of 21.8%. As detailed in the press release, the rate was driven by a benefit related to the filing of the 2024 U.S. tax return, partially offset by the settlement of a foreign tax audit. In summary, in what continues to be a pretty challenging demand environment, ITW delivered a strong combination of above-market growth with a revenue increase of 2% and solid operational execution, resulting in consistent improvement across all key performance metrics as evidenced by incremental margins of 65%, operating margins of more than 27% and GAAP EPS of $2.81, an increase of 6%, excluding a prior year divestiture gain. Turning to Slide 4 for a closer look at our sequential performance year-to-date on some key financial metrics. As you can see, ITW's organic growth rate, operating income, operating margins and GAAP EPS have all continued to improve in what has remained a mixed demand environment. Turning to our segment results and beginning with automotive OEM, which led the way on both organic growth and margin improvement this quarter. Revenue was up 7% and organic growth was up 5% with growth in all 3 key regions. Strategic PLS reduced revenue by over 1%. Regionally, North America grew 3%, Europe was up 2% and China was up 10%. The team in China continues to gain market share in the rapidly expanding EV market as customer back innovation efforts drive higher content per vehicle. In our full year guidance, we have incorporated the most recent automotive build forecasts, which are projecting a modest slowdown in the fourth quarter. For the full year, we continue to project that the automotive OEM segment will outperform relevant industry builds by 200 to 300 basis points as we consistently grow our content per vehicle. On the bottom line, strong performance again this quarter with operating margin improving 240 basis points to 21.8%, and we're well positioned to achieve our goal from Investor Day of low to mid-20s operating margin by 2026. Turning to Food Equipment on Slide 5. Revenue increased 3% with 1% organic growth. While equipment sales were down 1%, our service business grew by 3%. Regionally, North America grew by 2%, driven by 1% growth in equipment and 4% growth in service. Demand remained solid on the institutional side. International, however, was down 1%. Operating margins improved 80 basis points to 29.2%. For Test & Measurement and Electronics, revenue was flat this quarter as organic revenue saw a 1% decline. The demand for capital equipment in our Test and Measurement businesses remained choppy as revenues declined 1%. In addition, Electronics declined 2% as demand slowed in semiconductor-related markets. On a positive note, operating margin improved 260 basis points sequentially from Q2 to 25.4%. Excluding 50 basis points of restructuring impact in Q3, margins were 25.9% and both operating margins and revenues are projected to improve meaningfully in the fourth quarter. Moving to Slide 6. Welding was a bright spot, delivering 3% organic growth with a contribution of more than 3% from customer-back innovation. Equipment sales increased 6%, while consumables were down 2%. Industrial sales increased 3% in the quarter as North America was up 3% and international sales grew 4% with China up 13%. Operating margin of 32.6% was up 30 basis points as the Welding segment continued to demonstrate strong margin and profitability performance. In Polymers & Fluids, revenues declined 2%. Organic revenue declined 3%, which included a percentage point of headwind from PLS. Polymers declined 5% against a difficult comparison in the year ago quarter of plus 10%, while Fluids was flat in the quarter. The more consumer-oriented automotive aftermarket business was down 3%. But although the top line declined, the segment expanded margin by 60 basis points to 28.5%, supported by a strong contribution from enterprise initiatives. Moving on to Construction Products on Slide 7. Revenues were down only 1% as organic revenue declined 2% in the quarter, significantly better than last quarter's 7% organic decline. Revenue was also impacted by a 1% reduction from PLS. Regionally, revenue in North America declined 1%, Europe was down 3%, and Australia and New Zealand decreased 4%. Despite market headwinds, the segment improved operating margin by 140 basis points to 31.6%. For Specialty Products, revenue increased 3% with organic revenue up 2%. Revenue included a percentage point of headwind from PLS. By region, revenue in North America declined 1% against a difficult comparison in the year ago quarter of plus 8%, while international was up 7%, driven by consistent strength in our packaging and aerospace equipment businesses. Operating margin improved 120 basis points to 32.3%, supported by a strong contribution from enterprise initiatives. With that, let's move to Slide 8 for an update on our full year 2025 guidance. Starting with the top line, we remain well positioned to outperform our end markets in Q4, and we continue to project organic growth of 0% to 2% for the full year. Per our usual process, our guidance factors in current demand levels, the incremental pricing actions related to tariffs, the most recent auto build projections and typical seasonality. Total revenue is projected to be up 1% to 3%, reflecting current foreign exchange rates. On the bottom line, we're highly confident that the ITW team will continue to execute at a high level operationally on all the profitability drivers within our control. This includes our enterprise initiatives, which we now expect will contribute 125 basis points to full year operating margins, independent of volume. Additionally, we expect that tariff-related pricing and supply chain actions will more than offset tariff costs and favorably impact both EPS and margins. Our operating margin guidance of 26% to 27% remains unchanged. After raising GAAP EPS guidance by $0.10 last quarter, we are narrowing the range of our guidance to a new range of $10.40 to $10.50. Our EPS guidance range includes the benefit of a lower projected tax rate of approximately 23% for the full year and factors in that the top line is trending towards the lower end of our revenue guidance ranges. With those 2 elements effectively offsetting each other, we remain firmly on track to deliver on our EPS guidance, including the $10.45 midpoint, which, as a reminder, is $0.10 higher than our initial guidance midpoint in February. To wrap up, we remain highly confident that the inherent strength and resilience of the ITW business model, combined with our high-quality diversified portfolio and most importantly, our dedicated colleagues around the world, all put us in a strong position to effectively manage our way through a challenging macro environment. However, the demand picture evolves from here, we remain focused on delivering differentiated financial performance and steadfastly pursuing our long-term enterprise strategy, which is squarely centered around making above-market organic growth, a defining strength for ITW. With that, Erin, I'll turn it back to you. Erin Linnihan: Thank you, Michael. Jim, will you please open the call for Q&A? Operator: I'd be happy to. Thank you. [Operator Instructions] We'll hear first from the line of Jeff Sprague at Vertical Partners. Jeffrey Sprague: Maybe just 2 for me, hit 2 different businesses, if I could. First, just on construction. Clearly, you've been working the playbook. I mean one of the things that just jumps off the page to me is this is the 11th quarter in a row of organic revenue declines and the margins are still going up in the business. Maybe just anything in particular beyond kind of the normal 80/20 blocking and tackling that's behind that mix changes or other things? And just your confidence to be able to move those margins up further if and when the revenues do ever inflect positively. Christopher O'Herlihy: Sure. Yes. So Jeff, I think the margins in construction are squarely related to 2 things. Number one, I think the quality of the construction portfolio. As we often say, we tend to operate in businesses which -- there's a cyclicality and above that long term are fundamentally very healthy. And our strategy is always to try and operate in the most attractive parts of those markets. And that's what you're seeing in construction. We're in the most attractive parts of the market. We are executing very well from a business model perspective against those particular parts of the market. And that's ultimately what drives the margins. It's ultimately also what will drive the high-quality organic growth going forward. So very confident that not only will we grow in construction when markets recover, but grow at very high quality. Jeffrey Sprague: Great. And then maybe you could elaborate a little bit on, it sounds like you've got a fair amount of visibility on Test & Measurement improving in the fourth quarter. Maybe you could speak to that, anything in particular that you're seeing orders, end markets -- I'll leave it there, let you answer. Christopher O'Herlihy: Yes. So I think it's -- Test & Measurement had a normal cyclical improvement in Q4, which we expect to achieve again this year. Q3 was a little bit mixed, obviously. We saw continued slowdown on the CapEx side. Really, we would believe on the basis of the tariff uncertainty in Q2, ultimately having a spillover effect in terms of CapEx demand into Q3. So we expect that to improve a little bit. And then the other thing we saw in Q3, which should improve is we saw a little bit of a deceleration in semi, which only represents about 15% of the segment, but where we saw some real green shoots in Q2, we saw somewhat of a deceleration, still growth, but a deceleration in Q3, and we expect that to get a little better. Operator: Our next question will come from Andy Kaplowitz at Citi. Andrew Kaplowitz: Chris or Michael, you obviously didn't change your organic revenue growth guide for the year. I think last quarter, you talked about embedded in it was 2% to 3% organic growth for the second half, which means you still need a big uptick in Q4. I don't think comps get a lot easier for you in Q4 versus Q3. So it's just more pricing that's laddering in Q4? Because I think you just said, right, you're run rating as usual. Any other businesses get better in Q4 versus Q3? Michael Larsen: Well, I think what we are -- to give you a little bit of color on Q4, and you have to factor in what we said in the prepared remarks that we are trending towards the lower end of the organic growth guidance for the full year. We typically see a sequential improvement from Q3 to Q4 in that plus a couple of points of growth, primarily driven by the Test & Measurement business as Chris just mentioned, and offset by the typical seasonal decline that we're seeing in our construction business. So Q3 to Q4 revenue is up maybe 1 point or so. On the margin side, what we also typically see from Q3 to Q4 is a modest decline sequentially of about 50 basis points or so. So still in that 27% range and with a nice improvement on a year-over-year basis. And then the kind of the key driver of Q4 is then a more normal tax rate. So that's about a $0.10 headwind relative to Q3. So Q4 looks a lot like Q3 with the normal tax rate, and that's how you get to kind of the implied midpoint of our guidance here. Maybe just a comment or 2 on Q3. I think it was a little bit of an unusual quarter in the sense that we came into Q3 after a strong June. We had a strong July, perhaps related to some of the tariff announcement and related pricing actions. And then we saw a little bit of a slowdown in August -- actually pretty pronounced in August and then a more normal September, and really a mixed bag in the quarter with a stronger automotive performance, certainly, but also some of the green shoots we talked about last quarter in the order rates in places like Test & Measurement, and semi didn't really materialize for us. So I think at the end of the day, though, we're able to offset some of this choppiness, this macro softness with strong margin performance and as we typically do, we found a way to deliver a pretty solid quarter from a margin, earnings and free cash flow standpoint. Andrew Kaplowitz: Michael, helpful color. And speaking of that, I mean, you're well up already in your range in auto in terms of margin, almost 22% in the quarter. And auto markets, as you know, overall don't feel that great yet. So can you actually -- I know you did 5% organic growth, but can you actually push to the higher end of your low to mid-20s over the next couple of years? How should we think about that given you're kind of already there? Michael Larsen: Yes. I think we're pretty confident in the margin, the target we laid out kind of low to mid-20s by next year. I think there's still a lot of opportunity here from an enterprise initiative standpoint, primarily. You also see a pretty healthy dose of product line simplification again this quarter, which that's all short-term headwind to the top line, but really positions the remainder of the portfolio for growth and higher margin performance as we exit some of the slower growth and less profitable typically product lines. So the market builds will be what they are next -- in Q4, they will be a little bit lower probably than what we saw in Q3. So we won't have the same amount of operating leverage, but we'll still outperform as we have historically in the builds. And next year, you should expect kind of our typical 2 to 3 points above build. Whatever that build number is, obviously, as we sit here today, we don't know that. So... Christopher O'Herlihy: And Andy, just to add to that, the other big driver of margin improvement in auto is customer-backed innovation. We're getting a real nice healthy contribution from that this year. We expect that to continue and indeed accelerate over the next couple of years. And ITW innovation always comes at higher margin. Operator: Next, we'll hear from Jamie Cook at Truist Securities. Jamie Cook: The guidance relative to earlier in the year, I think earlier in the year, you assumed FX headwind of $0.30 that went positive or neutral last quarter. What's embedded in the guide? And you also have the benefits now from the lower tax rate. So I guess, Michael, I'm just trying to understand the puts and takes because it sounds like we have at least $0.40 of tailwind. You're lowering your organic growth to the -- sorry, your sales to the lower end, but it still seems like, I don't know, the guidance should be better, I guess, than what it is just based on those tailwinds. So if you can help me understand that, I guess. Michael Larsen: Yes. I think the short answer is that just given the choppy demand environment, we're maybe taking a more measured, a more cautious approach to our guidance here as we go into Q4. We're off to a solid start in October, but things can change quickly as we saw both -- as an example, the auto builds, the swing in auto builds, semi not really panning out. So I think we're just being a little bit more measured in our guidance here with 1 quarter to go. And as always, we have a path to do a little bit better than what we're laying out for you. You cut off initially, but I think you're talking about FX, what's embedded here is the current rates. As of today, and obviously, they can change a little bit, they are a little bit of a headwind -- tailwind now relative to a headwind earlier in the year, but we're talking pennies. So I think in Q3, FX was favorable $0.04. But then other things like restructuring were unfavorable by a couple of pennies. So there's some puts and takes there. And we've also embedded, obviously, as we said in the prepared remarks, the lower full year tax rate of 23%. And we expect a more typical 24% to 25% tax rate here for the fourth quarter. So hopefully, that's helpful. Operator: [Operator Instructions] We'll hear from Tami Zakaria at JPMorgan. Tami Zakaria: A medium- to long-term question for you. Given all the policy changes to incentivize bringing auto production back into the U.S., do you perceive this to be an opportunity down the line given your market share with the big 3? Or would onshoring not be a net gain because you already supply parts to manufacturing overseas? So how to think about that onshoring opportunity in auto? Christopher O'Herlihy: Yes. So Tami, I would say that largely, as we've said before, we're a producer we sell company. And so we've already -- we're positioned to supply our auto customers anywhere in the world wherever they are based on our current manufacturing setup. And that will continue. So business coming back to the U.S. would just mean more production for our U.S. factories, but they're already here. So we don't see -- I mean, there wouldn't be a huge net benefit that we can see based on the fact that we're a producer we sell a company. Tami Zakaria: Understood. And one question on PLS. I think it's about a 1% impact. Should we expect this to continue at that 1% range for the next few years? Or is this year more of a heavy lifting, so it might fade as we go into next year and beyond? Christopher O'Herlihy: Yes. So we haven't the planning process completed yet, Tami. But basically, what I would say is that for us, PLS is a bottom-up activity. It's driven by our businesses. It's very much an essential part of the ongoing kind of strategic review that we do and a critical part of 80/20 in our divisions. And obviously, deep into the company, we have this very tried and trusted methodology, requires a lot of discipline, but there's a lot of benefit that our divisions get from this. But the point is that there's -- it's bottom up. We don't have the numbers for 2026 yet. But whatever it is, it's something that makes sense in the context of -- it makes sense from a long-term growth perspective, in terms of it provides strategic clarity around where we want to focus, effective resource deployment on the back of that. And also from a margin improvement standpoint, obviously, there's some cost savings, which are a meaningful component of enterprise initiatives. A lot of these projects have a payback of less than a year. So we very much see PLS, whether it's 50 bps or 100 bps as an ongoing value-creating activity in our divisions. And like I say, we've got a lot of positive experience and expertise on this. But it's going to be a bottom-up number basically. Operator: We'll hear next from the line of Joe Ritchie at Goldman Sachs. Joseph Ritchie: I know that you'll typically like guide the trends, and -- but I guess as we're kind of thinking about 2026 and a potential initial framework with the moving pieces that you know today. Any color that you can kind of give us on how you're thinking about it, at least like this early on and what 2026 could look like? Michael Larsen: Yes. I mean I think as you say, Joe, we don't really give guidance until we've gone through our bottom-up planning process here and talk to the segments about their plans for 2026, and that doesn't happen until in November here. To give you a little bit of a way to think about this, maybe I think you should expect that per our usual process, our top line guidance will be based on run rates exiting Q4. We'd expect some continued progress on our strategic initiatives, including the contribution from customer-backed innovation. We'd expect some market share gains and the combination of those things leading to above-market organic growth again in 2026. And then the big question is really what will the market give us. On the things within our control, we'd expect to see continued margin improvement and a healthy contribution from enterprise initiatives. You should expect to see some strong incremental margins that are probably above our historical average. And I think those are kind of the big items. Then there'll be some puts and takes around price and FX and lower share count that may skew favorably. I'd expect a similar tax rate to this year. And then as usual, like I said, we'll update you in February, which -- and will include our usual kind of segment detail to help everybody kind of think through what the year might look like. Joseph Ritchie: Okay. Great. That's helpful, Michael. And then I guess just on capital deployment. I know you guys are doing the $1.5 billion buyback. It seems like you've got probably some room on your balance sheet if you wanted to lever up a little further and still stay investment grade. Like how are you guys thinking about the right leverage for you going forward? And put that in the context of potential M&A opportunities and what you guys are looking at across your different businesses? Michael Larsen: Yes. I mean I think we're sitting here at about 2x EBITDA leverage, which is right in line with what our long-term target has been. The buyback specifically is really the allocation of the surplus capital that we generate, which is a big number for ITW, about $1.5 billion, and that's what is being allocated to the share buyback program and leads to a reduction in the overall share count of about 2%. But all of that only happens after we have invested in these highly profitable core businesses for both organic growth and productivity. We're fortunate that only consumes 20% to 25% of our operating cash flow. The second priority here is an attractive dividend that grows in line with earnings over time. Chris talked about this being our 62nd year of consecutive dividend increases of 7%. And then when all said and done, we still have a lot of capacity on the balance sheet for any type of M&A opportunities. As you may know, we have the highest credit rating in the industrial space. We have arguably the strongest balance sheet. And so there's a lot of room here if the right opportunities were to present themselves. Operator: Next question today comes from Stephen Volkmann. Stephen Volkmann: So I'm curious whatever commentary you might wish to provide around what you're seeing on sort of price cost and obviously, it didn't impact you in the quarter. But are you seeing suppliers raising prices and you're kind of able to offset that however you choose? Or do you think maybe they're holding back and that's still to come? And then in that vein, just how do you ascertain that you will cover whatever costs? Will it be dollar for dollar or also on margin? Michael Larsen: Yes. I think, Stephen, the biggest driver of cost increases this year has been the tariff-related cost increases. And I think we've responded with both pricing actions that we've talked about and also supply chain actions. As you know, we are largely a produce where we sell company. I think the 93% or so of the company is produced where we sell. We had a little bit of exposure that we talked about earlier in the year. We've worked hard to mitigate that and put ourselves in a really good position. We've been able to, through those actions, offset the impact from tariffs this year. And in Q3, as we said in our prepared remarks, price/cost was positive both from a dollar-for-dollar earnings standpoint and also from a margin standpoint. So I feel like at this point, we're kind of back to a more normal environment. At this point, from a price/cost standpoint, we are not completely caught up yet, but we've got a quarter to go. And then for next year, who knows what the tariff environment might be for next year. But I think we feel very confident given our track record here in terms of being able to manage whatever those cost increases, whether they are typical inflationary increases or tariff increases might be as we head into next year. Stephen Volkmann: Super. Okay. And then just pivoting, China was obviously really good for you guys this quarter. I'm wondering if you might be able to drill in there a little bit and give us a sense of what's driving that? And I don't know, maybe some of the CBI initiatives or something. Michael Larsen: Yes. Do you want to go ahead, Chris? Christopher O'Herlihy: Yes. So basically, Stephen, what's driving China right now is auto in China, in particular, I think our penetration on EV in China, particularly with Chinese OEMs. We continue to make great progress on CBI and market penetration in China, particularly with Chinese OEMs. We continue to grow content per vehicle. As you know, China represents mid-60s in terms of percentage of worldwide EV builds. And we're growing nicely there, particularly with a strong position with Chinese OEMs. In addition, you mentioned CBI, I would say that China, even though it represents about 8% of our revenues, we certainly get a disproportionate amount of our patent activity from China in terms of the level of innovation activity that's going on. So yes, innovation in China, particularly in automotive is what's driving our progress there. And we're basically penetrating at a level well above the market. Michael Larsen: Yes. And maybe to put some quantification around it, if I just look at kind of year-to-date in China, as Chris said, the big driver is our automotive business, up 15%. That's our largest business in China, but also Test & Measurement, Electronics up in the mid-teens, Polymers & Fluids up 10%, welding up 20% plus. I mean, I think the fueled by CBI, certainly, in most cases here, I think the team is doing a really nice job overall, up 12% in China on a year-to-date basis. And pretty confident that the things, again, that are within our own control will continue to be -- have a positive contribution to the top and bottom line in Q4 and headed into next year. Operator: Next, we'll hear from the line of Julian Mitchell at Barclays. Julian Mitchell: Maybe just wanted to start with the operating margins. So I think you mentioned, Michael, that next year, you should be above the historical incremental. And I guess you have that sort of placeholder of 35% to 40% dating back to the Investor Day. So it's presumably in reference to that. But just wanted to understand as you look at next year on the margin side of things, is there a big kind of payback from the restructuring efforts that happened this year coming in? Price/cost maybe for this year as a whole is margin neutral and then that flips positive next year, maybe just any sort of fleshing out of the thoughts on some of those margin moving parts, please? Michael Larsen: Yes. I think, Julian, the biggest driver of margin performance for, I'm going to say, the last decade or so has been the enterprise initiatives. And we've consistently put up 100 basis points of margin improvement from our strategic sourcing efforts and from our 80/20 front-to-back efforts. And so we would expect that to continue to be the case next year. Whether that's exactly 100 basis points or not, we won't know until we've rolled out the plans, but that will far outweigh any contributions from price cost, for example. And then the other big element and which is a function of really what end market demand will do is if you look just at our performance year-to-date or in the third quarter, our incremental margins are significantly above kind of our historical 35% to 40%, including 65% in the third quarter. And you look at the margin performance this quarter in the automotive OEM business, where 5% organic growth translates into income growth of 20% plus. So it's just an illustration of we don't need a lot of growth to put up some really differentiated performance from a margin and profitability standpoint. So I can't tell you as we sit here today what the incrementals might be for next year on the organic growth. But I would tell you, I believe that they -- it will probably be above the historical range that we just referenced. Julian Mitchell: That's helpful. And then just maybe one for Chris. Looking at Slide 8 and that CBI contribution of sort of over 2 points to sales and the sort of partial offset from PLS headwinds that you discussed earlier on this call somewhat. And I realize this isn't how you look at it, and it's sort of really bottom-up driven. But if we're thinking about that spread of, say, CBI versus PLS enterprise-wide, is the assumption that, that should be more and more of a net positive as those CBI efforts that you talked about at the Investor Day a couple of years ago increasingly get traction? Just trying to understand how to think about the delta between those 2, understanding that they are independent bottom-up process. Christopher O'Herlihy: Yes. I'm not sure there's a huge amount of correlation between the 2, Julian. I mean, CBI is really referencing our efforts around improving the quality of execution on innovation, whereas PLS, we typically -- and our business is typically used for kind of product line pruning. I think the only correlation between the 2 is that they're both connected to differentiation. PLS results is as a result of where we feel we're on the same level of differentiation and we're product line pruning accordingly, whereas CBI, we're leaning in to basically create and develop more differentiated products. For sure, you're going to see an improvement in CBI over time. You've already seen that. The number has actually doubled since 2018, directionally in the 1% range. It was 2% last year, trending 2.3% to 2.5% this year, well on track to get to 3-plus by 2030. PLS is a circumstantial and ongoing review of our businesses by our businesses of their product lines and they react accordingly. And as I said earlier, we see this as there's a lot of value creation comes from PLS, but in a different way. So I'm not sure there's a huge amount of correlation between the 2. I kind of think of 2 kind of differently. Julian Mitchell: But the sort of net spread of them should be increasingly positive, I suppose. Christopher O'Herlihy: It should be -- no, absolutely. Driven by improvements in CBI. Correct, that's correct. Michael Larsen: I mean PLS, as Chris said, is an outcome of a process or 80/20 front-to-back process. We've talked about kind of in the long run, maintenance PLS being in that 50 basis points range. We have a little bit more this year. We've talked about specialty and kind of strategically repositioning that segment for faster organic growth. And then as Chris said, CBI will continue to improve from here. So that spread, to your point, will widen. But my thought for putting them right next to each other on Slide 8. They're completely independent of each other. And so I just want to make sure that's clear that there's no linkage between the 2. But mathematically, the spread will grow between the 2. And net-net will be a more positive contributor to organic -- above-market organic growth as we go forward. Operator: Our next question today will come from Joe O'Dea at Wells Fargo. Joseph O'Dea: Can you talk about the tariff impact a little bit? There were periods of time earlier this year where the math would have suggested something up to 2% kind of price requirement to offset. And it seems like we're in an environment now where the pricing required is probably less than 1%. But anyway, any thoughts around that? And then stepping back, it would seem like that's not necessarily a big hit to demand. And so the tariff kind of overhang would be more uncertainty related than magnitude of pricing required at this point related, but your thoughts on that? Michael Larsen: Yes. I think price cost from -- in terms of kind of combined with supply chain actions, our ability to offset tariffs, I think, is not really the main event at this point. I think we've demonstrated that we know how to do that, and we've further mitigated the risk of any tariff related specifically to China. So I think that part of the equation, we feel really good about. I think the impact on demand is probably something we talked about also on the last call that it may have led to a little bit of demand -- orders being frozen back in the April kind of Q2 time frame. And there's probably a little bit of overhang still from that. I mean I think we saw what's been a pretty choppy demand environment. As I said earlier, we had some positive order activity in June, July, then it slowed. April, May, kind of pretty choppy also. So I think the impact maybe from a demand standpoint, at least initially was maybe more significant. And who knows kind of where we go from here into next year. But I think it's largely behind us at this point, certainly from a cost standpoint and maybe from a demand standpoint, this is no longer -- tariffs are no longer the kind of the main event here. Joseph O'Dea: And so like what do you think the main event is in terms of seeing kind of an unlock of better demand, right? Because you're outgrowing markets, but that market growth rate, not kind of all that inspiring at this point. And so in sort of this protracted kind of challenged demand environment, if tariffs are kind of easing as a headwind, what do you think is the key to the unlock? Christopher O'Herlihy: Yes. So I think, Joe, we think we take a long-term view here. We believe fundamentally, we're in really good markets for the long term. We're obviously going through a period right now where there's quite a bit of contraction and uncertainty and so on and so forth in areas like construction. But our fundamental thesis is that we're in markets which we believe for the long term are attractive. We want to make sure we're in the best parts of those markets, and we believe that we are. We believe we can see quite clearly in areas like automotive and construction and historically in Welding and Food Equipment that we're outgrowing the markets at the point at which the cycle turns, we'll be really well positioned. And to Michael's earlier point, not just for growth, but for even higher quality of growth on the basis that our incrementals have strengthened from historical levels on the basis of portfolio pruning around sustainable differentiation, coupled with very high-quality execution on the business model. So we feel pretty good about the long term where we're just going through a period where we see some short-term demand issues. But we feel we've got a really good portfolio for long-term growth. Joseph O'Dea: Maybe just tying that into Test & Measurement and what you're seeing there. It seemed like in an environment, you're investing in CBI, like we hear a number of companies talking about innovation. It would seem like they need your equipment. Are you seeing this kind of build up in terms of what would have kept them on the sidelines, but if they want to invest in innovation, it would seem like they're going to need your help. Christopher O'Herlihy: Absolutely, that's correct. I mean Test & Measurement is a really fertile space for us in terms of long-term growth. There's lots of new materials being developed. There's increasing stringency in innovation standards and quality standards, all of which are requiring more and more exacting -- testing equipment. And that's where we play. So again, short-term issues here around CapEx environment and so on. So a little bit of compression in Q3 relating to some CapEx freezing in Q2. But for the long term, this is a really, really healthy environment for us -- will be a healthy environment for us on the basis of the quality of innovation in Test & Measurement and also the end markets they're lining up against like biomedical and so on, all of which have very strong fundamentals going forward. Operator: Next, we'll hear a question from the line of Nigel Coe at Wolfe Research. Nigel Coe: We covered a lot of ground here. Just want to go back to the comments around strong start to the quarter and then it sort of pared out. Do you think there's any unusual behavior with distributors around price increases or tariffs. Obviously, we had the big tariff event middle of the quarter. Anything you'd call out there, number one? And then number two, restructuring actions in the first half of the year, did we see the full benefit in 3Q? Or was there still some benefits to come through in 4Q? Michael Larsen: Yes. So let me start with kind of the cadence as we went through the quarter. And I'm not sure we have a great answer for you, Nigel. I mean I think like we said, June and July were really some of our better months with meaningful organic growth on a year-over-year basis, then a slowdown in August and a recovery in September. And if you look at net-net for Q3, we were actually pretty close to kind of typical run rates. But -- so the point I think we're trying to make, it's just a pretty choppy environment and things can change pretty quickly, but we're not really making any long-term forecast in terms of kind of what that may mean on a go-forward basis. Some of it may be related to the tariff announcements and the associated pricing, but really hard to tell. Restructuring for us, it's a little bit of a misnomer. I mean these are funds that are expenses that are funding our 80/20 front-to-back projects. And so there's no big restructuring initiative going on inside of ITW. Our spend this year will be similar to last year, in that $40 million range. We try to kind of level load things and do a similar amount every quarter. But it's really a function of the timing of tens of projects across the company and when the divisions want to execute on those projects. So those restructuring savings are -- these are projects with paybacks of less than a year. So it happens pretty quickly, but -- and it's part of what's funding the enterprise initiative savings that we're getting next year. But these are not big kind of restructuring -- traditional restructuring projects. These are all tied to 80/20 front-to-back as per usual. So... Nigel Coe: Yes. Okay. That's helpful. A quick one on Welding. We've seen, I think, now 2 quarters of nice inflection in growth on Equipment, but Consumables remains sort of step down in that low single-digit decline territory. Is that primarily a price differential between Equipment and Consumables or anything else you'd call out? Christopher O'Herlihy: Yes. So Nigel, I think it's mainly because the consumer is more of a discretionary purchase. I mean, Commercial or Consumables? Michael Larsen: Consumables, I think, right? Is that right? Nigel Coe: Consumables and Equipment driven up nicely. Michael Larsen: Yes. Yes. I think it's a little bit of a head scratcher, to be honest with you, Equipment up 6% and Consumables down 2%. Within that, there are -- some of the Welding -- some of the filler metals are actually showing positive growth. The other thing what we're seeing is a pickup on the industrial side. So these are typically large heavy equipment manufacturers. And then the commercial side or the consumer side is a little bit slower, where it's a little bit more of an exposed to the kind of consumer discretionary spending. So it's a little bit of a mixed picture. I think the real positive in Welding is this growth is fueled by CBI. And so it's not that the markets are picking up. It's really new products, primarily on the equipment side as well as both in North America and international with some really nice growth in our European and in our China business. So that's probably the best answer I can give you. Operator: Our next question will come from Avi Jaroslawicz at UBS. Avinatan Jaroslawicz: So I appreciate that you're saying that you're trending towards the lower end on the sales guidance. Can you just talk about some of the thinking for leaving that range unchanged and just kind of wider than you typically would for this time of year? I assume you're still thinking there could be some upside to get you to the midpoint or better for the year. And would that come from any particular segments or it sounds like more from demand than pricing. So just -- is that the right way to think about it? Michael Larsen: Yes. I mean I think typically, we update guidance kind of halfway through the year. And at this point, with a quarter to go, we're well within the ranges. And so we didn't see the need to kind of update the whole thing. And the decision was to narrow the range and to explain why we're not flowing through the benefit of the lower tax rate, which is really due to the fact that we're trending towards the lower end on the revenues. So that's our way of being as transparent as we can be around the guidance. I think the -- your question kind of Q3 versus Q4, I think we've kind of covered that. Again, the segment that typically shows the biggest pickup from Q3 to Q4 is our Test & Measurement business, and then that's partially offset by the Construction being down kind of typical seasonality. And when all is said and done, revenues from Q3 to Q4 should be up by 1 point or so. Certainly, we've also factored in, I should say, the lower auto build forecast there's been -- which is done by third-party kind of industry experts. And there's been some noise around some supplier issues for some of our customers, and all of that is included in our automotive projection here for the fourth quarter based on everything that we know as we sit here today. So hopefully, that answers your question. Operator: Our next question will come from Mig Dobre at Baird. Mircea Dobre: I also kind of want to go back to the PLS discussion. And I guess my question is this, when you sort of look at your comments for delivering above normal incremental margins, how reliant are you on PLS in order to be able to do that? How important is PLS in that algorithm? And I guess, given how high your margins are, and I'm kind of looking almost across the board in your businesses, you are pretty much outperforming anyone else out there that I'm looking at. Is there a point in time here where it's rational to sort of say, hey, look, maybe we can throttle back on PLS because we can actually deliver more earnings growth and more return for shareholders by just trying to accelerate organic growth rather than pruning the portfolio? Christopher O'Herlihy: Yes. So Mig, I think there is a relationship between PLS and incrementals and so on, but it's not the only factor. I mean PLS is an element of 80/20, it's not holistic 80/20. So I think the implementation of the business model, again, the quality of the portfolio is ultimately what drives the incrementals ultimately drives the margins. In terms of your comment on -- I guess, the comment on organic growth versus margin. And so from our standpoint, I mean, organic growth and operating margin and margin expansion kind of go hand in hand. And we talk about quality of growth. And I think we've demonstrated that for instance, coming out of the pandemic, we saw very healthy growth and margin expansion while over that period, we were investing in a very focused way in our businesses in innovation, strategic marketing, and that very much continues today. So really, it's about the quality of the organic growth, 35% incremental historically. We're now well above that, comfortably kind of into the 40s. And that's again at a time when we are very much investing in our businesses in a very focused way around innovation and strategic marketing and so on, and so for us, the math is pretty simple with margins at 26% and with growth in incremental margins at 35% plus or even 40-plus right now, it's the operating leverage that is really driving the margins forward from here. And as we look at 2030 and our 30% goal, that's a goal that's not going to be achieved through structural cost reduction. That's going to be achieved through continuous improvement in organic growth at high quality and high incremental margins. So we see the 2 as being correlated, I would say. Mircea Dobre: Understood. But in terms of maybe the framework for '26 asking the question that somebody else asked earlier, right, if CBI is contributing 2.3% to 2.5%, maybe you can rethink product line simplification to some extent and maybe the end markets get better. Again, from my perspective, being able to get your organic growth back to that 4%, 5-plus percent range is really the thing that at this point seems to be needle moving in terms of both maybe investor sentiment as well as overall earnings growth. So I'm curious if -- I understand it's early for 2026, curious though, if you think that it's plausible that we could be looking at that kind of growth as we think about next year? Michael Larsen: It's -- I think, Mig, we're probably, as we said earlier, running a little bit higher on PLS than kind of the normal maintenance run rate. We're doing that specifically in a business like Specialty Products, where we've talked about we're strategically repositioning that segment for growth. I will tell you that in other segments and industries that I know you follow like Food equipment and Welding, that number is significantly lower, maybe even 0 in some cases. So it's not an across the board. And it's also not a number that we want to or even could manage from the corporate -- from corporate. This is such an integral part of our 80/20 front-to-back process, it's a bottom-up number. And if we were to say -- and it's tempting, I know what -- I understand how you're thinking about it, it's tempting to say, okay, no more PLS. That also would say no more 80/20 front to back. And that is certainly not in anybody's long-term interest. I can promise you that. Operator: Ladies and gentlemen, that was the final question in our queue for today. We'd like to thank you all for your participation in today's session, and you may now disconnect your lines. Please have a good day.
Coinbase (COIN) saw up to a 10% rally on Friday's trading session thanks to a bounce back in Bitcoin and a price target raise from JPMorgan. Rick Ducat notes the stock's close correlation to Bitcoin prices and outperformance compared to the SPX as stock highlights.
Operator: Hello. Welcome to the Signify Third Quarter 2025 Results Conference Call hosted by As Tempelman, CEO; Zeljko Kosanovic, CFO; and Thelke Gerdes, Head of Investor Relations. [Operator Instructions] I would now like to give the floor to Thelke Gerdes. Ms. Gerdes, please go ahead. Thelke Gerdes: Good morning, everyone, and welcome to Signify's Earnings Call for the Third Quarter of 2025. With me today are As Tempelman, Signify's CEO; and Zeljko Kosanovic, Signify's CFO. I would, first of all, like to welcome As to his first earnings call as Signify's new CEO. During this call, As will take you through the first -- the third quarter and business highlights. After that, he will hand over to Zeljko, who will present the company's financial and sustainability performance. Finally, As will return to discuss the outlook for the remainder of the year and share some first reflections and priorities. After that, we will be happy to take your questions. Our press release and presentation were published at 7:00 this morning. Both documents are available for download from our Investor Relations website. The transcript of this conference call will be made available as soon as possible. And with that, I will hand over to As. A.C. Tempelman: Thank you, Thelke, and good morning, everyone, and thank you for joining us today. As Thelke said, this is my first earnings call in this role, and I look forward to this engagement with you this morning. Now I joined the company six weeks ago at a time when the markets are indeed very challenging. So let's begin with some of the key market developments I have observed in my -- over the third quarter. Firstly, we see the ripple effects of tariffs as Chinese overcapacity is redirected from the U.S. to Europe and other regions. And this is creating additional price pressure, especially in the professional trade channels in Europe and Asia, where competition has intensified. Secondly, in our Professional business, we also see continued softness in important European countries, such as France, the Netherlands and the United Kingdom. And increasingly also in the U.S., where demand is slower or has been slower than expected in the third quarter. And this is especially the case for the public sector projects with government funding. And thirdly, in our OEM business, we see further compression of demands and continued price pressure, particularly in Europe as well. And this has been, again, intensified by the increased imports of Chinese components putting pressure on the market for nonconnected. However, I'm glad to say the market also presents opportunities that fit our strategy well. Our growth in connected and specialty lighting and particularly in consumer is very encouraging. The consumer business grew in all major markets and was particularly strong in India. And this strong performance of consumer was boosted by the expansion of our Hue portfolio, and I'll cover that in a bit more detail a little later. Now overall, connected and specialty lightings grew by high single digits across both the professional and consumer businesses. And worth mentioning is also our agricultural lighting business that delivered a strong seasonal performance, helping to offset some of the weaker areas of the portfolio. So overall, if I would have to summarize, this quarter underlines the resilience and growth potential of our connected and specialty lighting and the price pressure on the more commoditized products in the traditional trade channel. Now let me move to an example that illustrates how our connected solutions are creating value for our customers and wider communities. I mean despite the challenges in the European public sector, there are still great projects. And one of them is presented here. We just completed the street lighting project for the municipality of Montbartier in France. And the local municipality set out to modernize its public lighting with the goals of improving safety, enabling remote maintenance in a sustainable, cost-efficient way. And by implementing our SunStay Pro solar luminaires that are fully integrated with our connected lighting managements and the Signify Interact platform. And this all-in-one solar powered solution allows the municipality to optimize luminaire run time, control the systems remotely and significantly reduce energy costs, while addressing environmental impacts. So it's a great example of how solar and connected technologies come together to support energy transition goals, while delivering meaningful benefits for customers and communities. And we hope to see a lot more of that going forward. Let me move to the second example, second highlights. I talked about this earlier, the exciting new portfolio expansion that supported the strong third quarter performance of our consumer business. And I just installed the Philips Hue system myself, and I have to say, I've been super impressed by it. It's a really cool product. And Hue is truly the leading connected lighting system for the home, with a very strong brand and a loyal growing customer base. And the launch in September exceeded our expectations, creating strong demands with excellent execution, including well-managed availability on our e-commerce sites. And among the new innovations was a new feature that transformed existing Hue lights into intelligent motion sensors that respond to movements. So really, this way, we continue to extend the role of Hue beyond illumination in our customers' home to integrating security, entertainment and intelligent lighting. And also worth mentioning, we introduced the new Essential range that introduces you to customers at a more accessible price point. So these are some highlights. And with that, I'll hand it over to Zeljko, who will continue to cover the financial performance of the quarter. Zeljko? Zeljko Kosanovic: Thank you As, and good morning, everyone. So let's start with some of the highlights of the third quarter of 2025 on Slide 8. We increased the installed base of connected light points to EUR 160 million at the end of Q3 2025 from EUR 136 million last year. Nominal sales decreased by 8.4% to EUR 1.407 billion, including a negative currency effect of 4.5%, which was mainly related to the depreciation of the U.S. dollar. Comparable sales declined by 3.9%. Excluding the conventional business, the comparable sales decline was 2.7%. This is reflecting the continued weakness in Europe's Professional business and a softer demands in the U.S. In addition, the OEM business saw further demand compression and continued price pressure. The adjusted EBITA margin decreased by 80 basis points to 9.7%. We sustained a robust gross margin, particularly in the Professional and in the consumer businesses. But we, at the same time, saw headwinds in the OEM business and conventional, which I will address later in the presentation. Net income decreased to EUR 76 million, reflecting a lower income from operation as well as a higher income tax expense as the previous year included one-off tax benefits. Finally, free cash flow was EUR 71 million. I will now move on -- move to our 4 businesses. Starting with the Professional business on Slide 9. Nominal sales decreased by 6.8% to EUR 928 million, reflecting lower volumes and a negative FX impact of 4.6%, mainly related to the depreciation of the U.S. dollar. Comparable sales declined by 2.1%, driven by different dynamics. First of all, we saw a softer-than-anticipated U.S. market. Europe remained weak, especially in the trade channel, and these developments were partly compensated by the continued growth of connected sales in most geographies and also a strong performance in agricultural lighting during the peak season for this segment. The adjusted EBITA decreased to EUR 97 million with an EBITA margin sustained at a robust level of 10.4%, however, contracting by 40 basis points compared to last year mainly due to the lower sales. The business maintained a solid gross margin, which expanded sequentially, but contracted slightly against the high comparison base in the previous year, and we also retained strong cost discipline. Moving on to the Consumer business on Slide 10. The positive momentum we saw in the first half of the year continued and strengthened in the third quarter, supported by sustained demand across all key markets. Nominal sales decreased by 1.1% to EUR 301 million, reflecting a negative currency impact of 4.8%, partly offset by the underlying growth. Comparable sales growth was 3.7%, driven by the continued success of our connected portfolio, particularly Philips Hue, and the recent new product launches as was highlighted by As a few minutes ago. We also saw a further acceleration of online sales, particularly through our own e-commerce website. Our Consumer business in India also continued to deliver strong performance, particularly in luminaires, further contributing to the segment's overall growth and profitability. Adjusted EBITA increased to EUR 27 million, while the margin expanding by 150 basis points to 9.1%, supported by a robust gross margin and operating leverage. Continuing now with the OEM business on Slide 11. As anticipated, performance deteriorated in the third quarter. Nominal sales decreased by 26.1% to EUR 93 million, while comparable sales declined by 23%, driven by lower volumes and the persistent price pressure in nonconnected components. The impact of lower orders from two major customers highlighted in previous quarters continued to materially affect the top line. Price pressure continued to be intense in this market as in the previous quarters. And overall, we are also seeing a further weakening of the market demand, especially in Europe. Adjusted EBITA decreased to EUR 4 million, with the margin contracting to 4.7%, mainly reflecting the gross margin decline due to the volume reduction and price pressure. Looking ahead, we expect market conditions to remain challenging, with limited recovery in demand in the near term. And finally, turning to the Conventional business on Slide 12. Performance in the third quarter was broadly in line with expectations, reflecting the ongoing structural decline in this part of the portfolio. Nominal sales decreased by 25.3% to EUR 76 million impacted by lower volume and a negative currency effect. Comparable sales declined by 21.5%, consistent with the gradual phaseout of conventional technologies across most regions. The adjusted EBITA margin decreased by 230 basis points to 17%. This was mainly driven by a lower gross margin, which was impacted by temporarily higher manufacturing costs as we are rationalizing our manufacturing sites. Let me now dive into the financial highlights on Slide 13, where we are showing the adjusted EBITA bridge for total Signify. The adjusted EBITA margin decreased by 80 basis points to 9.7% due to the following developments. The negative volume effect was 70 basis points, reflecting the decline of our OEM and Conventional businesses. The combined effect of price and mix was a negative 170 basis points, reflecting the further stabilization of price erosion trends across our business. As mentioned, we see higher the effect of price erosion in some parts of the business, such as OEM and Professional Europe, but also a positive pricing in the U.S. Cost of goods sold overall had a usual contribution year-over-year this quarter, with four main elements within that. First, we continue to deliver strong bill of material savings across all businesses, in line and even slightly higher than in previous quarters, which was including an accelerated price negotiation savings. Second, the overall manufacturing productivity was impacted specifically in the OEM business by significant volume decline, and in the Conventional business by temporarily higher manufacturing costs as a result of the site rationalization mentioned earlier. There were also one-off elements that impacted cost of goods sold positively last year, but did not repeat this year. And finally, the cost of goods sold in the third quarter included the effect of incremental tariffs, which were mitigated through pricing action, and are therefore neutral on the total gross margin level. The indirect costs improved by 130 basis points on adjusted EBITA margin level, reflecting the continued cost discipline across our business. Currency had a negative effect of only 10 basis points as we limited the effect of FX movements on our bottom line. Finally, Other had a positive effect of 40 basis points and related mainly to the outcome of a legal case. On Slide 14, I'd like to zoom in our working capital performance during the quarter. Compared to the end of September 2024, working capital increased by EUR 20 million or by 70 basis points, from 7.7% to 8.4% of sales. Within working capital, we saw the following developments: inventories decreased by EUR 70 million; receivables reduced by EUR 52 million; payables were EUR 156 million lower; and finally, other working capital items reduced by EUR 13 million. The increase of the overall working capital ratio is mainly driven by 2 factors: the ramping up of consumer ahead of the peak season and the impact of the top line compression on the OEM inventory churn. Now before I hand it back, I would like to touch on our progress toward our Brighter Lives, Better World 2025 commitments. Starting with greenhouse gas emissions. We are ahead of schedule to meet our 2025 goal of reducing emissions across our entire value chain by 40% compared to 2019. That's twice the pace required by the Paris agreements. Next, on circular revenues, we reached 37% this quarter, well above our 2025 target of 32%. The biggest driver here continues to be serviceable luminaires within our Professional business, where we're seeing strong adoption across all regions. When it comes to Bright Lives revenues, the part of our portfolio that directly supports health, well-being and food availability, we increased to 34% this quarter, up 1 point from last quarter and again, above our 2025 targets. Both our Professional and Consumer businesses are contributing strongly here. And finally, on diversity, the percentage of women in leadership positions remained at 27% this quarter. While that's below where we want to be, we are continuing to take concrete steps to improve representation from more inclusive hiring practices to focused retention and engagement efforts to help us reach our 2025 ambition. So overall, we are making good progress, with strong momentum in most areas and a clear focus on where we still need to accelerate. I will now hand back to As for the outlook. A.C. Tempelman: Thank you, Zeljko. So moving on to the outlook. Based on the softer than previously expected outlook, particularly for the Professional business in the U.S., and further demand compression in the OEM business, we are updating our guidance for the full year 2025 as follows. So we expect comparable sales growth of minus 2.5% to minus 3% for the year, which is equivalent to 1 -- minus 1 to minus 1.5 CSG, excluding Conventional. And as a result of this lower expected top line, we are also adapting our adjusted EBITA margin with a guidance to 9.1% to 9.6%. And finally, we expect our free cash flow to land at around 7% of sales. That's on the outlook. Now I wanted to share a few reflections and talk a bit about the priorities as I see them going forward. Almost eight weeks into the role now -- let me do that. There is a lot to be proud of at Signify. I mean we have very committed, capable professionals, a really impressive world-class innovative engine and a strong culture of cost and capital discipline that continues to serve us very well. At the same time, we are also clear about the difficulties that we face as a company. The lighting market remains very challenging. Growth has been lacking and the performance has been volatile. So coming in, I see the following immediate priorities. First, to outperform in what is a very tough markets. So we must focus on commercial and supply chain execution. We need to manage price pressure, continue to win in the connected and the specialty lighting and close efficiency gaps. We also need to maintain strict control and capital disciplines to enhance our profitability and cash flow. And I will make sure that, that discipline, we will stay with that going forward. Secondly, we can, and we should be clearer about our strategic intents and our strategic objectives. And therefore, we are planning to review our strategy. We will organize the Capital Markets Day towards the middle of next year, where we will provide clarity on our portfolio on how we deliver durable growth and on capital allocation. And thirdly, as key enablers, we will focus our R&D resources and continue to invest in accelerating digitalization and AI adoption. Now 18 months, the company launched a new operating model that we will not change, and we will fully leverage to its full potential. And at the same time, we will start shifting the culture, from products, to a more market-led mindset and approach. And from what I've seen so far that by addressing these priorities, I'm confident that we will set up Signify for future success. And with that, I'll hand it back to the operator to facilitate the question-and-answer session. Operator: [Operator Instructions] Our first question comes from Daniela Costa from Goldman Sachs. Daniela Costa: I hope you can hear me well. I will ask one and then the follow-up. But I just wanted to ask on your kind of early thoughts in terms of the OEM business. So it seems to be mentioning intense pricing pressure, lost some customers. Do you see this as more structural or more cyclical when you look at it? And have -- was that anything to do with -- what prompted you to talk about reviewing the portfolio, I wonder. A.C. Tempelman: How do we see the OEM business going forward? Well, first of all, we saw the impact of the loss of two specific customers that was quite significant. That also is explaining a large part of the drop we saw. That, of course, will go away after a year. But going forward, we expect that current conditions will continue to be challenging, both in terms of demand as well as the price pressure. But it's too early to call what exactly that will look like in the next year. Daniela Costa: And then just following up on the topic of tariffs. I mean in the release, they weren't too many references to it, but I was just wondering if you could give us a little bit of what is happening on the ground, given the U.S. market was highly dependent on Chinese imports on lighting. What's sort of the inventory attitude you've seen at distributors. Has there been any restocking of Chinese product? Could this be impacting what you are seeing in the market right now? And ultimately, as you look medium term, if the tariff stand, do you see them as a positive or a negative for Signify? Is it an opportunity to gain market share and put prices through? Or also you are very dependent on Asia and it's not really -- we shouldn't see it this way? Just a little bit more color there would be very helpful. Zeljko Kosanovic: Daniela, so maybe to give a bit of an update and a summary on what we see. So first of all, I think in general, on pricing, the scale players have generally taken price increases to the extent that was needed. Our price adjustment, on the Signify side, were generally in line with the market, and we also saw that prices increase are sticking. Now overall, we've been able, in the third quarter like we did in the previous quarter, and we expect to be able to continue to do so to successfully mitigate the tariff increase with pricing. So with a slightly positive impact on the top line for our U.S. business and a neutral impact on the bottom line. So overall, the strategy we have set up and of course, all the activities that we have taken on the supply chain side to adapt and to reduce the exposure or to optimize our cost base and outsourcing, I think, are really being executed really exactly in line with our plan. So there we are basically implementing what we had. And of course, we continue to maintain the agility to adapt, moving forward, depending on how the situation will evolve. But overall, slightly positive on top line, neutral on the bottom line and implementation in line with our strategy. Daniela Costa: So you don't see it as a market share grabbing opportunity or something a bit more structural medium term is just a pass-through? Zeljko Kosanovic: Look, the answer on that would be probably -- we should go more in detail, depending on the portfolio. Of course, what we are doing in the different portfolios is to find the balancing act between prioritizing market share gain where we do see opportunity and where we are extracting those opportunities very clearly, while protecting the margins. So I think it's really, at a more granular level, let's say, that this is going to be a different answer. But overall, it's to make sure that we can absolutely take advantage. And we have seen a clear example where we've been able to do so, while protecting the profitability, as I just mentioned. So this has actually been our strategy, and we are seeing that, of course, evolving, depending on the landscape of tariffs that has also been changing quite a bit over the last few months. Operator: The next question comes from Martin Wilkie from Citi. Martin Wilkie: It's Martin from Citi. Just coming back to the overcapacity being redirected from China that you referred to, just understand where we are in that process. And obviously, we hear a lot about China's antipollution drive to reduce overcapacity across other industries. You probably hear more about markets like solar, batteries, things like that. But is there a reduction or an anticipated reduction in Chinese overcapacity? Or is that something that you expect to remain like this for the foreseeable future? A.C. Tempelman: Yes. Thanks, Martin, for the question. So indeed, we look also at all the export statistics and what is happening with the trade flows. And indeed, what we see is that you see some of the decline in terms of trade flows from China to the U.S. seeing kind of an equal amount of quantities lending in the rest of the world and in Europe. So -- and that does cause some additional price pressure. To your question around, hey, do we expect that -- how sustainable is that -- in China, we see that is kind of flattening out, that price erosion. And well, to whether we see a significant consolidation in the Chinese market is still to be seen. So I wouldn't want to conclude anything on that at this point. Martin Wilkie: And just related to that, just keen to hear about your first impression of industry dynamics and the side that we might get a lot more detail at the Capital Markets Day next year. But when you consider what's happening with Chinese competition, but also, as you pointed out, you have some great connected products and so forth at Signify, what are your first impressions of Signify's competitive position and in particular, the moat around the business to address some of these competitor challenges? A.C. Tempelman: Yes. So there you really need to -- Martin, you need to really go deeper. What I see is that on the professional side, we play in many, many segments, and each segment has kind of its own dynamics. And equally, if you look at the business by trade channel, the dynamics around projects is very different than the competitive dynamics around the more traditional and online trade channels. So we need to make very explicit in our strategy and we will do that at Capital Markets Day about where we want to focus our efforts. And what is the portfolio that we want to build going forward. So that clarity will be created there. Operator: The next question comes from Akash Gupta from JPMorgan. Akash Gupta: My first one is on North America. So maybe if we can zoom in on U.S. business a bit. One of your U.S. competitors, they reported kind of flattish revenues in U.S. lighting, professional lighting, while you are talking about softness in the quarter, which was weaker than what you expected. Maybe if you can provide some color on what do you see in various categories in Professional channel? And I think you did talk about some weakness in public side. So maybe if you can talk about where do you see growth where you don't see growth in North America Professional. And is there any loss of market share that we should be aware of? So that's the first one. A.C. Tempelman: Yes. Sure. Good question. And indeed, the U.S. market, I mean year-to-date, we are growing in the U.S. We had expected more of the U.S. market in the third quarter, but that was not as high as expected. So we saw more flattish pattern. Now the two key messages on the U.S. market, I think, and you mentioned them yourself. One is that we see project activity is softening, and that is particularly driven by public sector projects. Will that change in the fourth quarter, that is to be seen. It's not that we lost projects, to your question around market share, but we see more of delays, right? So there's clearly a delay there. And then there's the trade channel where there, we see quite tough competition, particularly on the lower end of the product portfolio. So to your question about how are we performing in that context. So I think it's fair to say that we are on par with markets when it comes to professional projects. We are outperforming when it comes to connected and agricultural lighting, and we are probably a bit below par when it comes to the trade and do-it-yourself channels. Akash Gupta: And my follow-up is on organic growth guidance. So for this year, you are now guiding minus 1 to minus 1.5, excluding Conventional. And year-to-date, we are at minus 1.0. So that would imply that for Q4, you have -- the best expectation is flat organic growth. I think you already said consumer -- not consumer, sorry, OEM is going to be a bit weak in Q4. But maybe if you can tell us about the moving parts for both Professional and Consumer in Q4 that we should be aware of? And also on the growth, how much of this is also driven by price/mix compared to, let's say, simply lower than previously expected volumes? Zeljko Kosanovic: Yes. Akash, maybe to give a bit of color on the -- as you said, the building bricks on the dynamic of the top line in the fourth quarter. So first of all, if you look at consumer there, we see, as we mentioned, a strengthening momentum and we expect this to continue, and we have confidence on the momentum to continue with a strong Q4. Of course, this is the highest and the strongest quarter for that business. The Conventional business also is more predictable. Now to your question, I think the two areas where we see the most challenges and where we've looked, of course, at the different scenarios, Professional business. So this is trade as mentioned, in both U.S. and Europe and also the public sector in general as well as OEM business. So look, in the -- what is reflected in the guidance is the translation of what we see out of those scenarios of what could evolve in the fourth quarter in the continuity of our third quarter trends. So as we said, for the U.S. it's softer than what we had previously anticipated, but it's basically a softening of the momentum that we remain resilient in many parts of that business. Now on the price, maybe looking back, what we've observed across all our businesses is a stability in the pricing trends over the last quarters. However, with more price intensity, clearly, in the nonconnected part for the OEM business and also definitely in the trade part in Europe and also to some extent, in the U.S. So look, in terms of the price dynamics, it's not for price and mix dynamic. Of course, the mix will be impacted by our portfolio mix. But overall, no major change. And I think the softer or the update of the guidance is fundamentally driven by volumes. And as we said, mostly linked to professionally in the U.S. and OEM. Operator: The next question comes from Chase Coughlan from Van Lanschot Kempen. Chase Coughlan: My first one regarding the Conventional business, you, of course, talked about rationalizing the footprint a little bit more, which might have a several quarter and had some profitability.Can you just elaborate a little bit on the exact plan there? How much more can you rationalize, for example, how many facilities are you operating at the moment? And what will that be in a few quarters? Zeljko Kosanovic: Okay. Look, yes, the line was not totally right. But if I understood, and please correct me, the question, it's about the further rationalization of our manufacturing in convention. So look, yes, we've been, I mean, consistently, over the last few years, in driving, I think we used to have over 30 factories, now down to 3. So we've been doing proactively adjusting the manufacturing base, and we have a clear line of sight and a clear road map to do so. Of course, as I indicated earlier, in the process of doing so, then you do have adjustments that you need to really manage in the manufacturing process. So this is where we see temporarily, some headwinds or higher manufacturing costs in the process and the transition of doing so, but I think we have a very clearly established road map to drive that further, to the extent that is required to recalibrate the supply chain of that business, which we have been doing consistently over the last few years and for which we had, again, a clear road map for the coming years. Again, in that business, as a reminder, we are three parts. The general lighting or the conventional general lighting part of conventional, which is, of course, the part that is declining at a faster pace. We have the digital projection piece, which has a line of sight, let's say, another few years with very specific customers being served, and we have the specialty lighting, which has within that, growth opportunities. And that, of course, has a different road map of evolution in the future. And that will, of course, as we go along, see those pieces being bigger in the overscale of the conventional business. A.C. Tempelman: Yes. Maybe just to add to that, I was -- I spent some time with the conventional team, and I was very actually very impressed with that multiyear road map, that is really nicely faced with clear milestones and sign posts to bring that business -- harvest that business to the best extent possible. So I think the team is doing an extremely solid job on that. And to the question, is there more to go after? Yes. So we are now single-digit plants, but we also know how the trajectory will -- what it will look like going forward. Chase Coughlan: Okay. That's very helpful. I hope the line is a bit more clear. Now just on my second question, my follow-up, as you spoke about, capital discipline is one of the priorities going forward. And I'm curious on -- we're seeing net debt year-over-year increase. Earnings are, of course, coming down at the moment. Can I get your thoughts on the ongoing share buyback scheme? Is that something that you think should be continued going forward? Or do you have any, let's say, preferences for capital allocation elsewhere? A.C. Tempelman: Well, it's not that we don't have a capital allocation now, and I'll leave it to Zeljko to comment on that. But my promise was more around, I -- coming into this role, you talk to customers, partners, colleagues, but of course, also to investors. And I think what many investors rightly so ask for is, "Hey, what is your road map to sustainable growth"? What about your footprint and your portfolio? But also what about your capital allocation going forward? And I think we owe you that clarity, and we will include that in the Capital Markets Day mid next year, likely June, yes. Operator: The next question comes from Wim Gille from ABN AMRO -- ODDO BHF. Wim Gille: My first question is around Nexperia. Obviously, there's a lot of turmoil around this company at this point in time in terms of supply. And given that both Nexperia as well as you guys are at Philips. Are there any connections left there in terms of supply chain? And should we be looking into this in relation to your business? And the second question is, can you be a bit more specific around, let's say, the market share that you are looking at in the United States in terms of volumes? In particular, when I compare the performance of acuity versus you guys and if I did take into account a large part of the market used to be Chinese, which are no longer welcome there, I would have expected a bit more clarity on kind of your ability to win market share in terms of volumes in the U.S. Zeljko Kosanovic: Yes. Maybe first on the -- your question on Nexperia. So the Nexperia components are used in some Signify products. However, we do not anticipate a material impact to our supply in the near term. It's a very limited impact and mostly in the OEM business. And also at the same time, we do have an active and proactive supply chain risk management, right? So we continue to monitor the situation. And we always consists -- constantly review all the alternative sources. So that has allowed us to, in this specific case, also to apply with a lot of agility, the required mitigation. And yes, I think overall, I think we are seeing limited impact and we do have -- and the teams have been able to, of course, very, very fast, adapt and mitigate. And that's part of the strategy we have of proactive supply chain risk management and multiple sourcing to be prepared for those kinds. So limited impact for us in the near term. A.C. Tempelman: And then on the U.S. questions, are we keen to grow market share in the U.S.? Of course, we are. The -- but we need to make sure it's on strategy, right? So on the project side, clearly, we are doing well, and we are aiming to continue to grow. As I mentioned that we are probably a bit below par in the trade channel, and that is also where you see that dynamic indeed of the Chinese products. We are adding products into our portfolio that better fit that trade channel. So indeed, we see opportunities, right, in the U.S. to continue to grow our market share. Wim Gille: And then lastly, in terms of your priorities at the last slide, you also mentioned that you're looking to rationalize your portfolio. Are we then talking about significant chunks in terms of sales that you might exit or divest or whatever? Or is this more fine-tuning around the edges and it should not have a major impact on sales? A.C. Tempelman: Now let me just emphasize, Wim, that at this point, I say we are reviewing our portfolio. Don't read that as rationalizing because it's too early for me to say, "Hey, we're going to cut this or add that." It's too early. Now that said, I mean, I think, ultimately, the portfolio choices should follow your strategy. So what we'll do is we will create clarity about where -- what is the narrative for the company, where do we want to go on a 3-, 5-year horizon. If this is the company we want to build, then these are logical steps to take in terms of portfolio. And you should not only think line of business level there, but also around, "Hey, we are currently present in over 70 countries." We play in many different segments. But indeed, we also need to create clarity around how the different lines of business hang together and how we want to take that forward. So the answer is it's a review and all is included. I don't want to exclude anything at this point, nor do I want to create false expectations given where we are today. Operator: The next question comes from Marc Hesselink from ING. Marc Hesselink: A question is actually I mean two things related, both, one on gross margin and one on the OpEx. So I think given what you said before, it's likely that the lower gross margin versus previous quarters is here to stay or maybe even increase -- the pressure will increase a bit. In the quarter itself in third quarter, you really offset that by significantly adjusting your -- predominantly your SG&A cost. Is that also the way forward that when the gross margin remains under pressure that you will take more action in your short-term SG&A cost? Zeljko Kosanovic: Yes. Marc, thanks for the question. So I think, look, first of all, on the dynamic of the gross margin, what's very important to see in the dynamic. And as you said, comparing to -- I think we had 7 consecutive quarters with a margin -- gross margin above 40%, which typically would be on the higher end of the -- what we indicated as an entitlement. I think when we look at professional and consumer business in the last quarter and as we expect moving forward, we continue to see a very robust gross margin. So the -- let's say, the sequential decrease to 39.5% is entirely linked to the two headwinds I was mentioning earlier, first on the OEM business. So there is -- there are clearly the implications of the magnitude of the decline we see in OEM business on the manufacturing productivity. So this is really linked to the OEM business. And second, the temporary or transitory increase or headwinds on the manufacturing cost base of the conventional business, which we do expect to normalize by mid of next year. So I think in the dynamic of the gross margin, very clearly, very strong professional, very strong consumer. When we look, of course, at the dynamic for Q4, consumer having it's strongest quarter. And that, of course, will have a positive sequential implication on the evolution of the gross margin. So I think the dynamic on those two key pieces of the business are -- remain very strong and remain very much in line. Actually, we even saw sequential expansion of the gross margin in the Professional business quarter-over-quarter and a very limited, let's say, a decrease compared to last year, which was a very high comparison base with some one-off elements. So look, the trajectory of our gross margin remaining very strong. The two specific elements which are impacting on the OEM business linked to the volume and on the conventional business, which is more transitory. Now to your question on the evolution of the SG&A or the cost base indirect costs. As we indicated earlier, we are, of course, driving and further driving the optimization, making sure that we are deploying the investments needed to support the execution of our strategy, and this is what we are seeing clearly delivering on the connected parts and the specialty part of the business. And then, of course, at the same time, continuing to optimize and to adjust where needed, where we do see the most challenges. So I think this is a combination of those two elements that you see in the dynamic of our indirect cost base and that we expect to move forward. But the most important point is really the robustness of the gross margin absolutely sustained and confirmed for consumer and professional. Marc Hesselink: Great. Clear. And then maybe on the CapEx because also in last quarter and this quarter, the CapEx is a bit higher than last year. Is it a bit of timing? Or do you have -- is there a reason why CapEx would be increasing a bit? Zeljko Kosanovic: So there within the CapEx, I think you have, on the tangible part of CapEx, it's a limited increase, but it's more linked to some of the intangible product development. So there, we do have some -- but again, in the magnitude, I think it remains on a relatively low base, while the business remains a very low CapEx intensity. So you're right, we've seen sequentially some increase, but this is linked mostly to capitalized developments in innovation, R&D and also in the digitalization part. Operator: The next question comes from Elias New from Kepler Cheuvreux. Elias New: Just wondering on your other segment, which has seen strong momentum over recent quarters, but in the current quarter, seen a sequential decline in sales. Could you just perhaps give us some color on what is driving this? And how you would expect this to develop going forward? Zeljko Kosanovic: Yes, maybe to -- what is included in others is linked to the ventures business, and we do have one specific venture that has been developed and positioned on the connected consumer space in China. And as you mentioned, we've seen a very strong momentum. I think this venture that is continuing to perform very well. However, there were some, I think, favorable, let's say, contribution or propelling drivers coming also from the subsidies that were deployed by -- in China that were supporting an accelerated level of growth in the last quarter, which has normalized as we've seen in the third quarter. So this is the main -- the main element behind, but this is one of the ventures that is seeing a very successful traction and very well positioned in one part of the Chinese market, which is overall challenging, but that's one part of the market that has a good dynamic. And indeed, the translation of that has been lower in the last quarter compared to the previous quarters, but still substantially growing year-over-year. Operator: The next question comes from Sven Weier from UBS. Sven Weier: It's just one. And I think we've discussed a lot about relative performance of Signify against other lighting players. But I'm more curious about the relative performance of lighting within construction against other construction segments. And we're obviously seeing quite a bit of an underperformance here of lighting against other segments in the last couple of years. I guess my suspicion has always been around the renovation side that you see the kind of lagging effect of a higher LED installed base and longer replacement cycles, which I think has kind of been a bit denied by the company. I was just wondering if you're also aiming for the Capital Markets Day to provide us more color on that very point because I think it could be an important point to get a sense when does that kind of underperform potentially start to phase out and provide us more visibility on that item. That's my question. A.C. Tempelman: Yes. Thanks, Sven. And it's important so that we always start with market, not ourselves. And indeed, I think we -- the market is at the final wave of ratification, if you want, but we are not at the end of it just yet. So you still see that then having an impact, I guess, on the lighting sector in comparison with other construction-related sectors. On your question, will we create some clarity, yes. I think we'll create some clarity about how we see the harvesting road map for conventionals, but also how we see the market when it comes to ratification. And also where we see the growth opportunities because, clearly, beyond the hardware, we see then, of course, a lot of growth in connected, and that presents us with good opportunities as well. Yes. Short answer is yes, Sven, we will come back to that. Sven Weier: And so you agree that this could be a factor that you especially see on the renovation side out of the longer replacement cycles? Would you agree that this could be potentially one of the drags relative? Zeljko Kosanovic: Maybe what I can say on -- look, when we look at the dynamics of the market, how it translates because we, of course, have leading indicators that to understand exactly what you are pointing out, the look -- in short, I think the way -- the market, and of course, renovation is the most important piece of our exposure. I mean we are higher -- our indexation to the renovation is higher than to the new build in the professional nonresidential space. So to your question, I think, when you look at the different dynamics market per market, I would say, the answer to your -- or at least the conclusion you are taking is not the one that we would have. So I would understand that this has to be probably better articulated on how we see it forward, and we'll take note of your comment. But that's not what our analysis would indicate at least with the data we have. Operator: We have time for one last question, and it comes from George Featherstone from Barclays. George Featherstone: It's just about the capital allocation going back to some of the questions you've had already. Cash on the balance sheet is down about 35% year-over-year. Free cash flow is down 40% year-over-year on a year-to-date basis. You're obviously now guiding for lower cash generation ahead. How concerned are you about these trends? And do you plan to take any proactive actions to conserve cash given the weaker market trends that you talked about already? Zeljko Kosanovic: Yes. Thank you for your question. So first of all, if we look at the -- as part of our capital allocation policy and priorities, I think we've been very clear and that's what we've been driving consistently also over the past year to ensure and to sustain a strong capital structure, a strong balance sheet and a level of leverage that is supportive to an investment-grade rating sustained. So when we look at our leverage year-over-year, it has slightly decreased. So it's in line with what we expected. We have just completed, as was communicated also our refinancing with now a longer tenure for the EUR 325 million that was at maturity in the last quarter. When we look at the dynamic of cash generation versus the implementation of our capital allocation policy defined for 2025, I think there is no change or no concern to your point because we look at -- we are well on track on the execution of our share buyback program. We are able to define the priorities supporting growth as we intended. So look, no, I think the dynamic and the adjustment that we have indicated are not leading to a correction on the overall equilibrium, let's say, on the cash generation versus cash utilization that we defined in our policy for 2025. So no major change there. George Featherstone: Okay. And just specifically on the buyback, do you intend to complete that? I mean I think it's on the guidance you've given is an up to EUR 150 million. Is your intention to go all the way to EUR 150 million at this stage? Zeljko Kosanovic: So for now, we are well on track with the plan for the year. And yes, we are intending to complete, as what was committed again in our capital allocation policy, which still fits totally with the plan we have defined. So there, we are on track and expect to complete as was indicated. So in short, we had given a clear capital allocation policy for implementation in 2025, and we are executing to it consistently and expect to do so for the rest of the year. Operator: And with that, I will now turn the call back over to Thelke Gerdes for any closing remarks. Thelke Gerdes: Ladies and gentlemen, thank you very much for joining our earnings call today. If you have any additional questions, please do not hesitate to contact us. And again, thank you very much, and enjoy the rest of your day.
Operator: Ladies and gentlemen, welcome to the Sika 9 Months 2025 Results Conference Call and Live Webcast. I am Mathilde, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Dominik Slappnig, Head of Communications and Investor Relations of Sika. Please go ahead. Dominik Slappnig: Thank you, Mathilde, and good afternoon, everyone, and a warm welcome to our 9 months results conference call. Present on the call today is Thomas Hasler, our CEO; Adrian Widmer, our CFO; Christine Kukan, Head of IR; and Jomi Lemmermann, IR Manager. We are excited to share with you the highlights and key messages for the 9 months. Earlier today, we published our results and made the investor presentation available on our website. With this, Thomas Hasler and Adrian Widmer will provide further details on the results and the outlook. Afterwards, we will be ready to take your questions. I hand now over to Thomas to start with the highlights of the 9 months. Thomas Hasler: Thank you, Dominik. And also from my side, a warm welcome to this afternoon call. And let me quickly summarize the publications of today and some highlights underlying that we would like to share with you this afternoon. Sika has delivered a resilient performance in the first 9 months in a market that has -- remains to be dominated by uncertainty of various kinds. We have been able to increase our sales by 1.1% in local currency despite a heavy impact from our China construction business with a double-digit decline. Also this year, we are facing an unprecedented foreign currency impact. It's almost 5% and primarily due to the weaker U.S. dollar. But let me summarize a little bit our regions. And here, starting with EMEA. EMEA has seen for the whole year so far, a very nice double-digit growth in the area, Africa and Middle East. This is in line with the trend we have seen from last year, and it's strong also to continue. At the Eastern Europe business, we see green sprouts of growth. Eastern Europe is moving back to growth. It's mainly coming from the residential, so from the retail side, but it is clear this has picked up in pace and will also support the future evolution in EMEA. The region overall has reached 1.5% organic growth in the first 9 months. Americas on the other side, offers huge opportunities in the U.S. Here, we are collecting everyday data center opportunities that are unprecedented and growing and are not impacted at all by the uncertainties that are influencing other segments. The data center business has become a cornerstone of our direct business in the U.S. Just similar to our infrastructure business, which is doing very well in the U.S. Also here, we see more and more the impact of the Infrastructure Act that is delivering us opportunities from the East to the West Coast. We also see that the U.S. currently has some uncertainty that holds back on the reshoring. But here, plenty of these projects are ready to start, and we are also expecting that soon there will be more clarity and then production or construction start -- can start soon. We also see in the mature market of North America, a huge backlog in refurbishment, which is an opportunity to come soon as this backlog cannot pushed out very long. When I come to Asia Pacific, this is the region which has been most challenged, mainly influenced by the decline in our China construction business. If you would take the China construction business out of the equation, actually, the region, Asia Pacific would have been the region with the highest growth -- organic growth of around 4% in local currency. This comes from Southeast Asia and India with high single-digit growth. But as I mentioned, the China business is challenged and also we have taken here decisive measure to take here the margin and profit orientation above the volume orientation. But let me now move further into the P&L. And here, I would see the material margin increased to 55%, a significant demonstration of the synergies that we have been able to further increase from the MBCC and other acquisitions, efficiencies in our operations, and also a good cost management on the input cost side. This has also then trickles down to the EBITDA margin, which has rise by 10 basis points to 19.2% compared to prior year. Also here, the bottom line impact by the FX is quite significant. It is almost CHF 100 million when we look at the EBITDA alone. As mentioned before, we are taking decisive actions. This is in line with our manage for results key principle. We introduced our Fast Forward investment and efficiency program today, which builds on our leadership position. It will enhance customer value. It will improve operational excellence through digital acceleration and therefore, drive growth and profitability in the future. This program is built on a few blocks like investments CHF 100 million to CHF 150 million in the coming years. It is also coming with a shorter-term oriented structural adjustments in markets where we see ongoing weak momentum. Here, the China construction most pronounced, where we are making adjustments, which come with one-off costs of roughly CHF 80 million to CHF 100 million in '25 and the workforce reduction of up to 1,500 employees. The program overall will drive annual savings of CHF 150 million to CHF 200 million per annum with the full impact to come then implemented in the year of 2028. But now I hand over to Adrian to provide us more details and flavors to the financial 9 months performance. Adrian Widmer: Thank you very much, Thomas, and good afternoon, good morning to everybody attending. After Thomas' highlights, I would like to now put additional insights here to the financial results. In a market environment that remains challenging, as we have heard, we have achieved a modest sales growth in local currency of 1.1% in the first 9 months of the year, driven by acquisitions, while organic growth was flat year-to-date, owing to a minus 1.1% decline in Q3, driven by China. Without China, organic growth year-to-date in local currency was 1.7% or close to 3%, including acquisitions overall. Acquisition growth primarily came from the initial contribution of the 5 transactions we have consummated this year, including some residual impact of last year's bolt-ons, overall adding 1.1% of additional growth in the first 9 months of 2025. Sales were clearly adversely impacted by foreign exchange effects, especially as mentioned, related to a weak U.S. dollar, but also the RMB and the general strengthening of the Swiss franc. Overall, adverse foreign exchange effects reduced local currency growth by 4.9 percentage points in the period under review with a Q3 impact of minus 5.9%, slightly improved from a more significant impact in Q2, but still above the overall run rate. Corresponding growth, therefore, in Swiss francs was minus 3.8% for the first 9 months. Looking at the regions, region EMEA showed a similar Q3 trajectory as in the first half year, growing 2.1% overall, 1.5% organic and 0.6% through acquisitions. As Thomas has highlighted, business performance was particularly strong in the Middle East and Africa, where we recorded double-digit growth, but also with a good momentum in Eastern Europe. Here, foreign exchange effects at minus 3.3% year-to-date remained unchanged in Q3. Sales in the Americas region increased by 2.9% in local currencies, while Q3 growth was in line with Q2. Overall, year-to-date organic growth was 0.8%, while acquisitions continued to add 2.1% of growth in the period under review. While the business year got off a good start, U.S. trade policy measures triggered the mentioned uncertainty in the markets and slowed down momentum. While this caused Sika's growth in the U.S. and Mexico to soften, performance remained solid in Latin America overall, but also in the U.S., as highlighted by Thomas, some strong momentum in several areas. Here, adverse foreign exchange effects were most profound and reduced local currency growth by minus 7% in the region in the first 9 months, driven by particularly here the strengthening Swiss francs against the U.S. dollar of more than 10% starting in Q2, but also the devaluation of the Argentinian peso. Sales in Asia Pacific declined by minus 3.9%, while organic growth was minus 4.3% for the period. This result is mainly attributable to the challenging deflationary market environment in the Chinese construction sector for which we are focusing here on protecting our margins and driving efficiency. If we exclude here the impact, sales in the region would have been around 4% in local currencies. And also here, most -- or the strongest market was in India and Southeast Asia and also in Automotive & Industry, where Sika continued to expand its share in its technologies in both the local as well as international manufacturers. Also here, an M&A impact, namely the acquisition of Elmich contributing here 40 basis points of growth, an adverse foreign exchange impact at minus 4.6% reduced here local currency growth to minus 8.5% in Swiss francs in the first 9 months. Now turning to the full P&L and looking at material margin. Here, we have, as highlighted, driven up gross result by 30 basis points year-on-year due to also a very strong Q3 expansion, 55% of net sales in the first 9 months. This is also in spite of the deflationary environment in China and a small dilution of 10 basis points coming from M&A, but also overall material cost in recent months, also driven by our procurement initiatives showed a slightly declining trend. Reported operating cost this year, including personnel costs as well as other operating expenses, decreased slightly under proportionally in the first 9 months of the year versus the same period of 2024. Here, continued strong MBCC-related synergy trajectory as well as efficiency measures were offset by ongoing yet reducing cost inflation, currency impacts as well as initial onetime cost of around CHF 18 million in Q3 related to our structural cost reduction program. In looking at personnel costs specifically, which were down by minus 0.3% year-on-year on a reported basis, we have seen continued underlying wage inflation at around 3.5% per annum on a like-for-like basis. This is partially and increasingly being offset by cost synergies as well as operational and structural efficiency initiatives, but negatively affected by this initial fast forward severance expenses. Other operating expenses decreased strongly over proportionally by minus 6.5%, driven by accelerated efficiency measures and MBCC synergies. Overall, the integration of MBCC is largely concluded, while strong delivery of synergies is ongoing. Realized total synergies amounted to CHF 130 million in the first 9 months of '25 an incremental CHF 41 million versus the same period of last year, representing an annual run rate of CHF 166 million and therefore, well on track to push towards the upper range of the increased guidance of CHF 160 million to CHF 180 million for this year. Overall, EBITDA margin, as highlighted, increased by 10 basis points to 19.2%, up from 19.1% in the first 9 months. Absolute EBITDA decreased under proportionally by minus 3.3% from CHF 1.702 billion to CHF 1.645 billion due to foreign exchange translation effects, broadly in line with the effect on the top line also here highlighting our strong natural hedge and decentralized cost base in line with invoicing currency. Depreciation and amortization expenses were virtually flat in absolute terms at CHF 407 million or 4.8% of net sales as favorable translation effects were offset by PPA effects on the intangible side as well as a slightly higher depreciation rate. As a result, EBIT ratio decreased by 10 basis points to 14.4%, while absolute EBIT also was impacted by currency translation effects. If we turn below the EBIT, here, net interest expenses decreased and continued to increase significantly by CHF 16 million to CHF 105.5 million in the first 9 months. This compared to CHF 121.6 million in the same period of last year. Decrease is largely related to the scheduled repayment of our first Eurobond in Q4 '24 that was taken out for the financing of MBCC. And in addition, other financial expenses also showed a favorable development, representing a net income of CHF 10.2 million, up roughly CHF 7 million compared to the same period of last year, unfavorable hedging cost development, lower inflation accounting effects and also higher income from associated companies. On the tax side, group tax rate increased from 21.5% to 23.8% in the first 9 months. This is largely related to a positive onetime effect in the previous year. This is primarily the deferred tax benefit relating to a foreseen legal restructuring. And this year, we had also higher withholding tax on internal dividends distributed in the second quarter this year. As a result, net profit ratio was modestly down to 10.1% of sales. This is 20 basis points lower than last year. And also here, absolute net profit of CHF 870.9 million was impacted by currency translation effects. On the cash flow side, operating free cash flow in the first 9 months was CHF 630 million, which continues to be about CHF 220 million lower than cash flow in the same period of last year. However, cash generation in Q3 was strong and in line with last year. And the reduction here is primarily due to unfavorable currency movements compared to last year, particularly impacting here hedging of intercompany financing, but also partially due to a modestly higher seasonal increase in working capital slightly higher CapEx as well as higher cash taxes. For the full year, we expect to partially close the gap in Q4 and full year operating free cash flow in line with our strategic targets of higher than 10% of net sales, additionally supported by group-wide working capital initiatives. With this, I conclude my remarks on the 9-month financials and hand back to Thomas for the outlook. Thomas Hasler: Good. Thank you, Adrian. Yes, let me be short and brief on the outlook. We have published our outlook, and we confirm for '25, our expectation of modest increase in net sales in local currency for 2025. And our EBITDA margin of approximately 19%, including the one-off costs from the Fast Forward program, which I referred to earlier. The medium-term guidance, we confirm our profitability and cash flow expectation with reaching the band of 20% to 23% EBITDA in 2026. And we have created here a new guidance based on the revised growth assumptions for the market of 3% to 6% local currency net sales growth for the period of '26 to '28. Dominik Slappnig: We are -- with this, basically, we are now opening the line for your questions, please. Operator: [Operator Instructions] The first question comes from the line of Ben Rada Martin from Goldman Sachs. Benjamin Rada Martin: I have three questions, please. My first was on, I guess, the annual savings you've introduced today, the kind of $150 million to $200 million amount. Could you maybe break down the source of these between the two programs being the efficiency program and investment program? The second would just be on pricing growth. I assume you're starting to have some conversations around 2026 pricing. Could you maybe just give us a steer on what kind of level of pricing growth you expect at the group level? And then finally, on China construction, thank you for the disclosure today around that business. I'd be interested for our kind of housekeeping side, what share of the China business would be in construction at the moment? And what would be the split between, I guess, the channel side and the project side within China construction? Adrian Widmer: Yes. Thank you, Ben, here for the question. I'll start with the first one. We will provide more granularity here on, let's say, sort of the breakdown and the content of the impacts here then in November. But maybe at this stage, we expect about CHF 80 million out of the CHF 150 million to CHF 200 million to hit the P&L in a positive way in 2026. On maybe the pricing, and I'll take this one here, too, we had about 0.6% price increase year-to-date here, excluding China. China in a negative environment with negative pricing, but about 60 basis points for the first 9 months, which we're expecting to sort of roughly stay at that level for the full year basis. Thomas Hasler: Good. And to the third question in regards to our China business, our China construction business is about 70% of our China business. The remaining 30% is related to the automotive industrial manufacturing business, a business that is growing nicely in line also, let's say, with the transformation to e-mobility and the increased volumes overall. The 70% of the construction-related business, the larger portion, also roughly about 70%, 75% is the indirect business. It's the business that is related to the tile setting business in the residential area. And then the 25% direct business is especially strong with sensitive infrastructure programs and with the foreign direct investments of multinationals building in China. As we all know, the residential business in China has some challenges with huge inventories still being around and the foreign direct investment business has declined this year substantially, roughly 25%. These are the two drivers for the very soft business that we are facing and also then mandating that we take here decisive steps to structurally adjust to this condition as we don't see that quickly to resolve in the near future. Operator: The next question comes from the line of Priyal Woolf from Jefferies. Priyal Mulji: I just got two actually. So the first one is just on the rebasing of the midterm local currency sales growth. Would you mind just reminding us what the contribution was from market growth back when the target was 6% to 9%? Was it around 2.5%? And I'm just asking that in the context that you've obviously cut the midterm target by 3%. Are you effectively now implying that market growth will be flat or possibly even down for the next couple of years? Or is there something else sort of buried in the target cut today in terms of lower outperformance or lower pricing or lower M&A. And then the second question is just on the CHF 120 million to CHF 150 million investments that you're talking about. Is that CapEx? Or is there some sort of P&L cost involved with that? Thomas Hasler: Okay. Thank you, Priyal. I'll take the first one. And here, you are absolutely correct. Our former guidance was built on a 2.5% market expansion. And our current or our adjustment is basically correcting for the current, but also for the foreseeable future and here is more neutral or slightly negative. The elements of the strategy, the market penetration and the acquisition are from our side, unchanged, but the market has changed substantially longer than anybody could have anticipated. And therefore, we made this readjustment, but it's mainly -- or it is the market that really is unpredictable at this point, and we have taken that down to a neutral, slightly negative level. Adrian Widmer: Then the second one here, Priyal, on the investment program, the CHF 120 million to CHF 150 million. This is largely CapEx. There is about a 30% OpEx element as this is also relating to implementation of platforms, ongoing support digitalization, also training activities and so on. So about 30% of this is ongoing here OpEx, which we don't see as sort of onetime costs, but really sort of ongoing implementation and support cost. Operator: We now have a question from the line of Paul Roger from BNP Paribas Exane. Unknown Analyst: It's [ Anna Schumacher ] on for Paul today. I have two. Does the rightsizing China suggests you believe the slowdown is structural rather than cyclical? And will it impact your distribution strategy in the country? And secondly, when do you expect to see any benefits of reshoring in the U.S.? And how meaningful could it be? And what are your expectations for U.S. infra next year? Thomas Hasler: Okay. Thank you. Yes, I think on -- we have to differentiate in China between the two segments. I think the residential market expectation also for the next 1 or 2 years are still on a very low level. So this overbuild is not being addressed and it is also of less a priority for the Chinese government. So here, this is a market that will remain challenged probably for a year or 2 longer. And therefore, our, let's say, adjustments are structural in nature by now serving the reduced volumes with our market leader position that we have in that segment and also adapting the portfolio to the key application, the tile setting and waterproofing area, where we have a dominant position and also, let's say, discontinue low-margin sections of that market. The distribution channels are well established. They are the backbone that we serve. Here, actually, we are adapting that distribution channel to increase the spread and be able to further get closer to the market. So here, actually, we are increasing, and this is also helping to get better coverage and build on our market leadership in the segments where we have very good margins and where we also see possibilities to outperform the market. The construction direct business is a business where we believe that this is cyclical in a way that this foreign direct investment has an impact. But at the same time, we have in China also a more maturing, let's say, base infrastructure in place that requires more refurbishment and renovation. We are working in building up this in China with our competencies. So here, I would say the foreign direct investments, not that speculative how fast that will normalize, but we have there also possibilities to offset. And here, we are structurally adjusting also to be more dominant in the refurbishment, which when you look at mature markets like Europe or the U.S., this is the core of our business in construction. It has been relatively small in China so far, but that's a great opportunity for us to offset some other weaknesses. And then on the U.S., I'm always optimistic about the U.S. market. The U.S. market has seen a great start into the year. It has then been challenged with uncertainties and unpredictabilities, which many projects for industrialization or reshoring have been put on hold, ready to go. These projects have been, let's say, engineered to the level where it can start digging and building. And this is now a bit speculative question when will enough clarity be there. But I think with the tariff discussions, things are more and more becoming, let's say, not predictable, but it is easier for corporations to make conclusions. And I expect that we see in '26 on the reshoring, some nice progression as this holdback of projects as we see at the moment, will probably then be overwhelmed by also serving the increased demand. The consumption in the U.S. is not that bad. And I think this is a bit artificially pushed back. And here, I'm more optimistic that this will take place going into'26. Operator: The next question comes from the line of Elodie Rall from JPMorgan. Elodie Rall: I have three, if I may. First of all, on the China restructuring, you're talking about reducing headcount by 1,500. So can you give us a bit of color about how much that this represent as a percentage of China headcount? And also how much does this represent versus the CHF 80 million to CHF 100 million total cost savings? How much is China from there? And how could we think about China growth in H1, therefore, next year, given still the hard comp, I believe. So all the growth will be H2, I believe. Second, you talk about other weak markets driving this midterm growth outlook cut. So maybe you can elaborate on what they are? And lastly, on dividends, I was wondering if you would aim to protect the dividend level given additional cost savings -- costs this year. Thomas Hasler: Okay. Let me start with the China restructuring. The 1,500 employees and the largest portion from a single country comes from China. And it is a substantial reduction. It's a double-digit reduction of the Chinese workforce that is ongoing. This is something we are implementing without any further delay, but this is substantial. But we also have other markets that are -- or segments of markets is maybe the better way to put it because it's not countries or markets. It is actually segments that have softer performance. And here, this will then, in some, come up with the 1,500 employees. You asked about the China impact in H1 next year. it is clear that we will have some spillover from this year into next year as the effects that you have seen in Q3 and that we also expect to be significant in Q4 will, of course, compared to the base of the first half of '25, still be negative, but it will then also turn in the second half of next year and the impact will also, let's say, reduce. And as I mentioned before, Asia Pacific has a strong performance. It is the strongest if we exclude China. So here, we're also confident that Asia Pacific will contribute to the overall group growth next year, having strong engines in Southeast Asia and India. Then the dividend, maybe. Adrian Widmer: Well, maybe on the dividend, obviously, this is then a decision by the Board. This has not been taken yet, but I'm not expecting here that, let's say, the program will have a negative impact here on our dividend policy. Elodie Rall: And sorry, just to come back on China. How much does this represent in terms of the overall CHF 80 million to CHF 100 million cost savings -- cost this year, cost restructuring? Thomas Hasler: This is a bit too early. I mean we are going to really make an effort then in 4 weeks' time to give you more granularity about the program in regards to the investments, but also in regards to the cost split and so on. But it's clear, it is significant. I mean that's -- but it would be premature now to go into the details, but China is a large portion of the structural adjustment. Elodie Rall: And just to finish up on my previous question, what are the other markets that you have identified as weak? Thomas Hasler: Yes. The point is, as I mentioned, markets are soft. Weak is something I attribute to segments, segments where you see that, for instance, in Europe, we had a very good initiative on energy savings initiative coming from the Green Deal. These are fading. These are implications that we are, of course, considering also in our business. But the markets overall are soft. Europe is soft, but we see Eastern Europe is coming back. We also see that the northern part of Europe. So here, when I look into '26, I'm quite optimistic that we will see positive trends. Operator: We now have a question from the line of Ephrem Ravi from Citigroup. Ephrem Ravi: So two questions. Firstly, given the reduction in the overall growth target to Priyal's point, 2.5% was the market. But does this change your view on the market going forward? Or this is strictly a function of the fact that last 2 years, the growth has been less than your 2023 to 2028, 6% to 9%. So you're just resetting for the -- for what's already happened and your medium-term actual view in terms of how the markets are going to grow hasn't really changed. So it's just mainly a mark-to-market of what's already happened in terms of local currency growth so far? And secondly, China, I thought it was about CHF 1.2 billion of sales last year. And if it is down double-digit percentage, probably goes down to closer to CHF 1 billion. So given the low base, do you expect that to kind of be less of a drag going forward? So in theory, you should see faster growth just because of the mix effect of China not being a drag being on the numbers? Thomas Hasler: Yes. I think what is very important in our adjustment of our midterm guidance, this adjustment is related to our assumptions of the market compared to the original assumption. For us, most important is the outperformance of the market wherever they are. And this is in our strategy clearly outlined with the market penetration. We have not changed our ambitions on the outperformance of the competition and the market. And we also haven't changed our approach to be the consolidator in a very fragmented market through our acquisition activities, which I think also this year, we see with 5 transactions and the full pipeline of prospects. I think we are very confident on those elements where we have it in our hands. The markets, we had to reflect and also consider that there is also not a balancing act between the regions. We have a situation where actually softness is a global topic, with a few exceptions like maybe the Middle East, but not so relevant in the global scheme. So here, it is -- this is the driving factor for the adjustment is that we do reduce the market aspect, but do not change our commitment to outperform organically and then also on the acquisition, we will deliver as we originally have indicated. Operator: The next question comes from the line of Martin Flueckiger from Kepler Cheuvreux. Martin Flueckiger: Martin Flueckiger from Kepler Cheuvreux. I've got three questions. And I suppose I'll take one at a time. Firstly, I'd just like to go back to your statements regarding pricing in the 9-month period. If I understood you correctly, you were talking about 0.6% up year-to-date, excluding China. Now I was just wondering what does that mean for the group overall because that's really the number, I guess, that interests most people. That's my first question. I'll come back with the second one. Adrian Widmer: Yes. I mean, this means overall, it's pretty much a flattish picture for the group overall. Martin Flueckiger: Okay. And then secondly, you were talking about -- I think Thomas was talking about data centers being ramping up pretty rapidly in the U.S. Can you -- if I remember correctly, in the U.S., data centers account for about 8% of sales -- construction sales. Has that number changed in the 9-month period? And what kind of growth do you expect from this vertical in 2026? That's my second question. Thomas Hasler: Yes, you are right. This is about the magnitude. And this is the fastest-growing segment in construction and therefore, also logically, the contribution to the overall construction business in the U.S. is increasing, but it's about 8%. And what makes us very optimistic, I mean, these are also projects that are lined up. They are executed. They are actually rushed in execution whenever possible. So the lineup of projects that we have visibility gives us high confidence for the next 18 to 24 months. So this is a business that we like very much as it is also a premium business. It is driven by customers that buy not, let's say, products or systems, they buy peace of mind. They want to have undisrupted operations 24/7, 365. And that's a key element of our unique position in that market. Not only in the U.S., this spreads all over the globe because the owners of the data centers have very similar names at the end, and they don't want to take risks when they go abroad. And therefore, we are also leveraging that very much into Europe and other parts of the world. Martin Flueckiger: Okay. But sorry, just to clarify, when you say it's the fastest-growing segment in the U.S., I guess that's not really surprising. But I was just wondering whether you could tell us what kind of growth Sika is expecting from data centers in the U.S. in 2026. Do you have any broad idea at this point in time? Thomas Hasler: Of course, I have. And I would sum it up this is double-digit growing and this is significant. So it is not 10% or 11%. It's really a business that has drive and where we also put full focus on. This is the time. Martin Flueckiger: Okay. That's helpful. And then finally, my third question, could you talk a little bit about competitive pressures in construction chemicals this year, what you're seeing on the ground and whether it's intensifying or whether it's stable, whether there are any particular regions apart from China where you're seeing competitive pressures easing or worsening? Thomas Hasler: I think here -- I mean, China is a particular case, and I think Adrian indicated, China is, of course, price is super relevant. And as he mentioned, the overall group is at 0.6% without China. With China, we are at neutral. So China is a market in itself. But when I look at the rest of the globe, you can say -- when you have a booming market, pricing is probably less pressures because it's about getting the jobs done. We don't have booming markets everywhere. Therefore, I would say this is a normal situation where price is of high relevance, but nothing exceptional. Nothing -- would you say this is kind of strange. This is a normal behavior of markets when volume are slow, and this comes from small, medium, large. This is nothing in particular, nothing has really changed. But of course, when you have soft markets, then here, the tendency is that you have more pressure on price. But I think our performance in the first 9 months demonstrates we do have pricing power. We have here a leadership position that we can. This is probably for small players, midsized player, a bit less convenient as they are suffering more in soft times. Operator: We now have a question from the line of Cedar Ekblom from Morgan Stanley. Cedar Ekblom: I've got some follow-ups, please. On the growth for 2026, the exit rate at the end of this year is likely to be breakeven, maybe even modestly negative if trends don't really change in your core markets. I'd like to understand how we get to 3% in 2026. I think Elodie touched on this question, but I'd like to hear explicitly if you actually think 3% is the right number for 2026 based on what you see today, appreciating that things can change or if in 2026, we should actually be anchoring around a number below that range within the potential for growth to accelerate into '27 and beyond. So that's the first question. And then the second question, just in terms of the guidance on year-on-year margin improvement into 2026. So this year, I think it's 19.5% to 19.8% without the costs. And then if I've got the moving parts right, you have CHF 80 million of cost saves from the program next year. You have CHF 40 million synergies still to come if I look at the midpoint of what you're guiding to. So that gives me about 100 basis points of margin improvement. But I'd expect your leverage is still going to be negative. I mean, if I look at that chart on Slide 8, I think it is, you have negative operating leverage this year with growth that's probably not dissimilar to what the growth is going to be like next year unless anything doesn't change. So what other levers should we be thinking about into next year that actually allow us to see margins rise? Is there something we should be thinking about on gross margins improving? Is there some other kind of cost initiative that we should think about beyond this CHF 80 million program, just like sort of ordinary course of business efforts that's sort of coming on top of the CHF 80 million sort of special program? So those would be the two questions. Exit rate on growth is clearly below the 3%. How do we get to 3%? And then how do we actually get higher margins year-on-year even withstanding the 100 basis points or so of improvement that comes from this program plus synergies not yet come through from MBCC. Thomas Hasler: Okay. Thank you, Cedar. And I take the first question, and it's probably the most difficult question because it is clear. We don't know what's going on to happen next year. So let me phrase it in a way. This is not a guidance for next year. But if we assume everything equal, China, Europe, North America and so on, your assumptions are correct, that the exit rate at the end of the year will be low modest growth going into next year. We will still have spillovers from China. We will have benefits from trends that are supporting, but the magnitude to the lower end of our midterm or our adjusted midterm guidance is still there. So this is not yet a guidance, but it's also not a promise that every year of the coming 3 years will be within that range. I think the first year is probably the one that has, let's say, the highest challenge, but we also anticipate that there's a good likelihood in '27, '28, where we can substantially also move on that depending on how markets are evolving. So here, I think we have to be clear. This is not a straight line. This is also a line of recovery, which we can drive to some degree ourselves. I think we have a healthy acquisition pipeline. We see there some opportunities. I think also when we look at the pricing power that we have and also expecting that China is going to, let's say, be less impactful. So we have this element as well. But this is not a guarantee at this point of time that this 3% to 6% will be applicable to every of the consecutive years. Over the 3 years, we are very confident. But going into next year, we will assess the situation, of course, we will assess the markets and then we will establish our proper guidance for 2026. Adrian Widmer: And on the, let's say, the elements here of the margin improvements, and it's essentially the ones we're driving. I think there is also an opportunity on, let's say, the material margin, the gross margin to continue to drive. I mean, you have the synergies, as you mentioned, there will be another 30 to 40 basis points. And our improvement, let's say, bucket, which will clearly be driven here by Fast Forward program here, let's say, the sort of the CHF 80 million impact plus the ongoing activities we have, but there is not going to be an additional, let's say, program on top of it, but really sort of driving the different elements to an EBITDA of above 20%. Operator: We now have a question from the line of Arnaud Lehmann from Bank of America. Arnaud Lehmann: Could we talk a little bit about the gross margin? I guess that was quite a solid performance in the third quarter. I think a 5-year [indiscernible] when there was back in Q3 2020. So is this the new normal? Is 55%, you believe the new normal going forward for Sika and into 2026? That's the upper end of your historical range? Or do you think there could be upside to this? My second question is coming back on the Fast Forward plan. Is it something you've been thinking about in the last years or in the last months, let's say, was it something you were going to do anyway? Or is this more of a reactive move on the back of the recent decline in Chinese volumes or maybe a little bit of both? And the third question and last one on -- you hinted in the previous question around M&A activity. Considering the slower trends in underlying markets, do you think you could ramp up M&A activity while remaining within the criteria of your A- credit rating? Adrian Widmer: Let me take here the first one. Thanks, Arnaud, for the question. I think here, of course, the 54% to 55%, that's is for us clearly sort of also a range where we sort of monitor and steer the business. I mean it's never been sort of a very sort of dogmatic, let's say, hard target. And I think there is several elements obviously impacting here material margin, which, again, for us is an important element to steer the business. I think we're obviously here that the pricing element, selling value, driving innovation, also being able for us to position our solutions at the higher value point is important and an ongoing activity. I think on the input cost side, we have more recently seen, I would say, a more favorable picture also driving here clearly initiatives to improve it. So I think there is obviously a bit of upside here on the material margin, although this is influenced by many sort of different elements. So I think it's obviously something we actively steer as one of our here profitability buckets overall. Thomas Hasler: Okay. Then Arnaud, on the Fast Forward question, it's an interesting question because it has both elements. Digitalization is something we have highlighted as a megatrend in our strategy. And we are doing quite well in progressing. We are doing -- we bring digital solution. We just announced this week our Sika Carbon Compass. You can say, yes, we do. We are implementing SAP across the globe. But honestly, the speed of adoption, the speed of implementation is, in my view, not the speed that I would like to see. Digitalization has a different speed than construction industry and the construction industry is our great opportunity to be here the unprecedented leader in digitalization. So this has been, let's say, something I have observed over a longer period of time than 2, 3 months. And I see this as a great opportunity here to make firm steps, invest into the customer value. The customers are challenged in many different ways. Digitalization can ease, let's say, those complexities, can make business easier to execute and focus on core things. I think this is something that we want to drive, and this is the opportunity to integrate it also into this fast forward program. We have done great. I mean, Sika has a unique data pool. It's the leader in the market, the innovation leader, it's the market leader. We have data all over the globe. We are creating a pool that we can exclusively use to do data mining and leveraging those competencies. So for me, I'm a big fan of this digitalization, and I'm happy that Fast Forward gives us now also the possibility to accelerate substantially, let's say, on the tools, on the solutions, but also upskilling our organization that we also here can adopt much faster than in a regular environment. The other part, let's say, the China, the restructuring in general is something that has become in line with our, let's say, guidance adjustment for the midterm. Markets are soft, markets, we cannot change them. But in markets that are soft, this is the best time to make substantial adjustments. This is the time to act because when you act at this time out of a position of strength, you can then -- when backlogs are worked off, when markets are turning, you are in the strongest position to benefit from a boom in construction that will come, that has to come. The underlying demand is there. It's not served. So it is also a point that came to our realization over the course of this year and then more pronounced in the second half, which ultimately results in this Fast Forward program with the two elements that are super relevant, short term improvements, but of course, then also more midterm, let's say, benefits for the customer, driving our growth and utilizing the unique, let's say, digital footprint that we can have and that we want to have going forward. This is something I consider these digital capabilities, a key competitive advantage that we are going to achieve. Here, size matters. The globalization matters. We have a global input. We have it from Japan, China, India, Middle East, Europe, North and South America. Now all these bundled together gives us huge opportunities, which I want to tackle with our Fast Forward in an accelerated way. Arnaud Lehmann: And on M&A? Thomas Hasler: Sorry, M&A. I think here, I come back to the prior question. I mentioned smaller and midsized companies are more challenged when it comes to pricing power in soft markets. And we see here a clear, let's say, pain level reach for small and midsized player that they are considering selling their companies, even so it is probably not the best time to get the best price, but they hang in there and they consider selling much more now than maybe a year or 2 ago. And yes, we do have here also opportunities to, let's say, to acquire for attractive multiples business that maybe a year or 2 ago would have rejected to entertain. And I do think with our strong cash generation that we also have the ammunition to serve those increased possibilities. But it's also -- I think as always, every challenge has its opportunity. The opportunities on M&A are excellent, and we have the power and the will also to take advantage. Operator: The next question comes from the line of Ghosh, Pujarini from Bernstein. Pujarini Ghosh: So I have a few. So my first question is on the EBITDA margin guidance for this year. So without the restructuring costs, you have not cut your margin guidance. And in 9 months, you've done 19.2%. So to get to the bottom end of the range without the restructuring, you would need to do something like 20.5% in Q4. And looking at the historical trends, we've never seen such a big jump between Q3 and Q4. So could you explain why this year might be different and the various levers that you could pull in Q4 to get close to your target? And my second question is just a housekeeping. So what is your current guidance on the tax rate for the full year and for future years? And finally, coming back to the China restructuring plan. So could -- so of the CHF 150 million to CHF 200 million cost savings, could you give the split between how much of this would come from the restructuring in China and how much from the investment program that you're going to do? Adrian Widmer: Thanks, Pujarini. I'll take here the question one by one. On the 2025 EBITDA guidance here, I think a couple of points. On the one hand, you're right, the 19.2% here in the first 9 months. As I mentioned here before, we have about CHF 18 million of here one-off costs already included in Q3. So that's one element that basically puts here, let's say, the anchor at 19.4% and also in terms of, let's say, the one-offs we're guiding for the CHF 80 million to CHF 100 million, not everything is EBITDA relevant. We have about 25% to 30%, which is more sort of write-downs and impairments overall, which obviously then for Q4, yes, means, of course, a solid profitability quarter to, let's say, get at least here to the lower range here of the 19.5% to 19.8%. On the tax rate, here we had in previous years as reported, also one or the other positive impact, one-off effect. I'm expecting here for this year sort of around 23% in terms of the overall tax rate, which is also the level here of the next years to be expected roughly. And thirdly, on the question here of, let's say, sort of the China impact and the breakdown, again, I would like to defer here the answer and more granularity then to our November event where we will provide more sort of granularity on the various aspects of the program. Operator: We now have a question from the line of Patrick Rafaisz from UBS. Patrick Rafaisz: Two questions. One is on your cash conversion targets. You confirmed the 10% plus for this year. I was just wondering with the extra spending for the Fast Forward program, both on the cost and the CapEx, would you already fully commit to a 10% plus cash conversion also for '26? That's the first question. Maybe related to that, can you also talk a bit about the phasing of these investments? And then the second question would be on China and the portfolio adaptation you talked about. Can you add some color around the share within the China business that we are talking about that you are exiting due to the maybe market conditions or too low profitability? And also how long that will take to implement? Adrian Widmer: Good. Well, let's -- thanks, Patrick. I'll take the first two on the cash conversion, yes, clearly also confirming for '26 here, the targets to remain in place in terms of the cash conversion of at least 10% of net sales. Obviously, here, there is an additional element of CapEx, but that will be within that threshold. Second one on the phasing, again, I'll try again to convince you that we will provide more granularity then on the various sort of elements of the program, also the impact and the phasing then at the end of November. Thomas Hasler: Good. And then Patrick, on the China business. Our China distribution business is built on exclusive distributors all over China. And with the start of the softness of the market, our China team has tried to introduce, let's say, lower-margin trading products to support our distributors so that they can take a bigger share of wallet. And this came, of course, at the backside that the top line was then still showing some progression, but dilutive on material and profit margin. And this came then to a level where we had to say this needs to be reversed. So this has been a rather short-term element that has been introduced, and it is also something that we can flush out relatively soon. But it will be visible this year and next year as we -- some part is still in this year from the first half, and it will be out in the second half next year. So we will have some comps there that are maybe not so clear to read, but this is rather something that has been used tactically, but had to be revised. And that's what I mean with the core range. The core range, which is our tile shaping range and waterproofing range, which we produce ourselves and not tolling products that are adjacencies. Operator: The next question comes from the line of Alessandro Foletti from Octavian. Alessandro Foletti: Just on the automotive business, maybe we don't speak much about it. Obviously, it has been growing strongly in China, but how is it doing in the other regions, particularly also, yes, Europe and the U.S., I would guess. Thomas Hasler: Yes. I take that lately. I think, yes, we haven't talked much. But as you have seen, our growth in the industrial area is at organically 0.8%. It is doing better than our construction organically. It has here support from China, but also our business in Europe and in North America is holding strong despite a declining volume situation. And also, especially in Europe, we have still, let's say, a bigger, let's say, variation of models in the market, which means we are carrying more complexity serving, let's say, our customers. And despite that, we can still have above the build rate top line and especially also maintain a very healthy bottom line in that business. It is having a different direction. I think in Europe, we see also going forward, probably a comeback of the incentives for the electrification. This will be very positive. Germany is considering this for the years to come. So I'm on the automotive side in Europe, with the conversion, we will have more contribution. We have more opportunities. So I think we will see a positive trend in Europe. And in North America, we have there a bit the holdback with the tariffs. The automotive business in North America is highly, let's say, linked between the three countries with the supply chain. We serve the market out of Mexico and of the U.S. But also here, there's a different demand. The electrification is less of a relevance. It is truck and SUVs, pickups are relevant. These are for us higher contribution vehicles anyhow. But we also expect that when the new North American trade agreement is finalized, which hopefully takes place by the beginning of next year, then there will be also clarity and investments in automotive so that they can come back with competitive offerings to the end market, which at the moment is hesitant to buy in North America. I'm optimistic. I mean the business also in Brazil is doing very well. The business in Southeast Asia is doing very well. They are, of course, of smaller volumes than the three main markets. But I think we will have year-over-year, nice contribution from the automotive or industrial side. Alessandro Foletti: Right. But I'm not sure I get it right. It seems from your talk that maybe both in Europe and the U.S. is maybe still slight negative or flattish? Thomas Hasler: Yes. Yes. I mean the build rates are minus 3%, minus 4%, the car build rates. And we are flattish in Europe and slightly below in North America. Operator: We now have a question from the line of Yassine Touahri from On Field Investment Research. Yassine Touahri: Just two questions on my side. We've seen oil prices coming off over the past couple of months. Does it mean that we should see limited raw material inflation in -- at the beginning of 2026? Or -- and also a relatively muted pricing environment? Should we think of the coming quarter being close to what we've seen with relatively prices up a little bit and costs broadly in line with this pricing? And then my second question would be on the competitive landscape. Do you see -- I think some of the largest building material company in China, CNBM and [ Conch ] have started to invest in mortar, in construction chemicals. Do you see competition in China being tougher today than it was 5 years ago? And another one on this -- on the competitive landscape. I think Kingspan in the U.S. is planning to open a PVC roofing membrane next year. Do you think it could have an impact on your activity? Or do you believe they will target different segments? Thomas Hasler: Okay. I think the first question was on oil prices, right? Yassine Touahri: Yes. And whether it means that we should continue to -- we could continue to have an environment with limited price increase and limited cost inflation. Thomas Hasler: Yes. I mean we -- this is quite volatile. It is low at the moment. This is, in general, for us a positive. But I would say it's limited. I mean, this is also what we have talked about this year. There is -- some commodities have some softening, but others are still increasing cement, for instance. So I think on the input side, I think we are having here as far as we can predict, we have a relatively stable environment. So that is giving us also the possibility to make our price adjustments in line with our margin expectation. So I'm not concerned. But of course, things can change if one source comes unavailable and prices could rapidly move upwards. But at the moment, it's not a major concern. The -- and the second question was on the competitive landscape in China. I mean, here, you have to see that we are the only remaining sizable international construction chemical player in China for years. This is not just yesterday or the day before. This is our position in China. We have an exclusive position in the direct construction market. This is -- these are the higher-end construction. I talked about the multinationals, but I also talk about, let's say, sensitive infrastructures, nuclear power plants and others, airports and so on. So we have been able -- I mean, there are thousands of players in China and super aggressive in all aspects, but we have been able to hold strong in this market. And I believe our possibility to benefit through our, let's say, global excellence in a market that is maturing in a market that is also demanding higher building codes. The government is pushing for higher building codes as they see the adversal effect of cheap, let's say, infrastructure built 10 or 20 years ago. And we have a reputation in China that is outstanding, and we can also enlarge our addressable market in China through this trend. So this is on the direct side. On the indirect side, I talked about our distribution. I talked -- but you have to see that this is an application where our company has a market-leading position in China. Our brand, our international brand stands for reliable products to the homeowners. Homeowners, they buy, let's say, expensive tiles from Italy and homeowners do care that they are installed with a brand of trust. That's our unique -- of course, our products are up to the highest standards. But it is also our network that involves not only the applicator, but also the owner bring across this value. And this is very difficult for, let's say, the mainstream Chinese competitors to attack us. They attack themselves. So it is Oriental Yuhong and Nippon Paints that are crossing each other's way left and right and through brutal price war try to steal each other's market. Our market is much more protected through our unique positioning with our brand in China. And then... Yassine Touahri: Kingspan, yes. Thomas Hasler: I think -- I don't know if I should comment. I mean, I don't see it as a threat, not at all. I mean the North American roofing market is huge, and it has sizable players. I mean, sizable. And we are active in a very, let's say, clear designated area with large commercial buildings, where we have a reputation, where we have specifications, where we have applicators, I feel well protected. I have no fear. But if you go in such a market where there are the big boys playing, I would say I have respect for the courage to go into that market, but that's not me to comment and it's not me to make assessments there. It is an attractive market. I agree. It is for us, a fantastic market. But I think we have here also a unique position with our focus on the high end on durable and sustainable solutions with owners, with the focus on clear commercial large-scale roofs. Dominik Slappnig: Thank you very much. I think this brings us to the end of our call. We take this opportunity as well to highlight the date of our Fast Forward Investor and Media Conference on November 27. The conference will be held in Zurich, Tüffenwies, and it will start at 10 a.m. CET. So for all these who would like to fly in and out the same day, I think this will be possible. With this, we thank you for listening to our call and for your interest in Sika. We wish you all the best. Thomas Hasler: Thank you. Adrian Widmer: Thank you very much. Bye-bye. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Operator: Good day, everyone, and welcome to today's Fibra Danhos' Third Quarter 2025 Conference Call. [Operator Instructions] Please note, this call is being recorded, and I'll be standing by should you need assistance. Now I'll turn the call over to your host, Rodrigo Martínez. Please go ahead. Rodrigo Chavez: Thank you very much, Alvis. Hello, everyone. I am Rodrigo Martinez, and I run Investor Relations for the company. At this time, I'd like to welcome everyone to Fibra Danhos' 2025 Third Quarter Conference Call. We issued our quarterly report yesterday. If you did not receive a copy, please do not hesitate and contact us. Please be aware that they are also available on our website and in Mexico Stock Exchange website. Before we begin the call today, I would like to remind you that forward-looking statements made during today's call do not account for future economic circumstances, industry conditions and company performance or financial results. These statements are subject to a number of risks and uncertainties. All figures included herein were prepared in according to IFRS standards and are stated in nominal Mexican pesos, unless otherwise noted. Joining us today from Fibra Danhos in Mexico City is Mr. Jorge Serrano, CFO of Fibra Danhos; and Mr. Elias Mizrahi. Now I will turn the call to Jorge Serrano for opening remarks and financial and operating indicators. Jorge, please go ahead. Jorge Esponda: Good morning, everyone. Thanks for joining us today. Let me share some initial remarks on Fibra Danhos' third quarter results. It has been only 2 years since we announced our interest in industrial assets and Danhos is already a reference player in the CTT logistics corridors that services Mexico City. We have been recognized for our execution capabilities and high-quality construction standards. We have not only delivered our commitments on time and within budget, but we are also working in new opportunities that will translate into profitable growth. During the quarter, we signed build-to-suit lease agreements for more than 300,000 square meters on 3 additional industrial parks with best-in-class tenants that will generate cash flow by the end of next year. This is very relevant. Not only because it will translate into profitable adjusted risk returns, but also because it reinforces our strategy of diversification in industrial real estate and complements our traditional growth strategy on mixed uses and high-quality real estate developments. Our CapEx pipeline is additionally confirmed by Parque Oaxaca and Ritz-Carlton Cancún Punta Nizuc project, which are under construction and up and running. Sound financial results were supported by strong fundamentals. Total revenues of MXN 1.9 billion were 14% higher against last year, explained by increased occupation levels, positive lease spreads, higher overage, parking adjusted revenues and contribution of industrial assets. Total expenses increased 10%, keeping control on operating and maintenance expenses and dealing with labor-intensive services that have posted major increases. NOI reached MXN 1.5 billion, an increase of almost 15% year-on-year with a 78.6% margin that is 75 basis points higher than last year's. AFFO reached MXN 1.1 billion that accounted for MXN 0.69 per CBFI. Distribution was determined at the same level of MXN 0.45 per CBFI which amounts to MXN 722 million and represents a payout relative to AFFO of 66%. Retained cash flow, as you know, was used to finance our CapEx program, which was complemented with MXN 300 million of short-term debt. Balance sheet, however, remains strong with only 13% [indiscernible]. Our portfolio overall occupancy continued growing and reached 91%, with retail occupancy reaching 94%, office at 76% and industrial of 100%. Thanks. We may now turn to the Q&A session. Operator: [Operator Instructions] Our first question today comes from Alejandra Obregon of Morgan Stanley. Alejandra Obregon: The first one is on your CapEx and dividend payout. If you can perhaps provide some color on how to think of these 2 metrics in 2026 and 2027 as you move forward with Nizuc and Oaxaca. So that's the first question. And then the second one is in terms of your portfolio mix and perhaps if I'm allowed to think of it in a more long-term sort of way, maybe 3 or 5 years from here, how much do you expect industrial to represent of the mix in your portfolio and whether you see some recycling opportunities elsewhere. So how do you see your mix 3 or 5 years from here? That's the question. I'll stop here. Elías Mizrahi: Alejandra, this is Elias Mizrahi. Regarding distributions, so as you know, we've been investing very heavily on industrial assets. We're starting construction of Parque Oaxaca in the coming months. And obviously, we're also investing in the Nizuc project. So as long as we continue investing at this rhythm, we expect at least for 2026 for the dividend to remain the same. I think towards the end of next year, we'll probably have better color for 2027. But I think that this gives us the ability to reinvest our cash flows and give better returns for our long-term investors. Regarding the mix on our portfolio, I would say that we don't have a specific target on where we see or where we want to have the industrial assets as a percentage of our total portfolio. I think we're opportunistic. We will be looking at new development opportunities. And we're also investing in retail assets as well. So we don't expect only to grow in the industrial segment, but in all segments. So I think that more than targeting a mix, we'll be targeting solid projects with great risk-adjusted returns. Alejandra Obregon: Got it. And if I may follow up in terms of land and backlog, if you can talk about what you're seeing in the Mexico City and metropolitan area. Do you think there's more interest for you to continue growing here? And what -- and how does your land access look like from here? Elías Mizrahi: Yes. So first, I mean, we highlighted in our report and Jorge just mentioned the lease activity we had for the quarter. So we leased 300,000 square meters this quarter alone. We're very proud of that achievement. We already have 250,000 square meters operating and generating rent. And by year-end -- next year, we'll have more than 0.5 million square meters generating rent for the Fibra in basically 2 or 3 years since we basically announced the industrial component in our portfolio. So we continue to see strong demand. I think the market, as Jorge mentioned, welcomed Danhos, welcomed its development capacity and ability. And we're assembling land for future projects, which if we find the right land and the right opportunities, we will be able to develop them and continue growing. But we see the Mexico City market as strong and resilient for now. Operator: Our next question comes from Igor Machado of Goldman Sachs. Igor Machado: I have 2 questions here. And the first one is on the retail sales. So we saw some deceleration from department stores company. So any color that you could share with us like if you expect a retail deceleration for the next quarters, this would be helpful. And the second question is regarding the land for the industrial real estate assets. I'm just trying to better understand here who is selling the land and the terms of the selling. So that's it. Jorge Esponda: Igor, this is Jorge. Well, as you know, I mean, our retail portfolio has very positive occupation levels. I think we have a very strong tenant base. But it's true that we've seen some deceleration in the economy in consumption. However, we continue to have demand for our shopping centers. This is given the location we have. And that allows us to be quite defensive in a deceleration environment on the economy. So, so far, we're posting still very strong results in our retail portfolio. Operator: Our next question comes from [indiscernible] of JPMorgan. Unknown Analyst: Congrats on the results. My question is regarding any update on the office segment. Could you maybe walk us through how easy or hard it has been to renew the office properties? How sticky were these tenants with some minor decrease in the Toreo property? Elías Mizrahi: [indiscernible], I'm sorry, but there was some interference in the question. Can you repeat it, please? Unknown Analyst: Yes. My question was regarding the office segment. Maybe could you walk us through how easy or hard has it been to renew the office properties? And how sticky were these tenants? Elías Mizrahi: Yes. So at the beginning of the year, we had 2 major leases that -- actually this was pointed out, I think, in the fourth quarter of last year's or first quarter of this year's call. And both contracts were renewed. One was in Toreo, the other one was in Esmeralda. So in both cases, we were able to renew both big leases. And the smaller leases are also being renewed basically every quarter. So we're -- as we've mentioned, we're in the midst of keeping our tenants. Unknown Executive: [indiscernible] Elías Mizrahi: Yes. And leasing activity has picked up. In Urbitec, we leased this quarter 2,500 square meters. And also in [indiscernible] 3,500 square meters. So during the quarter, we leased approximately 7,000 square meters. Unknown Executive: [indiscernible] Operator: [Operator Instructions] Rodrigo, we have no questions at this time. I'll turn the program back over to you for any additional or closing comments. Rodrigo Chavez: Thank you very much, Alvis. Thank you, everyone, for joining us today. Please do not hesitate to contact us, Elias, Jorge or myself for any further questions. We are always available. We'll see you on our next conference call. Thank you very much. Operator: That concludes our meeting today. You may now disconnect.
Operator: Thank you for standing by, and welcome to the First Financial Bancorp Third Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] I'd now like to turn the call over to Scott Crawley. You may begin. Scott Crawley: Thank you, Rob. Good morning, everyone, and thank you for joining us on today's conference call to discuss First Financial Bancorp's third quarter and year-to-date financial results. Participating on today's call will be Archie Brown, President and Chief Executive Officer; Jamie Anderson, Chief Financial Officer; and Bill Harrod, Chief Credit Officer. Both the press release we issued yesterday and the accompanying slide presentation are available on our website at www.bankatfirst.com under the Investor Relations section. We'll make reference to the slides contained in the accompanying presentation during today's call. Additionally, please refer to the forward-looking statement disclosure contained in the third quarter 2025 earnings release as well as our SEC filings for a full discussion of the company's risk factors. The information we will provide today is accurate as of September 30, 2025, and we will not be updating any forward-looking statements to reflect facts or circumstances after this call. I'll now turn it over to Archie Brown. Archie Brown: Thanks, Scott. Good morning, everyone, and thank you for joining us on today's call. Yesterday afternoon, we announced our financial results for the third quarter. The third quarter of '25 was another outstanding quarter for First Financial. Adjusted net income was $72.6 million and adjusted earnings per share were $0.76, which resulted in an adjusted return on assets of 1.55% and an adjusted return on tangible common equity of 19.3%. We achieved record revenue in the third quarter, driven by a robust net interest margin and record noninterest income. We have successfully maintained asset yields while moderating our funding costs, which combined to result in an industry-leading net interest margin. In addition, our diverse income streams remained a positive differentiator for us with our adjusted noninterest income representing 31% of total net revenue for the quarter. Expenses continue to be well managed. Excluding incentives tied to strong performance and the record fee income, total noninterest expenses were flat compared to the second quarter. Our workforce efficiency efforts continued during the period. And to date, we've successfully reduced our full-time equivalents by approximately 200 or 9% since we began the initiative 2 years ago. We expect further efficiencies subsequent to the integration of our pending acquisitions. Loan balances declined modestly during the quarter, falling short of our expectations. Lower production in our specialty businesses along with a greater percentage of construction originations, which fund over time drove the modest decline. Loan pipelines are very healthy as we enter the fourth quarter, and we expect to return to mid-single-digit loan growth to close out the year. Asset quality metrics were stable for the third quarter. Nonperforming assets were flat as a percent of assets and annualized net charge-offs were 18 basis points, which was a slight improvement from the linked quarter. We're very happy that our strong earnings led to continued growth in tangible book value per share and tangible common equity during the quarter. Tangible book value per share of $16.19 increased 5% from the linked quarter and 14% from a year ago, while tangible common equity increased 47 basis points from June 30 to 8.87% at the end of September. I'll now turn the call over to Jamie to discuss these results in greater detail. And after Jamie is done, I'll wrap up with some additional forward-looking commentary and closing remarks. Jamie? James Anderson: Thank you, Archie, and good morning, everyone. Slides 4, 5 and 6 provide a summary of our most recent financial results. The third quarter was another exceptional quarter with outstanding earnings, robust net interest margin and record fee income. Our net interest margin remains very strong at 4.02%. Asset yields declined slightly while we managed deposit costs to a modest increase. Loan balances declined slightly during the quarter as production slowed in our specialty lending areas and slower funding construction originations increased as a percentage of the portfolio. Average deposit balances increased $157 million due to higher broker deposits and money markets, offset by a seasonal decline in public funds. We maintained 21% of our total balances in noninterest-bearing accounts and remain focused on growing lower-cost deposit balances. Turning to the income statement. Third quarter fee income was another record, led by our leasing and foreign exchange businesses. Additionally, we had higher syndication fees and income on other investments. Noninterest expenses increased from the linked quarter due to an increase in incentive compensation, which is tied to fee income. Our efficiency efforts continue to impact our results positively and remain ongoing. Our ACL coverage increased slightly during the quarter to 1.38% of total loans. We recorded $9.1 million of provision expense during the period, which was driven by net charge-offs. Overall, asset quality trends were in line with expectations with lower net charge-offs and nonperforming asset balances remaining flat. Net charge-offs were 18 basis points on an annualized basis, while NPAs and classified assets were both relatively flat for the period. From a capital standpoint, our ratios are in excess of both internal and regulatory targets. Tangible book value increased $0.79 to $16.19, while our tangible common equity ratio increased 47 basis points to 8.87%. Slide 7 reconciles our GAAP earnings to adjusted earnings, highlighting items that we believe are important to understanding our quarterly performance. Adjusted net income was $72.6 million or $0.76 per share for the quarter. Noninterest income was adjusted for a small loss on the sale of investment securities, while noninterest expense adjustments exclude the impact of acquisition and efficiency costs, tax credit investment write-downs and other expenses not expected to recur. As depicted on Slide 8, these adjusted earnings equate to a return on average assets of 1.55%, a return on average common equity of 19% and a pretax pre-provision ROA of 2.15%. Turning to Slides 9 and 10. Net interest margin decreased 3 basis points from the linked quarter to 4.02%. Asset yields declined 2 basis points from the prior quarter, while total funding costs increased 1 basis point. Slide 12 illustrates our current loan mix and balance changes compared to the linked quarter. Loan balances decreased $72 million during the period. As you can see on the right, the decline was driven by decreases in the Oak Street, ICRE and C&I portfolios, which outpaced growth in Summit and consumer. Slide 14 shows our deposit mix as well as the progression of average deposits from the linked quarter. In total, average deposit balances increased $157 million during the quarter, driven primarily by a $166 million increase in brokered CDs and a $106 million increase in money market accounts. These increases were offset by a seasonal decline in public funds. Slide 16 highlights our noninterest income for the quarter. Total fee income increased to $73.6 million during the quarter, which was the highest quarter in the history of the company. Bannockburn and Summit both had solid quarters. Additionally, other noninterest income increased $2.8 million for the quarter due to higher syndication fees and elevated income on other investments. Noninterest expense for the quarter is outlined on Slide 17. Core expenses increased $5.7 million during the period. This was driven by higher incentive compensation related to fee income and the overall strong performance by the company. Turning now to Slides 18 and 19. Our ACL model resulted in a total allowance, which includes both funded and unfunded reserves of $180 million and $9.1 million of total provision expense during the period. This resulted in an ACL that was 1.38% of total loans, which was a 4 basis point increase from the second quarter. Provision expense was primarily driven by net charge-offs, which were 18 basis points for the period. Additionally, our NPAs to total assets held steady at 41 basis points and classified asset balances totaled 1.18% of total assets. We continue to believe that we have modeled conservatively to build a reserve that reflects the losses we expect from our portfolio. We anticipate our ACL coverage will remain relatively flat in future periods as our model responds to changes in the macroeconomic environment. Finally, as shown on Slides 20 and 21, capital ratios remain in excess of regulatory minimums and internal targets. During the third quarter, tangible book value increased to $16.19, while the TCE ratio increased 47 basis points to 8.87%. Our total shareholder return remains strong with 33% of our earnings returned to our shareholders during the period through the common dividend. We maintain our commitment to provide an attractive return to our shareholders, and we continue to evaluate capital actions that support that commitment. I'll now turn it back over to Archie for some comments on our outlook. Archie? Archie Brown: Thank you, Jamie. Before we conclude our prepared remarks, I want to comment on our outlook for the fourth quarter, which can be found on Slide 22. As we close the year, we expect origination volumes to increase, which should accelerate our growth. Specific to the fourth quarter, excluding Westfield, we expect loan growth to be in the mid-single digits on an annualized basis. We expect core deposit balances to increase and combined with seasonal public fund inflows to result in strong deposit growth. Our net interest margin remains among the highest in the peer group, and we expect it to be in a range between 3.92% and 3.97% over the next quarter, assuming a 25 basis point rate cut in both October and December. This includes a modest bump in margin from the addition of Westfield in early November. We expect our fourth quarter credit cost to approximate third quarter levels and ACL coverage to remain stable as a percent of loans. We're estimating fee income to be between $77 million and $79 million, which includes $18 million to $20 million for foreign exchange and $21 million to $23 million for the leasing business revenue. This range includes the expected impact from Westfield. Noninterest expense is expected to be between $142 million and $144 million and reflect our continued focus on expense management. This range includes the impact from Westfield, which is expected to approximately -- to be approximately $8 million for the month of November and December. While we remain confident that we will realize our modeled cost savings, we expect the majority of those savings to materialize in the middle of 2026 once Westfield has been fully integrated. With respect to our pending acquisitions, we have received formal regulatory approval for the Westfield transaction and anticipate closing in early November. Our initial preparations for the BankFinancial close are underway, and we are more excited than ever to expand our reach into the Chicago market. We have filed the necessary applications and expect to receive approval from the regulators in coming months, eyeing a close during the first quarter of 2026. We're very excited to have the Westfield and BankFinancial associates join our team. In summary, we're very proud of our financial performance through the first 9 months of the year, which resulted in industry-leading profitability. We expect to have another strong quarter to close 2025 and build positive momentum as we head into 2026. With that, we'll now open up the call for questions. Rob? Operator: Your first question today comes from the line of Brendan Nosal from Hovde Group. Brendan Nosal: Maybe just starting off here on a topic that's of interest today, NDFI loan exposure. I think if I look at your reg filings from last quarter, it's a little over $450 million or 4% of loans. I know that it's not huge, but can you just kind of walk us through that book and let us know whether that exposure falls into any of the known commercial verticals that you already have today? Archie Brown: Yes. Brendan, we'll have Bill Harrod cover that. All right. Great. We've got, as of the end of the quarter, about $434 million in the NDFI portfolio. It's a diversified, conservatively managed and anchored in high investment grade tier with currently no adversely rated credit. The bulk of the portfolio is made up of traditional REITs of about $304 million across 46 notes, averaging about $7 million, consisting of a variety of public traded or privately held entities with investment grade or equivalent. We do have a securitization book within that portfolio of $73 million across 7 relationships with loans structured using S&P methodology to high investment-grade ratings. And we monitor those on a monthly basis with borrowing bases and independent third-party exams on a routine basis. And that makes up the bulk of what we have in that NDFI portfolio. Brendan Nosal: Awesome. That's really helpful color. Maybe turning to the net interest margin. I totally get the guide for next quarter, no surprise given recent and forthcoming rate cuts. I'm just kind of curious, so if we get those 2 cuts in the fourth quarter, how should we think about margin early in next year? I think in the past, you said that each cut is 5 to 6 basis points of near-term pressure before it grinds back up on lag funding costs. So any color there would be helpful. James Anderson: Yes, Brendan, this is Jamie. So on the margin, and again, so the other thing you have to keep in mind is we have Westfield coming into the mix. So that's going to create a little bit of noise, and it actually helps us going forward here, mitigate a little bit of our asset sensitivity. So -- but if you look at kind of the legacy, the legacy company and the margin, the way that it reacts to those 25 basis point cuts, like I said, and you mentioned it as well, we get about 5 basis points of margin pressure for each of those 25 basis point cuts. And the way -- the timing of that, the way that will kind of fold in is that you get a little bit more pain immediately from the cut. And then as deposit costs catch up, we start to actually move that back up. So -- but really 5 basis points of pressure. So if you think about our margin right now in that 4% range, if we get those 2, then we kind of start the year in that [ 3.90-ish ] range. But then when you factor in Westfield and with the purchase accounting and how that will work, we get a little bit of improvement in the margin from them. So it starts to help mitigate some of that pressure if we have those expected rate cuts here at the end of the year. Operator: Your next question comes from the line of [ Mark Shootley ] from KBW. Unknown Analyst: Maybe one more on the margin. I'm trying to think about on the asset side, loan yields were strong and actually ticked up in the quarter. So I was just curious like what new loan originations are coming on today with you guys sort of returning to growth and what you're expecting for the total sort of portfolio yield in the near term? Archie Brown: Yes, Mark, this is Archie. I'll start, and Jamie, you can kind of comment on me if you want to amplify. But the rate cut certainly that we had affects origination yields as well. And so we were probably before the cut around 7% on origination yields, and it's closer, I guess, high 6s. So you said 6.80%, 6.90% and it's going to come in closer to the mid-6s you look at the month of September, it was probably right around 6.50%, maybe 6.50% and change. So we'd say sort of right now in that range, maybe drop down a little bit more with some more rate cuts because, again, a lot of we do is commercial oriented tied to variable rates. James Anderson: Yes. And Mark, I mean, like we've talked about in previous quarters, if you -- again, looking at the legacy First Financial portfolio, absent Westfield, we still have about 60% of our loan book that moves on the short end. So obviously, those cuts will impact the yield on the loan side. Unknown Analyst: Yes, that makes sense. And then maybe just on the growth -- so you mentioned the pipelines are strong, and I was just curious like what specific verticals or markets you expect to drive that growth over the next couple of quarters? Archie Brown: Yes, Mark, this is Archie again. Yes, maybe talk about loan growth kind of overall. Our production, if you just look at total commitments, Q3 was on par with Q2. So pretty strong. I would argue it's the strongest of the year in both cases. But we saw the actual fundings from that drop compared to what we saw in prior quarter. So lower fundings, primarily construction related. And then we did see a dip in line utilization on the commercial side that accounted for a little bit of the -- little bit of lower overall growth in the quarter. As we look in Q4, strong commercial is the biggest driver. We've got different verticals within commercial, but strong commercial is the big driver. Summit funding, this is always their peak quarter for production. So that will be another big driver. Commercial real estate will have a little bit of growth is what we're projecting in Q4. And probably the only vertical that has a little bit of pressure is in our Oak Street Group. Just it looks like they've got a lot more payoff pressure that we're expecting here in Q4. But the combination of it all gets you to the number that we're projecting of 5% annualized growth. Operator: [Operator Instructions] your next question comes from the line of Daniel Tamayo from Raymond James. Daniel Tamayo: Maybe just one on the fees and expenses. So the 4Q guide pulling out Westfield just for a second was higher than what we were looking for and certainly what the 3Q number was. Just curious if there's something seasonal, unusual, unique in the fourth quarter? Or maybe if you can kind of give us some indication of what the run rates would look like going into '26. James Anderson: Yes, Danny, it's Jamie. Really, the big impact from the third quarter to the fourth quarter in that -- like again, I think you're looking at just ex-Westfield kind of the legacy First Financial numbers is really coming from Bannockburn. The forecast that we're getting from them for the fourth quarter is a little higher even than what we had in the strong third quarter. A little bit of bump as well as the Summit related to the operating leases. And then our wealth department, especially on the M&A and the investment banking side, up just a little bit from that division that we have there. So it's really those 3 areas, primarily though, driven by Bannockburn. And like we have talked before, Dan, I mean, they can -- that can bounce around a little bit. So I mean, to kind of talk about that long, long term, we look at that business kind of year-over-year now is growing in that -- generally in that 10% range. Archie Brown: Yes. And Dan, those are all commission-based kind of businesses. So when they do well, you're going to see more commission paid out, which drives the salary costs. James Anderson: Yes. Daniel Tamayo: That's great. That's very helpful. And my other question, I guess, on the credit side. So a good quarter from a credit perspective, guiding to similar credit costs. Just curious how long you think those play out? I think in the past, we've talked about a little bit higher run rate on the charge-off side. Any read-throughs in the near term past the fourth quarter on credit? Archie Brown: Yes, Dan, this is Archie. I don't -- I mean, I think it's kind of steady as we go. We've, I think, been saying all year, 25 to 30 basis points, kind of mid-20s seems to be the run rate for us in the current environment. And I think over a period of quarters, that's what we would expect. Daniel Tamayo: Understood. Okay. And then lastly, on the capital front, so you got the 2 deals closing here in the near term, take a little bit of a hit to capital. But curious, you'll still have pretty strong CET1. How you're thinking about buybacks? You probably think the stock is a little undervalued right now. Once we get past the deals, like if there's a bogey you're looking at on the capital side or any color there would be great. James Anderson: Yes, Dan, this is Jamie. So yes, I think you said it well. What we'll do here over the next really probably 2 to 3 quarters is let the deals flow in and kind of see where we're shaking out in terms of capital ratios at that point. I mean we are building TCE relatively and tangible book value relatively quickly at this point. And we will take -- so the TCE takes about 120 basis point hit in the -- once we close the Westfield deal just because of the all-cash nature of it. And then -- so we'll let the next 2 or 3 quarters kind of play out and then see where we are and see where we're trading in terms of multiple at that point. If we're trading anywhere in that 150% of tangible book value or below, we would potentially look at buybacks at that point. Operator: Your next question comes from the line of Terry McEvoy from Stephens. Terence McEvoy: From talking to some of the other banks that are in your metro markets in your footprint, kind of surprised with the deposit competition a bit stronger than I would have guessed. And your cost of funds up a few basis points quarter-over-quarter. So can you maybe just talk about deposit competition? And you didn't have loan growth this quarter. Next quarter, you're guiding towards that. Does that kind of drive those deposit costs higher as you look to fund that growth? Archie Brown: Yes, Terry, this is Archie. I'll start. It was modestly up for the quarter. I mean I would argue it is flattish. And with the rate cut that occurred, we did take some, I think, decisive actions on the deposit side that went into effect really this quarter. So now we have more -- of course, more short-term rate cuts coming. But we would expect a reduction in our deposit cost going forward in Q4. I mean it was pretty -- did a pretty aggressive cut. And yes, I mean, the market is competitive, but if you look at our current loan-to-deposit ratio, and we felt even with some loan growth, we felt we could take a little bit more aggressive actions. And we'll look to do more here with more Fed cuts. And then I think one of the things we like about BankFinancial, again, one, they have lower deposit and funding costs than we do. And that market from what we can see, still has a little more rational pricing than what we're seeing here kind of in Southwest Ohio. James Anderson: Yes. The other thing, Terry, to keep in mind, I mean, we do have the a little bit higher -- some loan growth in the fourth quarter and then going forward. But we don't think that puts a lot of pressure on our deposit costs because of the liquidity that we get coming in -- especially in the BankFinancial deal. If it closes in the first part of '26. So they already have a relatively low loan-to-deposit ratio, and then we're selling the multifamily portfolio, which will then create even more liquidity for us to utilize for loan growth or to pay off borrowings or to reinvest. Terence McEvoy: That's great. And nice to see the FX trading and the 4Q guide higher at $18 million to $20 million. I just want to make sure that run rate looking out into '26, do you think that is more consistent of next year? Or is this more of just a couple of strong quarters and next year we will go back to some of your prior comments on the outlook for that revenue line? Archie Brown: Well, certainly, Q4 would be a peak for them, Terry, if they hit the numbers that are being projected. And as Jamie said, it sort of bounces around. We look at it more on kind of an annual kind of 4-quarter basis rolling even. They will -- we've owned them now for quite a while. And what we've observed is they grow, they may flatten out a little bit, then they hit another growth spurt. But if you think 5% to 10% kind of growth rate I think you're in the ballpark for what we would expect them to do. James Anderson: Yes, Terry, this is Jamie. As we get into -- as we look out kind of into '26, I mean, that will -- I wouldn't annualize this fourth quarter number that we're talking about. So I would look more into '26 at like a $65 million to $70 million type of a run rate for them. Operator: Your next question comes from the line of Jon Arfstrom from RBC. Jon Arfstrom: Jamie, in your prepared comments, you touched on the workforce efficiency efforts. And can you talk a little bit about where you are in that journey? And then when you look at the 2 acquisitions, what kind of opportunities do you see there? Because it seems like you're going to apply this framework over the top of those 2 deals. Archie Brown: Yes, Jon, this is Archie. I'll start. We're probably 90% of the way through the company, the First Financial legacy company now. So there's a little bit left in some areas, but it's probably going to be a couple of quarters more to get a little bit of opportunity out of those areas. So as I think we alluded to in our comments that we think the opportunity to continue to get efficiency comes from the 2 acquisitions. And I think in the Westfield case, we had said around 40% expense reduction from the combination. And we're -- I think we're well on our way to achieve that, maybe slightly exceed it. BankFinancial was maybe just a little bit less because there's bigger branch count. But what we had modeled, again, we're well on our way to exceed that. And that includes us in both those markets, adding back roles to drive more revenue. Some of the businesses we have that maybe those banks didn't have, we're adding the appropriate people to help us grow in those markets. And even with that, we would still achieve the expense that we've -- reductions that we modeled in those deals. Jon Arfstrom: Yes. Okay. That makes sense. Yes, some good opportunities there, obviously, for production. And Terry took a couple of my questions on deposits. But Jamie, can you just remind us of the typical seasonal flows on deposits that you see in the fourth quarter? James Anderson: Yes. So we -- just -- yes, to remind you and everybody else, we get a seasonal bump in public funds, mainly from Indiana, where property taxes reduced. So we get those in May and November. And so typically, we will get, call it, around $150 million to $200 million kind of extra of deposits in those quarters on average. And then they -- a little bit more skewed, I would say, to the second quarter, but call it, $150 million to $200 million in both of those quarters, and then they run out in the subsequent quarter and kind of go back down to the base level. But that's pretty much like clockwork. I mean it happens pretty much every quarter. And then so that's what you saw here in the third quarter where those public funds running down by $100 million to $150 million. And then we just replaced those with -- sometimes we just replace those with brokered CDs or borrowings. Operator: And that concludes our question-and-answer session. I will now turn the call back over to Archie Brown for closing comments. Archie Brown: Thank you, Rob. I want to thank everybody for joining us today. We really feel great about the quarter we had and are excited about fourth quarter and the momentum we're building for 2026 with the pending acquisitions. We look forward to talking to you again in a quarter. Have a great day and weekend. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Welcome to the Eastern Bankshares, Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded for replay purposes. In connection with today's call, the company posted a presentation on its Investor Relations website, investor.easternbank.com which will be referenced during the call. Today's call will include forward-looking statements. The company cautions investors that any forward-looking statements involve risks and uncertainties and is not a guarantee of future performance. Actual results may materially differ from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described in the company's earnings press release and most recent 10-K filed with the SEC. Any forward-looking statements made represent management's views and estimates as of today, and the company undertakes no obligation to update these statements because of new information or future events. The company will also discuss both GAAP and certain non-GAAP financial result measures. For reconciliations, please refer to the company's earnings press release. I'd now like to turn the call over to Bob Rivers, Eastern Executive Chair and Chair of Board of Directors. Robert Rivers: Thank you, Joelle. Good morning, everyone, and thank you for joining our call. With me today is Eastern's CEO, Denis Sheahan; and our CFO, David Rosato. Eastern recently celebrated its fifth anniversary as a public company. Before Denis and David walked through our results, I wanted to take a moment to acknowledge this important milestone and share why I'm excited about our future. As shown on Slide 2, today, Eastern is a $25.5 billion organization with the fourth largest deposit market share in Greater Boston, and we are the largest independent bank headquartered in Massachusetts. Since our IPO, we have very intentionally expanded our footprint across attractive markets and build the scale we need to invest in the business while maintaining the understanding, accessibility and engagement that makes us our regions hometown bank. This strategy and most importantly, our people, our culture and our extensive community involvement are what enable us to expand and deepen customer relationships, attract top talent and capture growth opportunities. This has driven meaningful improvement in earnings, profitability and shareholder returns. One of the keys to our success has been our ability to stay true to who we are while growing and positioning Eastern for the future, that includes bringing in talented people to complement the many long-time Eastern employees who have contributed to our success. I'm so proud of what we've accomplished together. We are well positioned to serve our customers and communities with excellence, which underpins our ability to drive continued shareholder value. Now I'll turn it to Denis. Denis Sheahan: Thank you, Bob. As someone who's been in the Boston market for more than 3 decades, I can attest to how impressive the transformation of Eastern has been over the last 5 years. I'm incredibly proud to be part of this team and I share Bob's enthusiasm about the future and the opportunities ahead. Turning now to the quarter. We are very pleased to have received the required regulatory approvals for our merger with HarborOne which is on track for a November 1 close. This partnership strengthens Eastern's leading presence in Greater Boston and expands our branch footprint into Rhode Island, providing even more opportunities for organic growth. We're excited to bring together 2 banks that share a strong commitment to customers, community partners and employees. I want to thank the teams from both organizations for their outstanding efforts, and we look forward to welcoming our new customers and colleagues to Eastern as we build on the strong legacies of both institutions. We're also pleased to announce today the resumption of our share buyback program, which underscores our confidence in the future. Third quarter operating earnings of $74.1 million increased 44% from a year ago and generated solid returns. Operating return on assets of 1.16% was up 34 basis points from the prior year quarter and operating return on average tangible common equity increased 300 basis points to 11.7% over the same period. On a linked quarter basis, operating income was down from a very strong second quarter, which benefited from higher-than-expected net discount accretion due to early loan payoffs at fee income. Our ongoing strategic investments and hiring talent and commercial lending continued to deliver strong results. Over the past year, we have increased the number of relationship managers by approximately 10%. The Eastern has become an attractive destination for high-quality talent, particularly those with large bank experience. We have the size to matter competitively, yet are small enough for them to apply their trade and provide a sense of ownership in building a business. Our loan growth continues to reflect the impact of this strategy. Total loans grew 1.3% linked quarter and 4.1% year-to-date, driven primarily by strong commercial lending results. The commercial portfolio has grown just under 6% since the beginning of the year, and the pipeline remains solid ending the quarter at approximately $575 million. Wealth management is an important component of our long-term growth strategy, and the wealth demographic and our footprint provides significant opportunities. Beyond strong investment solutions and results, we provide comprehensive wealth services, including financial, tax and estate planning as well as private banking. Assets under management reached a record high of $9.2 billion in the third quarter driven by market appreciation and modest positive net flows. We've been pleased with the integration of the Eastern and Cambridge Trust wealth teams and the strong retention of clients and talent since the merger. We're also enhancing our internal distribution capabilities. Our retail branch network through training and greater awareness is becoming a meaningful driver of referrals. Notably, in the first half of this year, retail generated more funded wealth business than Eastern achieved in any prior full year. On the commercial side, the strengthening alignment between our wealth management and banking businesses is in the early stages, but beginning to produce results. There is still a lot more work ahead, but we are encouraged by the momentum of our wealth business, which was recently named the largest bank-owned independent adviser in Massachusetts for the second consecutive year. Finally, our capital position remains robust, and we continue to generate excess capital. Tangible book value per share at quarter end was $13.14, an increase of 5% from June 30 and up 10% from the beginning of the year. In addition to using capital for organic growth, we are committed to returning capital to shareholders through opportunistic share repurchases and consistent and sustainable dividend growth. As such, we are very pleased the Board authorized a new 5% share repurchase program of up to 11.9 million shares. David, I'll hand it over to you to review our third quarter financials. R. Rosato: Thanks, Denis, and good morning, everyone. I'll begin on Slides 4 and 5. We reported net income of $106.1 million or $0.53 per diluted share for the third quarter. Included in net income is a GAAP tax benefit related to losses from the investment portfolio repositioning completed in Q1 that accrues over the course of 2025. On an operating basis, earnings of $74.1 million or $0.37 per diluted share decreased from a very strong second quarter which benefited from higher-than-expected debt discount accretion and fee income. Compared to the prior year quarter, operating net income increased 44% reflecting margin expansion of 50 basis points and significant improvement in the efficiency ratio from 59.7% to 52.8% driven by higher revenues and thoughtful expense management. We are pleased with the continued strength of our profitability metrics. While operating ROA of 116 basis points and return on average tangible common equity of 11.7% were down from second quarter metrics, both meaningfully improved from a year ago when operating ROA was 82 basis points and operating return on average tangible common equity was 8.7%. We remain focused on driving sustainable growth and profitability and delivering top quartile financial performance. Moving to the margin on Slide 6. Net interest income and margin declined from the second quarter primarily due to higher deposit costs and lower net discount accretion. Net interest income of $200.2 million or $205.4 million on an FTE basis, decreased 1%. Included in net interest income with net discount accretion of $10 million compared to $16.5 million in the second quarter, which was higher than expected due to early loan payoffs. Excluding net discount accretion, net interest income would have increased approximately 3%. The margin of 3.47% was down 12 basis points from 3.59%. The yield on interest-earning assets decreased 6 basis points, while interest-bearing liability costs were up 7 basis points. Net discount accretion contributed 17 basis points to the margin compared to 29 basis points in the prior quarter. Excluding net discount accretion, the margin would have been flat quarter-over-quarter. Turning to Slide 7. Noninterest income of $41.3 million declined $1.6 million from the second quarter. On an operating basis, noninterest income of $39.7 million was down $2.5 million. The decrease was driven primarily by $1.9 million in lower income from investments held for employee retirement benefits compared to a very strong Q2. This decline was partially offset by $1 million in lower benefit costs reported in noninterest expense. In addition, miscellaneous income and fees were down $1.2 million due primarily to a loss on sale of commercial loans from our managed assets group and lower commercial loan and line fees. These headwinds and fee income were partially offset by deposit service charges and investment advisory fees, which both increased $300,000 in the quarter. Turning to Slide 8. We highlight wealth management, our primary fee business. Assets under management reached a record $9.2 billion, driven by market appreciation and modest positive net flows. Wealth management fees, which account for nearly half of total noninterest income were up $300,000 or 2% from Q2, primarily due to higher asset values. In addition, the prior quarter benefited from approximately $700,000 in seasonally higher tax preparation fees. Moving to Slide 9. Noninterest expense was $140.4 million, an increase of $3.5 million from the second quarter due to higher operating expenses and merger-related costs. Merger costs of $3.2 million were up $600,000 from the prior quarter. Operating noninterest expense was $137.2 million, up $2.8 million. The increase was primarily driven by $3.3 million in higher salaries and benefits, primarily due to higher performance-based incentives, one additional pay period in Q3 and seasonal staff. In addition, technology and data processing costs increased $1.4 million, and occupancy and equipment expenses were up $500,000. These increases were partially offset by a $2.3 million reduction in other operating expenses. Moving to the balance sheet, starting with deposits on Slide 10. Period-end deposits totaled $21.1 billion, a decrease of $104 million or less than 1% from Q2. A decline in checking balances was partially offset by higher balances in money market accounts and CDs. On an average basis, deposits were up 1.4%. We continue to benefit from a favorable deposit mix with nearly half of deposits and checking accounts, providing a stable and low-cost funding base. Importantly, we remain fully deposit funded with essentially no wholesale funding which further enhances our balance sheet strength. Total deposit costs of 155 basis points increased modestly from the second quarter as the cost of interest-bearing deposits increased 8 basis points primarily driven by money market accounts. We remain focused on growing deposits to support our funding strategy. As competition for deposits has become heightened in our region, we are disciplined in balancing the needs of our very strong deposit base with that of the margin. Looking ahead, as we thoughtfully integrate HarborOne deposits, we anticipate deposit costs to remain somewhat elevated. However, as the Fed eases, we will work deposit costs down and target deposit betas like our experience during the most recent tightening cycle or about 45% to 50%, with lags relative to Fed actions. Turning to Slide 11. Period-end loans increased $239 million or 1.3% linked quarter led by further strength in commercial. Continued momentum from Q2 and CRE drove balances higher by $133 million, while strong broad-based growth at C&I increased balances by $104 million. Consumer home equity lines continued a steady trajectory of quarterly growth, adding $45 million in outstandings. Commercial has delivered strong year-to-date performance with nearly $700 million of loan growth from year-end. This performance reflects the impact of our opportunistic hiring of growth-oriented talent, continued strength of Eastern's brand and our long-tenured relationship managers. Our combination of meaningful scale, which allows us to offer a broad suite of products and services and deep local expertise and presence is what differentiates us. Slide 12 is an overview of our high-quality investment portfolio. The portfolio yield was up 1 basis point to 3.03% from Q2. In addition, the AFS unrealized loss position continued to decline as it ended the quarter at $280 million after tax compared to $313 million at June 30 at $584 million at year-end. Turning to Slide 13. Capital levels remain robust as indicated by CET1 and TCE ratios of 14.7% and 11.4%, respectively. Consistent with our commitment of returning capital to shareholders, the Board authorized a new share repurchase program of up to 11.9 million shares or 5% of shares outstanding after completion of the HarborOne merger. The program expires on October 31, 2026. In addition, the Board approved a $0.13 dividend to be paid in December. As displayed on Slide 14, asset quality remains excellent, as evidenced by net charge-offs to average loans of 13 basis points and reflects the quality of our underwriting and proactive risk management approach address the issues quickly and previously. While nonperforming loans rose $14 million linked quarter to $69 million, the increase was driven primarily by a single mixed-use office loan which has been in managed assets for some time. A portion of this loan was charged off during the quarter and had been previously reserved. Importantly, we continue to believe the worst of the office loan problems is mostly behind us. We remain cautiously optimistic in our outlook on credit as overall trends continue to be positive. Reserve levels remain strong, as demonstrated by an allowance for loan losses of $233 million or 126 basis points of total loans. These metrics are consistent with $232 million or 127 basis points at the end of Q2. Criticized and classified loans of $495 million or 3.82% of total loans increased modestly from $459 million or 3.6% at the end of Q2. Finally, we booked a provision of $7.1 million, down from $7.6 million in the prior quarter. On Slides 15 and 16, we provide details on total CRE and CRE investment -- investor office exposures. Total commercial real estate loans are $7.4 billion. Our exposure is largely within local markets we know well and is diversified by sector. The large concentration is the multifamily at $2.7 billion, which is a strong asset class in Greater Boston due to ongoing housing shortages. We have no multifamily nonperforming loans, and we have had no charge-offs in this portfolio for well over the past decade. We remain focused on investor office loans. The portfolio of $813 million or 4% of our total loan book decreased $15 million linked quarter. Criticized and classified loans of $138 million were about 17% of total investor office loans compared to $118 million or 14% of total investor loans at the end of Q2. In addition, our reserve level of 5.1% remains conservative. As disclosed last quarter, the investor office loan portfolio includes our relatively limited exposure to the lab life science sector, consisting of 4 loans totaling $99 million or less than 1% of total loans. None of these loans were originated as speculative construction transactions. All loans are accruing, and we continue to monitor these loans as part of our ongoing review of the office portfolio. Before turning it back to Denis, I wanted to give a brief update on the HarborOne merger, which is expected to close November 1. We are reiterating the key assumptions we announced earlier this year and are on track to deliver on our estimated cost savings, onetime charges and gross credit market. We will disclose updated interest rate marks on our fourth quarter call in January. As a reminder, the original announcement assumed 80% stock consideration, the midpoint of the range. Based on the performance of our stock, our current estimate assumes 85% stock consideration. Furthermore, we continue to plan for the sale of HarborOne securities portfolio, the deleveraging of HarborOne's securities portfolio with proceeds intend to pay down FHLB borrowings. HarborOne's period-end loans and deposits at September 30 were $4.763 billion and $4.433 billion, respectively. And it didn't, if approved, we intend to early adopt the changes to the CECL accounting standard designed to remove the current double counting of expected credit losses. I'd now like to turn it back over to Denis. Denis Sheahan: Thanks, David. We are pleased with this quarter's results and are excited about closing the HarborOne merger. We're the leading local bank in Massachusetts, and this merger strengthens our presence south of Boston and into new markets in Rhode Island, providing opportunities for organic growth for many years to come. The continued improvement in our profitability will allow us to return meaningful amounts of capital and enhance shareholder value. This concludes the presentation. I will now open the call for questions. Operator: [Operator Instructions] Your first question comes from Damon DelMonte with KBW. Damon Del Monte: First question, just with regards to -- I know it's a tricky quarter because you have HarborOne closing next week and we're in the middle of the fourth quarter here. But David, as we kind of think about the margin, obviously, a bunch of noise on the fair value accretion side of things. But if you look at the core margin, as you noted, it's flat quarter-over-quarter. Do you think that kind of -- can hold steady here in the fourth quarter and then kind of grind higher into '26? Or do you think that the competitive pressures on deposits will probably weigh on that a little bit? R. Rosato: Let's talk about both sides of that, Damon, and good morning. So the core eastern margin, there's 2 key drivers, right? There's accretion income, which unfortunately, in Q3 was down $6.5 million. That's the wildcard here. The average run rate is, call it, $11 million to $12 million. So last quarter, we were above trend. This quarter, we were a little below trend. And you saw that ripple through asset yields, that's the wildcard. On the other side, on the deposit side, the competition has heated up here. We've talked -- I think we talked about this last quarter as well in retail and government banking. I think that pressure remains in Q4. So that leads me to roughly flat deposit costs with a little bit of a wildcard on the asset side. The -- from a -- and then just as a reminder, we'll have 2 months of HarborOne in our Q4 numbers. Our thinking is that the original margin expansion and numbers that we put out back in April for the combined institution are still good numbers. Damon Del Monte: Okay. Great. And then how about as far as just like on the expense side, it was higher this quarter, you had some elevated comp and benefit type costs and stuff. Again, kind of looking at the core Eastern expenses, do you think that kind of stays at a similar level here going into fourth quarter? Or could it tick even higher just given year-end accrual true-ups and things of that nature? R. Rosato: I think we were a little inflated on the comp line this quarter. I think that will tend to settle down in Q4. There's been a little uptick in tech expense. That is -- will probably be consistent. So I'm not overly concerned about our expense base at this point. And with telegraph roughly flat in Q4 overall to down a touch. Damon Del Monte: Okay. Great. And then with the deal closing here next week, kind of just curious on your updated thoughts on appetite for additional deals over the coming months or in 2026. Is that something you guys are considering? Or I think messaging has also been more about a focus towards organic growth. So just kind of wondering how you balance those 2 avenues. Denis Sheahan: Damon, it's Denis here. And that sort of remains consistent. Look, our focus right now is clearly on continuing to build on the good organic growth that we've had in recent quarters on the important integration of the HarborOne merger. We feel good about that opportunity and are looking forward, as I said in my comments earlier, to working with our new customers, our new colleagues at HarborOne but as you can well imagine, there's a lot of work to do there on that integration. We have no plans in terms of additional mergers in the near term. But that said, we think if a merger opportunity were to arise, it's in our shareholders' best interest for us to evaluate the opportunity. It doesn't mean we would execute but certainly, it's lower on our list of priorities when we think about capital allocation. But as Bob indicated with his opening statements, and you look at the progress at Eastern Bank since we had our IPO, the performance improvement is very material and significant and the opportunity of the new markets that those mergers provided are a meaningful contributor to our operating performance so we think it's -- if the opportunity arises, it's in our best -- shareholders' best interest to consider it, but it's not our focus today. R. Rosato: I would just add to that. It's clear when you think about deployment of capital from our perspective, nothing has changed. It's organic growth. It's now we're excited that with the Board's approval of the share repurchase, so we can be back in the market. It's supported the dividend. And then by far, #4 is anything around M&A. Damon Del Monte: Got it. Okay. Great. And then just lastly, David, real quick. You had mentioned before, like last quarter about the possibility of another restructuring, but it would kind of depend on market conditions and kind of how you felt the best use of capital once HarborOne has closed. Any updated thoughts on that if you're considering that still? Or is it the focus more on organic growth and buybacks only? R. Rosato: It's really -- we're really not focused at all on any type of further portfolio restructuring of Eastern Bank. It is organic growth, where -- which we've had a very good track record of success year-to-date. As Denis referenced, the pipeline is robust, and our brand is resonating in the market. So it's that, it's being back in the market for buybacks. And it's not no contemplation at all right now of any type of further portfolio restructuring. Operator: Your next question comes from Mark Fitzgibbon with Piper Sandler. Mark Fitzgibbon: David, you had mentioned in your comments earlier on the Wealth Management business. I think there was $550 million increase in AUM this quarter. A lot of that was market driven. Could you break out for us how much of the $550 million was market-driven versus flows? R. Rosato: Yes, it was predominantly market-driven good equity and fixed income markets. The net flows in the quarter were a little over $50 million positive. Mark Fitzgibbon: Okay. Great. And then secondly, are there plans within the wealth management business to hire more people or to acquire other RIAs or wealth businesses? Denis Sheahan: Mark, this is Denis. So yes, we are looking for talent, and we have brought on some existing talent in the wealth area. We're active and engaged in opportunities to bring in talent, whether it be in business development or portfolio relationship management. So hopefully, you'll hear more from us about that in the coming quarters. And in terms of M&A in the RIA space, no, we're not interested in that to any degree. It's challenging for those opportunities to work from a variety of perspectives. One being culture and integration and another being the financially challenging to make them work. So we're not interested at this point in any kind of M&A there. Mark Fitzgibbon: Okay. And then Denis, I guess I'm curious, and I know it's a little awkward, but any comments on the slide presentation that Holdco put out earlier this week. I guess I'm curious do you agree with it? Do you plan to implement any of the things that they've proposed and do you plan to meet with them? Denis Sheahan: Well, Mark, as you know, we're very open to engaging with our shareholders. We do a lot of investor conferences and investor road shows, et cetera, and we're happy to engage with any of our investors and we've -- what we believe is a shared goal, we and our investors of driving the performance of the company even higher than we've already done and to build long-term value creation for our shareholders. So we welcome that dialogue from whomever. But I would say most importantly, I really want to turn our focus to the future and think about -- we're excited about the future of the company. We feel very well positioned here today and even more so with the combination with HarborOne to execute the strategy that we've built to really drive that top quartile financial performance, that's the mantra at the company. That's what we're aiming for. That's our aspiration. And that's what we're really, really focused on. And we think that's going to deliver very, very attractive shareholder returns. So that's our focus. I'm not going to comment on anything in any particular disclosure that someone has made. But rest assured, that this team is focused on driving performance, and that's what gets us up every day. That's what gets us excited. And as I said, we're going to continue to focus on that. Operator: Your next question comes from Laurie Hunsicker with Seaport Research. Laura Havener Hunsicker: Just wanted to go over to Slide 16, your office exposure here. And I just want to make sure I'm reading this right. It looks like your office nonperformers jump linked quarter. But I guess what's also new is you've got $19 million now in nonaccruals maturing in the first quarter there at '26. And so I'm just wondering how we should think about that with respect to the provision just since that's new, can you help us understand that a little bit? Denis Sheahan: Sure, Laurie. So it's one loan that -- just with a little background, that loan was originated in 2016. It's been -- so pre-COVID, we've been watching it since COVID, so for quite a few years here. This is consistent with what we've said all along, there will be a couple of loans in the portfolio that we'll have to deal with. In the grand scheme of things, small numbers, this loan, we started building reserves that will mature next year. That's why it hit the schedule. We will have it probably full resolution, probably not in Q4 but into Q1. It's on our books at what we believe will be the final resolution economics. So there's real -- it is one loan, but there's really no story there or anything different worth mentioning about that loan or about the rest of the portfolio. Laura Havener Hunsicker: Okay. And then just with respect to that loan, I mean, can you share with us occupancy or anything around that? Or if you expect to extend or just how you think about it. Denis Sheahan: I will share one fact. It's 85% occupied. Laura Havener Hunsicker: That's great. That's helpful. Okay. And then spot margin, do you have an update on that for September? Denis Sheahan: Did you say spot margin? Laura Havener Hunsicker: Yes. Do you have a September spot margin? R. Rosato: Yes. So it was 3.48%. So 1 basis point higher than the quarter. Operator: Your next question comes from Janet Lee with TD Cowen. Sun Young Lee: Apologies if I missed it in the prepared remarks earlier, but if I were to interpret your comments around NIM, so basically, as we look into 2026, although maybe deposit costs were a little bit more elevated this quarter because of competition as rates come down, you're able to still sustain your NIM? Or is that the way -- where is that the right way to think about this? R. Rosato: Yes, generally true statement. What I was trying to elaborate on a little bit from Damon's question, is 2 drivers, right? There's the accretion income, which bounces around last quarter is a little above trend. This quarter is a little bit below trend. Hard to predict, as we all know. On the deposit side, we've -- in Q3, we were -- there was one Fed move so far. We were slow in our repricing down. So less than our historical long-term beta of 45% to 50% competition in our market remains intense or heavy. We're 5 days away from seems to be a foregone conclusion the Fed's going to move again followed by another move in December. So we will be pricing down as we get covered from the Fed. Our message is, in the near term, a little slow, a little slower to maintain and eventually grow market share, but longer term through this full cycle we should expect us to achieve our full betas. Sun Young Lee: Got it. That's helpful. And a follow-up on higher -- bigger picture. So Denis, it's been a little over a year since you joined Eastern from Cambridge. So I believe you have assessed Eastern franchise or the business overall. So given its historical roots as a mutual conversion and given a lot of the M&As that you guys have done, I mean growth has been slow or slower versus, I guess, stand-alone Cambridge or Eastern. As you look at Eastern's franchise, like what parts of the business are perhaps underutilized? Or where do you see the most upside to growth or increase in profitability? I get that you guys are seeing acceleration in C&I opportunities, but are there other parts of the business where you think could be improved? Denis Sheahan: Janet, thanks for your question. So I would reflect on it this way. We have seen very significant increase in the company's profitability. That's really riding on the back of the strategy that the team before David and I had, very significant, and it positions us well. In terms of continuing to grow profitability, I think of it about the areas that you hear us emphasizing in our comments, the commercial lending team, it was, frankly, one of the things that attracted me when I was thinking about merging Cambridge into Eastern is the journey that Eastern has gone on for several years, including as a mutual and when it converted to build out that commercial banking division. The talent on the team is terrific. They can execute. They're excited about the growth that we're -- we have and that we're continuing to embark on. So I think the Commercial Banking division is certainly one. Second, and this isn't necessarily an order of priority. All our businesses are important, but wealth management. The market in Massachusetts and New England broadly, from a demographic perspective, we don't have significant population growth, but what we do have is a very good wealth and household income demographic. So our ability to lean into that business, further, over the years, it takes time. I've seen this in my past and how you build out a wealth management business successfully. I think we will significantly improve our performance. It's low capital intensive, very beneficial to ROA. And we have a good -- a really strong capability in that area. I think about our retail and deposit franchise. We have new leadership in that area, a terrific team, and I feel very good about our prospects in that area of the company as well. So that's a lot, Janet, but we're fortunate to have a lot. And it comes down to the talent on the team and our ability to execute in the market, including our newer markets. When I think about our markets, you have to really -- the merger integrations well done take years. If I go back to the Century merger, in my view, is not fully integrated. Have we maximized the potential of our opportunity in this old Century markets, in the old Cambridge markets and the soon-to-be HarborOne markets? Absolutely not. So I think there's a lot of opportunity ahead. The management team is excited. We're pumped. So that's how I would answer your question, Janet. Operator: There are no further questions at this time. I will now turn the call over to Bob Rivers for closing remarks. Robert Rivers: Well, thanks again, everyone, for joining us this morning. Best wishes for a very happy and healthy holidays, and we look forward to talking with you again in the new year. Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
Operator: Good morning. My name is Didi, and I will be your conference operator today. I would like to welcome everyone to the Virtus Investment Partners quarterly conference call. The slide presentation for this call is available in the Investor Relations section of the Virtus website, www.virtus.com. This call is being recorded and will be available for replay on the Virtus website. [Operator Instructions] I will now turn the conference to your host, Sean Rourke. Sean Rourke: Thanks, Didi, and good morning, everyone. On behalf of Virtus Investment Partners, I'd like to welcome you to the discussion of our operating and financial results for the third quarter of 2025. Our speakers today are George Aylward, President and CEO; and Mike Angerthal, Chief Financial Officer. Following their prepared remarks, we'll have a Q&A period. Before we begin, please note the disclosures on Page 2 of the slide presentation. Certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and as such, are subject to known and unknown risks and uncertainties, including those factors set forth in today's news release and discussed in our SEC filings. These risks and uncertainties may cause actual results to differ materially from those discussed in these statements. In addition to results presented on a GAAP basis, we use certain non-GAAP measures to evaluate our financial results. Our non-GAAP financial measures are not substitutes for GAAP financial results and should be read in conjunction with them. Reconciliations of these non-GAAP financial measures to the applicable GAAP measures are included in today's news release and financial supplement, which are available on our website. Now I'd like to turn the call over to George. George? George Aylward: Thank you, Sean, and good morning, everyone. I'll start with an overview of the results we reported this morning, and then I'll turn it over to Mike to give a little more detail. We delivered solid financial results in the third quarter, supported by higher average assets under management and favorable market momentum. We did, however, have net outflows as our quality-oriented strategies continue to face headwinds in a market environment that has largely favored momentum. Our focus remains on our initiatives to increase our retail separate account offerings, expand the availability of ETFs in key channels and grow the wealth management business. Key highlights of the quarter included higher earnings per share and operating margin, strong growth in ETF assets with our highest level of quarterly sales and net flows, positive net flows in both fixed income and alternative strategies, an increase in our quarterly dividend for the eighth consecutive year, and we completed a debt refinancing, providing significant liquidity and flexibility to invest in the business and return capital to shareholders. Our exchange-traded fund business was a particular highlight this quarter. ETF assets reached $4.7 billion, up 79% over the prior year with a strong organic growth rate over the period. In the third quarter, ETF sales and flows reached their highest quarterly level at $0.9 billion each, benefiting from strong investment performance and demand for some of our strategies. As of September 30, 77% of ETF AUM were beating benchmarks over the 3-year period and 85% were outperforming peers over the same period. We continue to focus on broadening access to our ETFs in key distribution channels and introducing compelling new offerings. We currently have 21 ETFs across a variety of strategies, and we have several actively managed funds in filing that we anticipate will launch over the next few quarters, including several growth equity-oriented ETFs from Silvant, a real estate income ETF managed by Duff & Phelps, a multi-managed fixed income ETF collaboration between [indiscernible] and Sykes and a set of building block ETFs from Virtus Systematic. And these follow the introduction of a global macro ETF from AlphaSimplex during the third quarter. On the inorganic side, I would reiterate my comments from our last call that the environment remains very favorable with attractive opportunities to add compelling new capabilities or increase scale. As always, however, we take a highly disciplined approach to inorganic growth and we will act only when an opportunity is both financially and strategically compelling. I would note that in the quarter, we did have $1 million of discrete business initiative expenses that were related to inorganic activity. Turning to investment performance. While recent equity performance reflects our quality orientation in a market that has favorable momentum, we are pleased with the performance we have generated over market cycles. Over the 10-year period, 70% of our equity assets and 77% of our fixed income assets beat their benchmark. For just mutual funds, 70% of equity funds and 80% of fixed income funds outperformed the peer median. I would also note that 25 of our retail funds are rated 4 and 5-star funds and 84% of our rated retail fund assets were in 3, 4 or 5-star funds. Turning now to review of the results. Total assets under management were $169 billion at September 30, modestly below the prior quarter level as favorable market performance was offset by net outflows. Total sales of $6.3 billion increased 12% from $5.6 billion in the second quarter with higher sales of fixed income and alternative strategies. On a product basis, we saw higher sales in institutional and ETFs. Total net outflows for the quarter of $3.9 billion were unchanged sequentially in spite of our highest level of ETF flows and positive flows in fixed income and alternative strategies, which were more than offset by outflows in quality equity strategies. Looking at flows across asset classes, the equity net outflows largely reflect our weighting towards quality-oriented strategies. And while quality has historically outperformed over longer market cycles, it tends to underperform momentum in risk-on environments, which has been particularly stark over the past 2 years. Fixed income net flows were positive for the quarter and the trailing 12 months, supported by very strong investment performance, both for the shorter and longer-term periods. For the quarter, we saw positive net flows in our fixed income strategies across several products, including ETFs, institutional and retail separate accounts. Net flows of alternative strategies were also positive, primarily in ETFs. In terms of what we're seeing in October, flows across products and asset classes are trending similarly. ETF sales and net flows remain strong, but U.S. retail mutual fund headwinds continue. In institutional, trends are also similar to the third quarter with known redemptions exceeding known wins and with the wins across a range of strategies, including such things as emerging market debt and global and domestic REIT. Turning now to our financial results. The sequential improvement reflected growth in average assets under management and stable operating expenses. The operating margin was up 170 basis points to 33% or 33.4% without discrete items with an incremental margin that continues to be above 50%. Earnings per share as adjusted of $6.69 increased from $6.25 in the second quarter. Relative to the prior year period, earnings per share as adjusted decreased 3% on lower average assets. In terms of our balance sheet and capital, given the nearing maturity of our previous credit agreement, we refinanced with a new $400 million term loan and $250 million revolving credit facility, increasing our financial flexibility and extending our debt maturity profile with attractive terms. On a net basis, this added $158 million of cash to our balance sheet at the end of September. We also raised a quarterly dividend, representing the eighth consecutive annual increase. Regarding share repurchases, we were not in the market in the third quarter given other considerations and priorities. As a reminder, we bought back $50 million of our shares in the first half of the year, which was higher than our full year of repurchases in each of the prior 2 years. Buybacks remain an important component of our capital management strategy. And given our strong liquidity position, we intend to continue to balance return of capital to shareholders with investments in the business, including inorganic opportunities. With that, I'll turn the call over to Mike. Mike? Michael Angerthal: Thank you, George. Good to be with you all this morning. Starting with our results on Slide 7, assets under management. Our total assets under management at September 30 were $169.3 billion, and average assets increased 2% to $170.3 billion. Our AUM represented a broad range of products and asset classes. By product, institutional is our largest category at 33% of AUM. Retail separate accounts, including wealth management at 28% and U.S. retail mutual funds at 27%. The remaining 12% comprises closed-end funds, global funds and ETFs. Within open-end funds, ETF assets under management grew to $4.7 billion, up by $1 billion sequentially on continued strong net flows and have increased 79% over the prior year. We are also diversified within asset classes in equities between international and domestic and within domestic, well represented among mid, small and large-cap strategies. And fixed income is well diversified across duration, credit quality and geography. Turning to Slide 8, asset flows. Sales grew 12% to $6.3 billion with higher sales of both fixed income and alternative strategies. Reviewing by product, institutional sales of $2 billion compared with $1.3 billion last quarter, driven by fixed income and multi-asset strategies and included the issuance of a new $0.4 billion CLO. Retail separate account sales were $1.4 billion, essentially unchanged from the prior quarter. Open-end fund sales of $2.8 billion were consistent with the prior quarter as strong growth in ETF sales were offset by lower sales of U.S. retail funds. ETF sales were $0.9 billion, more than double the prior quarter level. Total net outflows were $3.9 billion, consistent with the prior quarter. Reviewing by product. Institutional net outflows of $1.5 billion improved from $2.2 billion due to the increase in inflows into fixed income strategies. As always, institutional flows will fluctuate depending on the timing of client actions. Retail separate accounts had net outflows of $1.2 billion, driven by small and SMID-cap strategies, while large cap and fixed income generated positive net flows. We also continue to see positive net flows in our style-agnostic, high conviction, large-cap growth offerings. For open-end funds, net outflows of $1.1 billion compared with $1 billion in the prior quarter and were driven by equity strategies within U.S. retail funds, which more than offset positive net flows in ETFs. ETFs continued to generate strong double-digit organic growth rate with $0.9 billion of positive net flows. Turning to Slide 9. Investment management fees as adjusted of $176.6 million increased 3%, reflecting a consistent average fee rate and an increase in average assets under management. The average fee rate, excluding performance fees, was 41.1 basis points, unchanged from the prior quarter. Looking ahead, we believe this fee rate is reasonable for the fourth quarter modeling purposes. And as always, the fee rate will be impacted by markets and the mix of assets. Slide 10 shows the 5-quarter trend in employment expenses. Total employment expenses as adjusted of $98.7 million increased slightly due to higher variable incentive compensation. As a percentage of revenues, employment expenses as adjusted declined by 70 basis points to 50.2%. Looking ahead, it is reasonable to anticipate employment expenses as a percentage of revenues will remain within our recent 49% to 51% range. Turning to Slide 11. Other operating expenses as adjusted were $31.1 million, down from $32 million due to lower rent expense from office consolidation and the prior quarter impact of the annual equity grants to the Board of Directors, partially offset by $1 million of discrete business initiative expenses. As a percentage of revenue, other operating expenses were 15.8%, down from 16.7%. For modeling purposes, our range of $30 million to $32 million per quarter remains appropriate. Slide 12 illustrates the trend in earnings. Operating income as adjusted of $65 million increased 9% sequentially due to higher revenues and relatively stable operating expenses. The operating margin as adjusted of 33% increased 170 basis points from the second quarter. Excluding the discrete business initiative expenses, the operating margin was 33.4%. With respect to nonoperating items, interest and dividend income of $4.1 million declined sequentially due to elevated CLO interest income in the prior quarter. Looking ahead to the fourth quarter, it would be reasonable to anticipate a higher level of interest income given increased cash balances at the end of the quarter as a result of the recent debt refinancing, offset partially by lower CLO interest income. Interest expense was $4.8 million in the third quarter. It would be reasonable to assume that will increase in the fourth quarter given the higher debt level. Noncontrolling interest, which reflects minority interest in one of our managers were modestly lower, primarily due to the increase in our ownership late in the quarter. A reasonable run rate for the fourth quarter is approximately $2 million. Net income as adjusted of $6.69 per diluted share, which included $0.11 of discrete expenses, increased 7% from $6.25 in the second quarter. In terms of GAAP results, net income per share of $4.65 decreased from $6.12 per share in the second quarter due to $1.54 of unrealized losses on investments, partially offset by $0.42 of fair value adjustments to minority interests. Slide 13 shows the trend of our capital liquidity and select balance sheet items. On September 26, we completed the refinancing of our credit agreement, increasing the company's financial flexibility and extending the maturity profile. The new $400 million term loan has a 7-year maturity and the revolver provides $250 million of capacity through 2030, each bearing interest at SOFR plus 225 basis points. Cash and equivalents at September 30 were $371 million. In addition, we had $300 million of other investments, including seed capital to support growth initiatives. During the third quarter, we raised our quarterly common dividend by 7% to $2.40 per share. Other uses of capital during the quarter included $29.7 million to sponsor the new CLO as well as $14.8 million for a planned increase in equity of our majority-owned affiliate. The last of the scheduled equity purchases of the affiliate will be approximately $7 million in the fourth quarter. At September 30, gross debt to EBITDA was 1.3x, up from 0.7x at June 30 due to the upsizing of our credit facility. And we ended the quarter with $29 million of net debt or 0.1x EBITDA, which declined from 0.2x at June 30. Our strong levels of liquidity, including the undrawn revolver and modest net leverage provide meaningful financial flexibility to continue to invest in the business and return capital. And with that, let me turn the call back over to George. George? George Aylward: Thank you, Mike. So we'll now take your questions. Didi, would you open up the lines, please? Operator: [Operator Instructions] And our first question comes from Ben Budish of Barclays. Benjamin Budish: Maybe just first on the ETF side, you've noticed -- noted that that's an area of strength. Could you just maybe unpack for us a little bit, what are the key strategies that are attracting the most interest? Is it the wrapper itself? Is it the particular strategies that are offered in that wrapper, the franchises? And how do you think about that in terms of what informs the future pipeline? You mentioned a couple of things upcoming. But as you think about the next couple of years, how are you thinking what might make sense either to launch or to kind of rewrap? How you're thinking about all that? George Aylward: Sure. Yes. So I think in terms of what's driving, I think it's both components. So I think the ETF wrapper itself is highly preferred by a large number of investors and financial advisers. Transparency benefits, tax efficiency. So I think in certain instances for specific strategies, it's become a vehicle of choice. In terms of what strategies people are accessing. So for us, our ETF business is a newer business, and we've been building out track records in many of our strategies. And currently, we've seen growth occurring in several of them, particularly those that I think we noted in the alt space or that have certain kinds of return patterns that are being found to be very attractive. So I commented a little bit on some of our pipeline because we really do see a lot of opportunities for very specific types of strategies in the ETF wrapper that increasingly will be utilized in portfolios. I also made comments for us, getting availability for ETFs is a big focus. A lot of times with newer ETFs, it's harder to get access in certain of the subchannels. So as we grow them, and so including in this quarter, we had one that we got to a level of access and that drove some of our flows this quarter. So that continues to be a priority for us. And then just separately, I would note for the ETF share class relief, we are one of the firms that do have filings in process related to that as well. Benjamin Budish: Very helpful. Maybe just following up in terms of growth priorities. You mentioned inorganic opportunities in your kind of brief comments about uses of capital. Just any update on pipeline potential timing? And are there any changes in the environment that make things more or less feasible? You talked about sort of growth versus momentum. Does that sort of inform the types of assets you're interested in acquiring? Just any update there would be helpful as well. George Aylward: Yes. But on the last point in terms of the quality versus momentum, and again, having been in a period where for the last 2 years, quality has significantly underperformed the momentum. That is a current event. So in terms of a long-term M&A strategy, that might not necessarily have a huge impact on it, though it would influence it. We look forward to the reversion for quality coming back into favor, which is generally when quality-oriented strategies have their best performance. So unless momentum continues to lead the markets for the next multiple years, will have a headwind. But when it inverts, we will be well positioned to take care of that. In terms of inorganic, again, I repeated some of the comments from last quarter, which is that the activity remains very active and that there is a lot of opportunities in terms of things that could potentially make sense. We really focus in on a very disciplined and focused approach on what really makes sense in terms of either adding another differentiated high-performing traditional capability or private market expansion or something that would allow us to have access to more clients outside the U.S. Those are the 3 areas I believe we previously have commented on. And we do think all of those could potentially be interesting opportunities for us. We have nothing specific to announce at this time on anything that we're doing. But again, it continues to be a very active area for us. Operator: And our next question comes from Crispin Love of Piper Sandler. Crispin Love: First, just looking big picture at net flows, they've been pretty elevated for 4 consecutive quarters net outflows. When you look forward, do you see any key levers to be able to improve those flows to get to more neutral, at least less negative outside of just quality coming more into favor versus momentum? George Aylward: Yes. Well, I mean, a couple of things. So we did have positive flows in fixed income strategies in the quarter. We had positive flows in alternative strategies. We have positive flows in our ETF. And in multi-asset, I think we were kind of breakeven. So a lot of our flows are really around our overweight to quality-oriented equity strategies. Actually, our equity strategies that are not highly correlated to quality actually are in positive flows. So it's just the significant overweight that we have to those types of strategies is the reason that it's overshadowed any of the other areas that have been positive. So what we're focusing in on primarily now while the cycle is still negative towards us is to grow those things that don't have that same correlation. So as I commented on some of our more style agnostic or momentum-oriented equity strategies actually were in positive flows, and we're actually seeing activity there. But they're just such a smaller part of our business they're not going to overshadow the quality and the momentum. But in terms of the quality momentum, and again, this has really been -- and we highlighted how bad of a 2-year period this has been to give some examples. So for the S&P MidCap Quality Index, it trailed the S&P MidCap momentum by about 32%, which is really kind of ranks in the 93rd percentile of the data that goes all the way back to 1992 and actually, it's the worst level since October of 2000. And similarly, on the small cap, the Morningstar U.S. Small Cap quality trailed the Morningstar U.S. Small Cap momentum by about 82%, and that's the worst level going back to 2008. So it really has been an unusually stark underperformance of quality versus momentum for a longer period of time. And I think as I just commented previously, historically, as they invert is usually when quality has some of its strongest outperformance, right? So in some of these strategies and some of these strategies I've personally been watching for over 20 years, they can generally have some of their best performance and then following that some of their best flows after that inversion. So we don't fundamentally believe that lower quality, less profitable, highly shorted companies are going to continue to always lead the market. And then lastly, when we sell our strategies, we sell them how they'll fit into a portfolio, right? So generally, people aren't just buying one equity manager hoping for the highest return. So really, where we're positioning those capabilities is really that someone should have a portion of their equity allocation not only in just the pure indexes, which is really a small number of names leading those indices, but to also then have certain allocations to either quality or other types of capabilities in the event that the markets inflect. And so I think increasingly, as people will look at do they need to have some protection in case there is that flip, that will be an area that we would be able to take advantage of. Crispin Love: Great. I appreciate all the color there. And then just second question for me on other OpEx. You had the office space consolidation. Is this something that you've been thinking about for several quarters? And then shouldn't that drive down the run rate for OpEx going forward? Or are there offsets in there as well? And then also, if you can just detail what the $1 million of discrete business initiative expenses were in the quarter? Michael Angerthal: Sure, Crispin. I'll jump in. It's Mike. So with respect to the office consolidation, this is the quarter that you actually see it in the run rate. Those are some actions that we have taken starting late last year and earlier this year that have now been reflected in the run rate. So we talked about the $30 million to $32 million range ex the discrete items sort of coming in at the low end of that range given the benefit of that office consolidation. So we provided the transparency around the discrete items. As George alluded to, they're generally related to at elevated levels based on some of the inorganic activity that we have been focused on. So we thought providing that transparency would be helpful in the analysis of other operating. So again, it is specific to some of those activities and at levels higher than what we would anticipate a more normalized level. Operator: And our next question comes from Bill Katz of TD Cowen. William Katz: Okay. Just sticking on the discrete spend here. Is that now over? Or should we anticipate that, that will persist? And then relatedly, are you back in the market for buyback at present? George Aylward: Yes. So on the first part of the question, again, in the prepared comments, we're clear that we're still being very active, and there's still a lot of opportunities for us. So we'll sort of stand by that and sort of saying we are still being very active in evaluating potential opportunities. And as it relates, we don't have anything specific to discuss or announce at this point, but that continues to be an area where we are being very active. And on buybacks, nothing specific to say other than we continue to view that as a core element of our capital strategy. Halfway through the year, we had done $50 million, which has gotten us to the highest level of over 2 years. So that will continue to be something that we will always evaluate. But as always, we have to balance it with other factors and other considerations for that. So nothing specific on what that might be in the short term other than to say we still view return of capital as a critical part of our capital strategy. William Katz: Okay. And just as a follow-up, just going back to your commentary that the fourth quarter, the institutional trends are still looking like they were in prior quarter. Can you unpack that a little bit, where you're seeing strength, where you're seeing the weakness? And underneath that, I was sort of wondering if you could just talk about what you're just sort of seeing generally in terms of allocations. And I'm curious specifically about the demand for liquid alts. George Aylward: Yes. And actually, 2 of the areas that actually I was actually very happy to see is, I mentioned emerging market debt, right, which is an area that had previously maybe not been as much in favor as some of us believe it should have been. So I think I commented on opportunities that we've seen in emerging market debt as well as global REIT as well as domestic REIT. So those are really nice to see there. I think generally, in the institutional, which for us, we have a nice non-U.S. institutional business. And I believe both of the ones I referenced are non-U.S. You kind of have a slightly different investor profile there. So that's why sometimes we can see interest in strategies that may not be as in favor in the U.S. retail market, even the U.S. institutional market, but have some opportunities there. So I mean, those are the 2 that I would highlight, but I think there's a variety of managers. Mike, I don't know if there's anything else you'd add to that. Michael Angerthal: No, I think you covered it. We -- the pipeline is across managers and across geographies, including from our European and Middle Eastern teams. Operator: And our next question comes from Michael Cyprys of Morgan Stanley. Michael Cyprys: Just want to ask about ETFs. I was hoping maybe you could speak to how broadly distributed your ETFs are today across the wires, IBDs, RIAs, et cetera, how that is compared to where you'd like that to be? Talk about some of the steps you're taking to expand your distribution presence for your ETFs, including in models? And if you could maybe just update us on how models are contributing, if at all, today. George Aylward: Yes. No, it's a great question, and that's specific to the comments we made and where we're focusing and one of the main areas of focus is increasing the availability of our ETFs in certain channels. Because as you're kind of intimating, getting access is not the same in every channel, right, the wires versus the RIAs as well as getting access into some of the big model providers and professional ETF buyers. So for us, we're focused on all of those areas where we are not where we want to be. We think we have a great opportunity, particularly if we can get some of our ETFs up to a certain level of scale, which will matter in some of the channels, say, like the wirehouses where you need a certain period of time and you need a certain asset level to have access. We always have focused in on some of the model providers and the professional buyers. But again, I still think that's a huge opportunity for us. I mean one of the reasons that we're focused on both sides of increasing the distribution as well as increasing the offerings because we just really see that there is just a great opportunity set for us and some of the areas that we kind of focus in on as we move forward. So our hope is that the growth will come from getting a lot more of the assets that we currently don't have that we do want and -- but then expanding those offerings to provide more building blocks for ETF models as well as for individual investors. And I think as I commented on a previous call, another area that we focus in on is our own models and using our ETFs for solution-oriented, outcome-oriented types of capabilities, which we have seeded and designed several things along that way. So that's why it's just been a big area for focus for us. And I think as you've seen, almost all of our product development has either been on the ETF side or the global fund side as well as -- and I don't want to leave retail separate accounts out because retail separate accounts, our focus there has really been on expanding the offerings. We have a strong placement in retail separate accounts on the equity side, and we have been just expanding the number of fixed income offerings and have put together several structures to allow us to take advantage of that. So that's another area that we would like to see some additional growth because we think we have a good opportunity set. Michael Cyprys: Great. And then just a follow-up question on inorganic activity. I was hoping maybe you could elaborate on the types and size of properties that you're evaluating. Talk about your process of how you're going about sifting and sorting through these properties and remind us of your criteria and hurdle rates. Does the transaction need to be accretive day 1 or within the first 12 months? How are you thinking about that? George Aylward: Yes. So when we speak about inorganic, we're covering the whole continuum of those things which are really -- could add meaningful scale, those things that can add capabilities that are quite additive to our current set of offerings, and that would also include expanding us from the public market offerings into the private markets. When we talk about inorganic, we also, because of our flexible model, that could include things like joint ventures or other types of structures. So we kind of leave ourselves open to a variety of different opportunity set and kind of evaluate -- primarily what we're trying to evaluate is the best strategic fit, the financial benefit and really the long-term value creation. So we'll include a lot of factors, which will include things like accretion, but we'll also include factors like what impact we'll have in our growth rates, et cetera. So I don't have specific hurdles that I would provide, but we do go through a filter of various elements as we determine between 2 alternatives or 3 alternatives, what we would prioritize. The good news is, again, with our current level of net debt being de minimis and our cash flow still generating, we do have flexibility to evaluate different types of opportunities. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Aylward. George Aylward: Great. Now thank you, and I want to thank everyone today for joining us. And obviously, as always, if you have any other questions, please reach out. And thank you very much. Operator: That concludes today's call. Thank you for participating, and you may now disconnect.
Cenk Gur: Dear friends, this is Kaan speaking. Thank you for joining our third quarter earnings call. I'm speaking to you from Copenhagen. While I am on the road, I wanted to take a moment to connect with all of you and share my perspective on the current operating environment and how we are positioning ourselves for the period ahead. After my remarks, I will leave the floor to Turker, Ebru and Gulce and our IR team, who will go through the detailed financial results and handle the Q&A. Although I'm not able to stay for the entire call, I'm looking forward to catching up again soon. Before we dive into the numbers, I want to take a moment to talk about the broader macro environment, particularly what we are seeing in Turkiye. As you all know, the strong monetary tightening in April postponed the anticipated margin expansion. Following today's 100 bps rate cuts, we expect the policy easing to continue in measured steps. On the growth side, following a solid pace in Q2, economic activity shows sign of moderation in Q3. We envisage another period of mild economic growth this year around 3.5%. Current account balance remains supportive for exchange rate stability. Looking forward, achieving lasting this inflation will be key to sustaining healthy growth across the real and financial sectors. Monetary measures have successfully restored financial stability and the Central Bank restarted reserve accumulation in May. Gross reserve have surpassed its mid-March level by reaching $189 billion, while net reserves have steadily improved to around $57 billion. Domestic residents still favor Turkish lira assets and deposit dollarization remains weak. A fixed deposit share in the banking system has been stable around 40% levels on the back of the macro prudential measures, keeping Turkish lira deposit rates higher than the policy rate. Foreign capital flows have been on the rise since May. Without a doubt, global conditions generate a conducive environment for the continuance of the existing exchange rate regime and support financial market stability. Let's move on to our bank. Let me start with our overall performance. During the quarter, we delivered healthy loan growth accompanied by across-the-board market share gains, particularly in our core customer segments. This growth was quality driven, fully aligned with our disciplined and selective lending strategy as well as the regulatory requirements. On the funding side, our dedication continued on expanding and deepening customer relationship. This translated into market share gains in low-cost deposits and a strong performance in demand deposits, further enhancing the stability and efficiency of our funding base. This balanced development on both sides of the balance sheet supported a solid increase in net interest income, while our fee income also maintained its strong momentum. At the same time, we remain fully focused on asset quality and risk management. Our prudent underwriting standards, proactive monitoring and well-diversified portfolio continue to support the resilience of our asset base. As a result, we maintained strong solvency comfortably above regulatory threshold. This solid foundation positioned us well to capture growth opportunities ahead while continuing to safeguard the strength and stability of our franchise. We are executing today with discipline while transforming for tomorrow through a clear long-term vision. We have a strong proven business model, which we continue to enhance and adapt as customer needs evolve. Our business models brings together digital excellence, strong customer engagement and strategic investment in technology and our people, all shaping the future of sustainable growth and lasting value for all stakeholders. Let's move to our 3-year strategic plan, where we regularly share transparent updates on our progress each quarter. Execution remains strong with the majority of our 3-year strategic objectives already delivered or well within reach. Our only shortfall remains in Turkish lira time deposit market share, which is a reflection of our funding optimization efforts and the impact of a regulation-driven low level of Turkish lira LDR. Our dedication for customer growth remains fully in place through both customer acquisition and deepening relationship. Backed by a well-structured balance sheet, this forms a scalable, resilient earnings platform with strong momentum and long-term growth potential. Let me leave you with 3 takeaways. First one is we continue to grow selectively and with discipline. Secondly, we manage risk proactively. And lastly, we remain focused on sustainable core revenues that will drive real return on equity in the upcoming periods. I'm very proud of our teams. Their hard work and dedication truly drive our success. A sincere thank you to all people for their commitments. And dear friends, the partners, thank you for your continued trust and support. I look forward to seeing you all again soon, bye for now, Turker and Ebru. Over to you. Kamile Ebru GÜVENIR: Thank you so much, Kaan Bey. We will start now with the first slide on the NII and the revenues. Our net income in the 9 months was up by 17% year-on-year to TRY 38.908 billion, resulting in an ROE of 20.4% and ROA of 1.8%. During the same period, we had solid revenue growth, up 48% year-on-year to TRY 155.970 billion, led by robust fee generation and renewed NII momentum during third quarter. To put in numbers, our quarterly swap adjusted NII improved notably by 48% [ quarter-on-quarter ], supported by disciplined balance sheet management, while strategic investments, deepening client relationships and strong cross-sell execution continue to fuel fee growth. Together, these drivers further strengthened our recurring revenue base and the solid NII recovery this quarter underscores how we're leveraging our strong solvency position to deliver profitable growth and our balance sheet flexibility. Strong growth alongside robust solvency highlights our agility and risk reward discipline. As we move ahead, our sustainable growth mindset, solid balance sheet and analytical capabilities will drive margins further. Moving on to the balance sheet. We achieved a 28% year-to-date growth in TL loans, well on track to meet our full year loan growth guidance of over 30% shared at the start of the year. On a quarterly basis, our TL loan growth of 13% led to across-the-board market share gains, while risk discipline remained intact. Please also note that our robust growth achieved is in full alignment with the loan growth regulations. During third quarter, we captured 90 basis points of market share in business banking loans among private banks, illustrating our targeted focus on segments with growth potential. Building on our leadership in consumer lending, we expanded our presence further, capturing 30 basis points additional share among private banks. This demonstrates our readiness to capture new opportunities while managing risk. On the FX book side, we grew by 4.1% quarter-on-quarter and 5.1% year-to-date, capturing 30 basis points market share gain among private banks during the quarter. The increase was mainly driven by government-backed infrastructure projects, multinationals and blue-chip corporates, reflecting a prudent, quality-focused growth strategy, fully aligned with regulations. Please also note that we have a solid pipeline, indicating upside potential to our mid-single-digit foreign currency loan growth guidance for the full year. Moving on to the securities. Our security portfolio composition demonstrates our balanced approach with a focus on yield maximization, 69% of our securities are TL, while we have selectively increased our positioning in the foreign currency side through proactive Eurobond investments. This is underlined by a robust 21% year-to-date growth in our foreign currency securities in dollar terms. We are well positioned with long duration, comparatively higher yielding TL fixed rate securities, which will support book value growth going forward. To put in numbers, 65% of our TL fixed rate securities are classified under fair value through other comprehensive income. Our TLREF index bond portfolio offers decent spread. While our CPI linkers offer positive real rate and its share in total has actually declined since 2022 by 33 percentage points. Our active yield-focused management of the securities portfolio has supported timely adjustments to market dynamics and will underpin margin resilience in the periods ahead. Moving on to the funding side. We effectively utilized our flexible balance sheet and strong deposit franchise while optimizing our funding costs. At the same time, we successfully strengthened our TL deposit base, capturing notable market share gains in both demand deposits and widespread consumer-only segments. Our TL demand deposit market share among private banks increased quarter-on-quarter by 190 basis points, reaching a robust 18.6% as of third quarter. Accordingly, TL demand deposit share in total TL deposits advanced by 300 basis points year-to-date to 16%. Share of total demand deposits in total deposits also excelled by around 500 basis points to 33% during the same period. Meanwhile, our strong customer engagement helped us achieve a 40 basis point market share gain in the sub TRY 1 million TL time deposits, reaching 16.5% in third quarter. On top of our strong and widespread deposit base, our low TL LDR, which, as you can see, was partially utilized for growth opportunities during the quarter, is still offering substantial room for funding cost optimization in the coming period. Moving on to P&L. NIM recovery resumed in third quarter as expected, following the temporary margin pressure in second quarter due to the pause and the reversal of the rate cut cycle. Our swap adjusted net interest margin expanded by 73 basis points quarter-on-quarter, supported by both improved funding dynamics and well-positioned loan portfolio. Please note that our CPI normalized quarterly NIM improvement was also strong at 50 basis points after adjusting for the impact of CPI linker valuation change based on the revised October to October CPI estimation of 32.5%. It is worth to note that our weekly NIM trend towards the end of the quarter indicates ongoing progress in margin improvement for the fourth quarter. Our unwavering focus on profitable growth and effective funding strategies will remain key drivers supporting NIM evolution. On the other hand, the disinflationary phase and the magnitude of the upcoming rate cuts will continue to influence the extent of the quarterly NIM improvement. As a reference, the underlying year-end policy rate assumption of our revised guidance in July was at 36%, whereas the current expectations actually point to a tighter environment. Moving on to the fee slide. Our net fees advanced by 67% year-on-year, reflecting innovation, strong customer engagement and diversified offerings. Our diversified fee base remains a key strength with solid contributions from every business line. To name some of them, first, net payment systems fees advanced by 76% year-on-year, reflecting effective customer engagement and targeted campaigns. Second, net bancassurance fees surged by 77% year-on-year, backed by our advanced digital solutions actually, which are covering around 80% of our sales. Third, net money market transfer fees rose by 58% year-on-year, reflecting higher transaction volumes and digital channel migration of transactions. Our strong market positioning in key business lines ensures a diversified and resilient fee base throughout the rate cut cycle, offsetting the cyclical impact of interest rate-driven payment system fees. While the banking sector fees benefited from the rate environment, our market share gain among private banks reflects the bank's inherent strength in fee generation and ongoing focus on sustainable growth. I am very pleased to share that the fee growth once again outpaced OpEx, lifting our fee to OpEx ratio to 104% as of 9 months. Accordingly, our fee to OpEx ratio showed an 18 percentage point increase year-to-date, underlining our continued execution on customer-driven revenue growth and disciplined cost control. On that note, let's move on to the OpEx. The year-on-year increase in operating expenses was limited to 35% in 9 months, underscoring our strong cost control and operational efficiency. This realization is still evolving below our revised guidance of around 40% for the full year. Moving on to asset quality. Retail-led NPL inflows continue to be persistent trend across the sector. During this period, our disciplined risk management framework has enabled us to optimize the loan portfolio while preserving sound asset quality. This was supported by excellence in advanced analytical capabilities across the retail segments, automated and AI-based credit decision models, diligent tracking and individual assessment of our corporate and commercial loan portfolio as well as our prudent provisioning. Our NPL ratio remained at 3.5%, fully in line with our full year guidance. Meanwhile, the share of Stage 2 plus Stage 3 loans representing potentially problematic exposures remains low at 9% of our gross loan portfolio. Please also note that the restructured loans represent only 3.2% of the total loan portfolio. In 9 months, our total provisions reached almost TRY 68 billion, reflecting our continuous provision reserve buildup. Meanwhile, our coverage ratio for Stage 2 and Stage 3 loans stands strong at 34.3%, mirroring disciplined risk management practices. Excluding currency impact, our net cost of credit increased to 230 basis points on a cumulative basis, mainly driven by ongoing retail-led inflows and also further strengthening of our already strong coverage ratios. Hence, our full year cost of credit may slightly exceed the upper end of our guidance range of 150 to 200 basis points by the year-end. Our total capital, Tier 1 and core equity Tier 1 ratios without forbearances remain robust at 17.2%, 13.6% and 12.4%, proof of resilience alongside solid growth. As for the sensitivity, as we share every single quarter, 10% depreciation in TL results around 29 bps decrease in our capital ratios, while the impact diminishes for higher amounts of change. And 100 basis points increase in TL interest rate results in 9 basis point decline in our solvency ratios, again, demonstrating a limited sensitivity and the strength of our capital buffers and also declining as the interest rates go higher. So solid capital strength anchors resilience and long-term profitable growth. This slide highlights the snapshot of our 9 months financial performance. As a final note, across the board, strong loan growth, improving NII performance, along with robust fee income generation led to strengthened core revenue momentum. That said, the ongoing disinflation process and the magnitude of the rate cuts will determine the extent of the NIM improvement. Going forward, customer-centric growth will remain our main engine of sustainable profitability, supported by robust fees, disciplined operations and prudent risk management. Before moving on to the Q&A, I'd like to share a few highlights regarding our nonfinancial performance. As highlighted in our ESG video, we sustained a strong momentum, advancing our 2025 sustainable action plan with measurable results. We are on track with our long-term sustainability goals and notably have reached 74% of our sustainable finance targets as of third quarter. We are proud to pioneer a tailored banking program via Akbank's women platform, offering integrated financial and social benefits to women customers. We strengthened our internal engagement through the climate ambassador program in the third quarter, empowering Akbankers to foster a green future. With our consistent performance in climate strategy, governance and social impact, we maintained our leadership position, sustaining a AA score in MSCI, which was just updated this month. All these efforts reflect our continued commitment to building a low-carbon and inclusive economy in line with our long-term objectives. This concludes our presentation. Kamile Ebru GÜVENIR: And we are now moving on to the Q&A session. Please raise your hand or type your question in the Q&A box. And for those of us joining by telephone please send your questions by email to investor.relations@akbank.com. And as I see, there are a few hands up already. And the first question comes from Mehmet Sevim. Mehmet Sevim: I just had one question on the trajectory of margins. And maybe starting with the 3Q performance, which looks really strong and with the 73 basis point expansion this quarter, I just wanted to understand if this was completely in line with your expectation going into the third quarter? Were there any aspects that surprised you, such as loan or deposit pricing, behavior of households or corporates or anything in this quarter? And then secondly, just going into the fourth quarter, you already indicated the NIM trajectory from here depends on the policy rate understandably. But with what we know today, where do you see the exit NIM? And how should we think about it into the early quarters of 2025 -- 2026, apologies? Türker Tunali: This is Turker. Thank you very much for joining the call. Let me start with the third quarter and then move on to the fourth quarter of '26 to share some thoughts on '26. Actually, as you have rightly mentioned, so there was a strong recovery in our quarter NIM in the third quarter, mainly coming from the deposit cost easing. That was actually in line with our expectations. But having said that, actually, when we dive into deep, as you may recall, by the end of June, we had this like easing on the upper bands of policy of Central Bank funding decrease. So there was an indirect rate cut. And on top of it, we had another rate cut in July. We were successfully able -- like we were able to reflect these rate cuts into our deposit pricing as a result of which our core spread from second quarter into third quarter has improved by roughly 3 percentage points. But after the latest rate cut in September, as you may have followed from like market data, like second half of September, I am referring to. This deposit rate -- deposit cost easing has stopped somehow, maybe due to the ratio requirement of the Central Bank. But at the end of the day, that latest rate cut was not reflected into like deposit pricing. Now we are at the beginning of the fourth quarter. Let's wait and see actually how the -- like the coming weeks will evolve. Also not to forget like a partly a week ago, we had this monthly reporting period, and maybe that was one of the reasons of this pricing behavior in the market. So we will be observing how the upcoming days will evolve also after this -- after today's rate cut. So it will definitely impact our net interest margin in the fourth quarter. But having said that, I can say like the net interest margin starting into the fourth quarter is surely above the third quarter figure, but the magnitude of the improvement will be important since after today's announcement of Central Bank, probably last rate cuts will be also a bit more moderate. Therefore, actually, it puts some pressure on our full year NIM guidance in the range of 3% to 3.5%. So it's very likely that we may like stay behind this. But definitely, this rate cut cycle will further help us to improve our net interest margin also in the upcoming year as well. Maybe in the past, we were talking with some net interest margin peaks in '26. But probably like as of today, what we are like forecasting, this rate cut cycle will be more like gradual in '26. Therefore, we may see a gradual net interest margin improvement throughout the year rather than seeing a peak in the first quarter or in the second quarter. So that's what we are currently observing. But at the same time, so to offset some of this net interest margin maybe gap, our growth has exceeded our expectation. And it's very likely that we will be beating our full year loan growth guidance by the end of the year. So just recall, so mid-single digits for FX and 30% for TL loan growth, we will be probably ending year above this level, which is also currently increasing our Turkish lira LDR. So we are like in a way, operate in a more optimized manner. And also, we are funding roughly 20%, 25% of our TL balance sheet via wholesale funding, where we are fully benefiting from the rate cut cycle, albeit it is a bit maybe more moderate, but that's how it is at the moment. Kamile Ebru GÜVENIR: The next question comes from David Taranto. David Taranto: I have 3 questions, please. The first one is about this year. The 25% ROE target appears quite ambitious considering the 20% ROE achieved in the first 9 months of this year. Could you please elaborate on how you see the full year ROE outlook evolving following the third quarter results? Second question is a follow-up on NIM. In the last quarterly presentation, you mentioned expectations for NIM to reach 5.5% in the fourth quarter of this year and towards 6% in the first half of next year. And given the changes in the macro outlook, do you still see this trajectory as achievable? To my understanding, you now see the peak NIM at a lower level, but you do not expect an immediate normalization. You see it hovering around those levels for some time. Third one is about the fee. The fee income continues to show strong momentum. The year-on-year growth accelerated this quarter despite regulatory changes on the debit cards. When do you anticipate this growth to begin decelerating? And what factors would likely to drive that shift? And perhaps I could squeeze one more. The percentage of Stage 2 loans remain below the sector average, but there has been a large increase in restructured loans in this quarter. Are these driven by unsecured retail loans or business loans? And could you please elaborate a bit on your strategy here? Türker Tunali: David, let me start with the ROE. So definitely, so this gap on the -- potential gap on the net interest margin guidance side may put some limitation to like achieve this 25% ROE guidance. So probably we are going to end the year in between the existing level and 25% guidance. Definitely, the NIM improvements going forward will impact the level of ROE improvements in the fourth quarter. With regard to our like previous talks and the previous earnings call, so definitely, this delay in the rate cut cycle, just recall, when we made this guidance revision, we were anticipating policy rate to come down to 36% by the end of the year. But nowadays, we are more like 38% level. So at this 2% deviation. So will definitely also impact our exit NIM. But surely, exit NIM will be like much higher than the third quarter NIM, but maybe not at this 5%, 5.5% levels. And the improvement trend, as I answered Mehmet's question, probably the NIM improvements will be like more like in a step form like with gradual improvement. But definitely, like next year's NIM will be significantly higher than this year's NIM. That was your second question. And third question, fee income. Yes, our third quarter fee income performance wise was quite strong. That was also driven by our growth trend in the third quarter. It has also positively impacted our fee income growth. And currently, our year-on-year fee income growth is above our guidance, and we are expecting to end the year again at similar levels between the existing level and the full year guidance. And this latest regulatory change on the debit card side will impact fourth quarter, but its magnitude is more moderate. So it's not that significant. Probably into next year and maybe also into fourth quarter and into next year, the Central Bank's decision with regard to interchange commission caps will be important as we -- as you know, it hasn't been touched so far, which was also one of the reasons why this year's fee income growth was also way above the initial guidance of 40%. But assuming with the upcoming rate cut cycle and with some also central banks starting to reflect these rate cuts into interchange commissions, we may expect some moderation, but the aim of Akbank will be again to continue with this enhanced fee income generation capacity also as a result of our customer acquisition efforts. So definitely, we will be aiming to preserve this superior fee to OpEx ratio. We may see some moderation there, but our ambition will be always to stay at this 100% levels. Finally, with regard to stage -- not Stage 2, but yes, Stage 2 was almost the same at the same level, but the ratio of restructured loans increased from 2.6% to 3.2%, so only 0.6% increase. And just recall, by the end of the second quarter at Akbank, we had the lowest restructured loans, not only in nominal terms, but also as a percentage of total loan book. And this slight increase was mainly driven by the restructuring scheme of BRSA. As you may recall, that restructuring scheme was also -- was made available for credit card customers with not -- without overdue status, but having rolling over some of their debt. So we had to respond to them when the customer was coming with some restructuring demand. That's the main reason. But just to recall, 3.2% like probably will be, again, like a quite low figure when we see the sector figures in the coming weeks. And as Ebru has mentioned, we continue to further improve our provisioning charge. Therefore, our cost of risk is currently slightly higher than the full year guidance, and we may end the year slightly higher than the guidance, but it's like bottom line impact is not that material compared to the NIM impact. But I think so, it's a more prudent approach. I hope I was able to answer your questions? David Taranto: Yes, all good. Thank you. Kamile Ebru GÜVENIR: The next question comes from Konstantin Rozantsev. Konstantin, we cannot hear you. Okay. I guess I'm just looking into the written questions. They're mainly regarding NIM and cost of risk, and we've answered both of them. I don't know if there are any further questions. Another -- Konstantin is now again coming in. I guess this is a different Konstantin. Konstantin, please go ahead and ask a question. Konstantin Rozantsev: Could you please confirm, if you can hear me? Kamile Ebru GÜVENIR: Yes, we can hear you now. Konstantin Rozantsev: I had 2 questions, which I wanted to ask. The first one is on the retail FX deposits. So I see in the sector data that in the recent weeks, there has been some increase in the stock of retail FX deposits even on parity adjusted basis. So could you please confirm why is it happening? Well, is it completely explained by the fact that there are these KKMs, which are maturing and which have been moved into FX deposits? Or is there also some elements that regular lira deposits are being moved into FX deposits as well? So that's the first question. Second question, could you please comment if you have done any stress test on the loan quality in different macroeconomic scenarios. And if yes, then what do the results of the stress tests suggest? Do you have some specific examples in mind and some particular scenarios in mind saying that these scenarios lead to the high pressure or like large pressure on the loan quality. So could you please quantify these scenarios if you did this stress test? Türker Tunali: Konstantin, this is Turker. With regard to your first question, this FX deposit increase, as you mentioned, is mainly due to the parity change. Currently, gold deposits make up a significant part of FX deposits in the system. So therefore, actually, the gold price change has -- is impacting the level of FX deposits. But other than that, when I really look at our own portfolio, the strong TL deposit base is there and the shift from TL into FX is not material. Surely, with the phasing out of the KKM scheme, the remaining small part of KKM modelers are switching to FX. But it was in a way, FX indexed deposits. But other than that, there is no behavior change in the customers. With regard to the stress, surely, we are always monitoring our portfolio like in different ways. We are applying different stress scenarios into our capital. But in all these stress tests, we preserve our strong capital. But other than that, there isn't really currently any specific sector or area where we feel concerned. And when you look at our loan portfolio breakdown, there [ isn't ] a sector concentration. And it is really like in every sector, there are like customers with a better asset -- with a stronger financial performance and maybe a weaker financial performance. And according to that, we are continuously changing our lending criteria in terms of collateral version, in terms of duration. So that's how it's. Konstantin Rozantsev: Okay. And sorry, just a third quick question. Do you have any number in mind for cost of risk for next year, 2026 in the base scenario? Türker Tunali: Actually, currently, we are in our budgeting process, and we will be sharing our guidance by the end of -- probably by the end of January. But maybe as a reference point, probably it will evolve at similar levels like in '25. Kamile Ebru GÜVENIR: Okay. At this moment, I do not see any further hands up for questions. So I guess we're coming towards the end. There are no written questions that are different to the questions that have been actually asked. So this concludes our earnings webcast. Thank you all for joining us today. Please do not hesitate to contact our team if you have any further questions, we're always glad to help. And we also look forward to staying in touch in the upcoming conferences. We'll be in Dubai for the Jefferies Conference. We will be in London for the Goldman Sachs Conference, and we'll be actually in Prague for the WOOD's Conference. So if you're attending, we look forward to seeing you there, and bye for now.
Operator: Welcome to the HEXPOL Q3 presentation. [Operator Instructions] Now I will hand the conference over to the CEO, Klas Dahlberg and CFO, Peter Rosen. Please go ahead. Klas Dahlberg: Thank you, operator, and hello to you all, and thank you for joining this call, and welcome to the HEXPOL Q3 presentation. This is Klas Dahlberg speaking, and I'm here together with our CFO, Peter Rosen. If you please turn to Page 2. I will start with a business update. Peter will take you through the financials, and I will summarize the quarter. After that, we are happy to answer your questions. If we then go to Page 4, please. I will start by going through the Q3 performance. We see that most markets continue to be affected by the geopolitical uncertainty, but it's pleasing to see that the European market continues to be rather stable, while the North American market is still challenging. We had only minor direct impact from tariffs, whereas the indirect impact on end customers affected the overall demand, especially in North America. It's also pleasing to see that including acquisitions, volumes were actually higher than last year. And excluding acquisitions, they were in line with last year, but with an unfavorable mix. Looking at our main segments, we saw that the automotive end customer segment continued to be slow, primarily in North America. That was partly compensated for by increased demand in building and construction and also in wire and cable. Our most recent acquisition, Piedmont in the U.S. and Kabkom in Turkey contributed positively to the quarter. Sales prices as well as prices on major raw materials were stable, both versus last year but also sequentially. High uncertainty continues triggered by U.S. tariffs and U.S. trade policy, and that is impacting us indirectly, as mentioned before. In North America, that is the main reason why we could not grow the overall sales and results compared to last year. In the quarter, we delivered sales of close to SEK 4.7 billion with a negative FX effect of some SEK 300 million. Piedmont and Kabkom added some SEK 240 million in sales that was offset by lower organic sales in Rubber Compounding Americas. Compounding Europe showed rather stable organic sales. We reached an EBIT of SEK 688 million and a margin of 14.7%, impacted negatively by FX of some SEK 50 million and an unfavorable mix. The operative cash flow continued on a good level, and we reached SEK 740 million in the quarter. If you please turn to Page 5. If we look into the different business areas, starting with HEXPOL Compounding, the overall organic volumes were in line with last year. The lower sales were impacted by negative FX of some SEK 290 million, but also by the mix. The automotive end customer segment was down primarily in North America, but that was partly offset by increased demand in building and construction and wire and cable. The price on major raw materials were sequentially stable and also versus last year. And the lower operating margin was affected by an unfavorable mix. Rubber Compounding Americas is, as you know, an important part of the HEXPOL Group. And we are very happy to welcome Ken Bloom back to HEXPOL as the Interim President for Rubber Compounding Americas. Ken has a clear mission to take the next step capturing and growing that business. If we then jump to HEXPOL Engineered Products, if we exclude a negative currency impact of SEK 22 million, we actually had a small increase in sales compared to last year and also good development across all product areas, leading to a stable EBIT. We are firmly committed to sustainability and our focus continues. We are on a good path to deliver on the 75% CO2 reduction target that we set for the end of this year. We are also working on the sustainability strategy and the new targets will be completed during Q1 next year. M&A is, as you know, an important focus area for our growth plans. We have the financial resources to accelerate acquisitions. Short term, the geopolitical uncertainty impacts the M&A activity level. There is somewhat a wait-and-see mentality among some companies, and that is affecting that. And last but not least, on November 4, we will have our Capital Market Day in Stockholm, and then we will share more about our growth strategy. If we then turn to Page 6. It's time for the financial update, and Peter will start with the sales development in Q3. Peter Rosén: Thank you very much. So if I can ask you to turn to Page 7, we'll take a look at the sales development in the quarter. And as you've seen, we delivered sales of SEK 4.7 billion in the quarter, which is down 6% compared to the same quarter last year. And if we look on the drivers, we see that organic sales are down 4% in the quarter. And at the same time, the acquisitions of Piedmont and Kabkom added 5% in sales. And as Klas mentioned, there were large negative effects in the quarter, adding up to SEK 312 million. Coming back to the volumes, overall organic volumes were on the same level as last year, but sales were still down, affected by a less favorable mix. Looking at it from a geographical perspective, Europe showed stable sales in the quarter, while we saw a decrease in North America that also translates into the decrease on group level. From an end customer perspective, automotive showed soft demand, which was partly offset by increased demand primarily from building and construction, wire and cable, but also several smaller end customer segments that showed higher sales in the quarter. If I can ask you to turn to Page 8, just taking a look at the financial overview and the P&L. We delivered a profit of SEK 688 million. That includes a negative FX impact of just above SEK 50 million. EBIT margin of 14.7%, which is below what we did the same period last year. And the main reason for this is somewhat less profitable mix, but also OpEx in relation to the lower sales that we saw here in the quarter. Strong cash flow in the quarter with an EBIT of SEK 688 million, we delivered a cash flow of SEK 740 million in the quarter. If I can then ask you to turn to Page 9, taking a somewhat different view of the financial performance here in the quarter. We see that sales came in at SEK 4.7 billion with an operating profit at SEK 688 million below last year, as mentioned, and an operating margin of 14.7%, which is then below what we did last year. If I can ask you to turn to Page 10, looking at the drivers of the operating profit, we see that the lower EBIT is primarily driven by the lower sales, but also impacted by lower gross margin. The lower gross margin is affected by mix. OpEx is somewhat above last year levels, but that is driven by we've added Piedmont and Kabkom to the cost base compared to the same period last year. If I then ask you to move over to Page 11, starting to look at HEXPOL Compounding in the quarter, delivered sales of SEK 4.3 billion in the quarter, which is below what we did the same period last year. Negative FX has a sizable impact of almost SEK 300 million in the quarter. Recently acquired Kabkom and Piedmont added about SEK 230 million in sales, while as mentioned before, organic sales were down some. And these lower organic sales are seen in North America, while Europe showed sales on the same level as last year. And as mentioned, from an end customer perspective, the lower sales is seen with automotive customers, and this was partly offset by higher sales to end customers within building and construction, wire and cable and also some other smaller segments. Operating profit came in at SEK 624 million with a margin of 14.4% for the quarter. If I can ask you to turn to the next page, we take a look at Engineered Products, where adjusting for negative effects in the quarter, sales were up 3%, and this is driven by strong performance by the gaskets products. Operating profit at SEK 64 million with a good EBIT margin of 18.1%, both in line with last year levels. If I can ask you to turn to Page 13, taking a look at the working capital. You can see that we continue to manage working capital efficiently. Despite adding Piedmont and Kabkom, working capital is on the same level as last year, both in absolute terms and in relation to sales. And as mentioned also in last quarter, there are no changes to underlying payment terms. And if I can then ask you to turn to Page 14, taking a look at the cash flow. As mentioned, we delivered a strong cash flow in the quarter, SEK [ 640 ] million with smaller movements across the various items, but well above the EBIT that we delivered in the quarter. And then finally, when it comes to the financial part, if I can ask you to turn to Page 15, looking at the net debt standing at SEK 3.9 billion and a net debt-to-EBITDA ratio of 1.14 at the end of the quarter. This is higher than last year, but this is mainly driven by the acquisition of the minority share of almak as well as the acquisition of Kabkom that we've done this year. So all in all, after the third quarter, we continue to stand with a very strong financial position. And with that being said, I hand over to Klas. Klas Dahlberg: Thank you, Peter. Finally, then just to summarize the third quarter. Europe showed stable sales compared to last year. Engineered Products also showed stable sales with a good profitability. We saw lower demand in North America affected by the high uncertainty related to U.S. trade policy; however, we didn't really see a direct impact from tariffs in Q3. As mentioned, Ken Bloom is appointed as the Interim President for Rubber Compounding Americas. And we consolidated Kabkom as of the 1st of May. And as we've said many times now, wire and cable that they represent is a growing segment for us. We continue to focus on M&A, and we have a strong balance sheet allowing us to act. We continue to focus on sustainability with good progress, both when it comes to our internal targets, but also when it comes to our products. And on the 4th of November, we will have our Capital Markets Day in Stockholm. So by that, we conclude the presentation of the third quarter, and we open up for your questions, ladies and gentlemen. Operator: [Operator Instructions] The next question comes from Joen Sundmark from SEB. Joen Sundmark: So starting with a question on automotive. If I look at the S&P figures on light vehicle production in Q3, it looks like it has improved a bit compared to last year, yet you mentioned that the decline in automotive seems to be present for you guys in Q3. So do you expect that there is some kind of lagging effect here? Or is it rather your particular exposure that's impacting this? If you could shed some light on that, it would be very helpful. Klas Dahlberg: All right. So when it comes to automotive, we always look at the production. And as you say, there is, of course, a certain time difference, those figures compared to our figures. When it comes to the North American market in September, there was, from a sales point of view, an increase, and that was due to the fact they had a subsidy of EUR 7,500 per vehicle. So that triggered sales in that very month, let's say. But other than that, it's a rather slow market. Joen Sundmark: Okay. That's clear. And I know that you have a fairly short order book, but could you share some color on the current discussions on demand that you have with your customers out there and sort of what they foresee demand-wise? Klas Dahlberg: Well, as you say, we have a very short order book. And the trend we have seen is that it becomes even shorter. So we get very late orders from many of our customers. But yes, the overall situation, like I said, it's a rather uncertain situation. So we don't have good visibility when it comes to the order book. Joen Sundmark: Okay. Fair enough. And on the back of that sort of uncertainty in demand and as the margin trend have been quite negative now for a few quarters, do you see any signs of that shifting? Or how are your sort of current discussions going to address that and improve the margin profile going forward? Peter Rosén: Peter here. Just to be clear, we don't give guidance or earnings. That being said, there are a couple of things. One driver of the somewhat lower margin is the mix. And it's no secret that automotive is an important end customer segment for us. So we would prefer to see that automotive production goes up and we get some of those volumes back and which is, of course, something that we are working on. The other part is looking at our cost structures. And there are 2 things. One is looking at the manufacturing footprint. But in the short run, we haven't taken any new decisions on that. Then when it comes to the more -- the other cost side, we're looking both at manning indirect production to bring that down and allocate that according to the volumes coming in. And you will see in Q3 that the number of people were actually lower, about 60 people less this quarter compared to last quarter, Q2 this year. So we're looking at those costs as well to see what can be done to bring down the cost level and manage those. Operator: The next question comes from Henric Hintze from ABG Sundal Collier. Henric Hintze: This is Henric at ABG. So on -- I was wondering if you could give us an update on how you view the M&A landscape at the moment. For example, are potential buyers and sellers closer or further apart on pricing compared to earlier this year? Klas Dahlberg: As I mentioned in my report that what we see right now is some of the companies are also affected by this uncertainty in the market. And because of that, there is a certain wait and see at the moment. So it's not maybe so much about multiples and so on. It's more that if their total result goes down, they are a bit hesitant at the moment to, let's say, to close a deal, if I call it that. So that is what we see. But with that said, we still have quite a pipeline of companies of prospects, so to say. So that's what we're dealing with at the moment. Henric Hintze: All right. And continuing on capital allocation, if this wait-and-see attitude persists among sellers, would you consider buybacks or extra dividends if you're unable to find attractive M&A opportunities? Peter Rosén: Peter here. Priority #1 is to do the M&A, and it's a very high and very clear priority for us. That being said, a while back, the dividend policy was upgraded to be in the range of 40% to 60%. And I think that's where we are right now. So priority #1, M&A. And then we haven't increased dividend policy since I think about 2 years. So that's what we can say at this point. Operator: The next question comes from Gustav Berneblad from Nordea. Gustav Berneblad: Yes. It's Gustav here from Nordea. I thought maybe just to build on your comment there, Peter, on the cost side. As you said, you haven't really taken out anything recently. Is that more due to -- you want to wait and see where demand is heading due to the geopolitical uncertainty? Or do you feel that you do have a quite good balance where you are today and with enough overcapacity to be ready to deliver if demand returns? If you can elaborate a bit more on that. Peter Rosén: Yes, of course. First of all, I think just to point out, last -- Q4 last year, we decided to close one site in the U.S., and that project was finalized in second quarter. So I just want to say that to be clear that we've just finished one project to close a production facility. That being said, there's always a trade-off on do we want to close sites in relation to the expected volumes when they come back. Since we are a batch producer, and we also don't work with order stocks, we need to have a flexibility when it comes to production capacity because when customers come and ask for volumes, we need to have that capacity ready to produce. So we need to strike a balance between the cost and having the capacity to meet volumes when they come back. And I would say that's where we are right now. Gustav Berneblad: Okay. Perfect. And then if we move to Europe, I mean, it looks to be quite stable here year-over-year. Is it possible to give a bit more comments there? Is that stability, is that across all end markets? Or are you seeing sort of wire and cable drawing a heavier part here and being sort of a cushion, if you know what I mean? If you can just elaborate a bit there. Peter Rosén: In a sense, it's a similar pattern as we see on the group level just with smaller movements. So automotive, somewhat softer and building and construction, wire and cable and some of the other smaller end customer segment being somewhat positive. So in a sense, same pattern, but smaller movements compared to North America. Gustav Berneblad: That's very clear. And then just one last question there to build on Henric's here on the M&A side. Would you say that you're more open to close acquisitions in Asia today than you were a couple of years ago within compounding? Klas Dahlberg: So when it comes to Asia, that's too early for us to say. And I think that's also part of, as I mentioned, our Capital Market Day to come back to that subject, how -- what opportunities could be there for HEXPOL, let's say. We will come back to that, Gustav. Operator: The next question comes from Andres Castanos-Mollor from Berenberg. Andres Castanos-Mollor: Can you please comment on any impact of the bankruptcy of first branch group if it has had any impact at the [indiscernible] Group level at all? I assume it was a client. Is there any receivable at risk here? Or will you have any demand -- lack of demand, let's say, while the company solves its issues? Peter Rosén: We don't normally comment specific customers. But let's put it this, Andres. We don't expect any material impact at all from that customer. Andres Castanos-Mollor: Right. And also, I was thinking in the changes in the U.S.A., the footprint changes you've been doing there, a few plant closures, also replace the leadership of the business there. What are your priorities or objectives for the region with these changes? Peter Rosén: Sorry, Andres, I didn't hear the beginning of your question. You mentioned change footprint. Andres Castanos-Mollor: Yes, footprint changes. You have closed a few plants in the U.S.A. You have also replaced your leadership there. What are the objectives for the new interim leadership? Peter Rosén: If I'll start with the first one when it comes to the manufacturing footprint. The last 2 years, we've closed 2 sites, one in California. The reason for that was that we had 2 sites in California, and we could see that we could service the customers from one site. So that's an efficiency improvement that we closed that down, and we could maintain all those customers. The site that we decided to close last year was Kennedale, Texas, similar reason there. We saw that we could service those customers from other sites. So it was a redundant capacity that we had, and that's why we closed Kennedale. So both of those plant closures where we said that we could maintain the volumes, but we could service our customers from other existing sites. So that was to improve profitability. Klas Dahlberg: And if I may, Klas here, Andres, regarding leadership in North America, we saw a need for a change to better address the challenges we see and also to capture the opportunities in the North American market. And we think that Ken Bloom is the right person to do that. And he has experience also from HEXPOL. He knows the organization. So we are very positive about that change. Operator: The next question comes from Johan Dahl from Danske Bank. Johan Dahl: Just wanted to dig a bit deeper on the comments you made, Klas, regarding unchanged organic volumes in the quarter, if I got it correctly. I mean, excluding acquisitions, I guess you referred to unchanged volumes in the group. Does that mark a material improvement compared to what we've seen earlier in the year in your view, i.e., the year-on-year progression on volumes? Is that sort of significantly better than in Q3 compared to previous quarters this year? Peter Rosén: Johan, it's Peter here. Just to be clear, again, we're not going to give any guidance on coming quarters when it comes to volume or profitability, et cetera. That being said, if we look at the volume development, we've seen both in Q1 and Q2, we did discuss that we had lower organic volumes. This quarter, organic volumes are in line with last year -- Q3 last year. So in that sense, it's somewhat different compared to the first and second quarter this year. What that will mean -- Sorry, go ahead, Johan. Johan Dahl: Can you hear me? Peter Rosén: Yes. No, I can hear you again. Johan Dahl: That's good. No, it's just -- you have minus 4% on organic revenue growth, right? And you're saying raw material is flat pretty much and also volumes flat organically. It's a fairly massive shift in the top line if you have the average selling price per tonne going down 4%. So what I'm just wanted to pick your brains on is what's your sort of visibility in terms of how this develops going forward? Is it just a function of sort of small variations U.S. versus Europe and auto versus other segments? Or is there something else going on here? Are you selling significantly more bulk volumes, for example, commoditized products? Are you losing market share in that sense? Peter Rosén: No, you're right in your first reasoning. If we look at the 4% organic, volumes are -- organic volumes are basically flat compared to last year. If we are very specific, we're talking very, very low single-digit volume down, percentage. So a very, very small part of the 4%. Then if we look at the other part, it's not sales prices, but there is a mix effect, and it consists of 2 parts. One is a geographical shift. We do lose -- see lower volume and sales in our North American market. And price levels in North America are generally higher. So that has an impact. Then we also see that there is a, call it, a product mix shift, which is the basically automotive. Automotive, as we've said many times before, is a good end customer segment for us. So it's a combination, smaller combinations of those 3 items that make up the organic. So it's not a structural shift in that sense. No, it is not. Johan Dahl: It's just that it's a fairly big number for those sort of variations. But I totally hear your message there. And on to the topic, what you can do to affect this. Is this just a function of the way markets go? Or do you have any visibility, i.e., how you sell more advanced compounds, et cetera? Klas Dahlberg: You mean for the profitability, Johan? Johan Dahl: Well, I guess both in the end, both top line and profitability. I understand that if U.S. is weaker than U.S., it's going to impact your organic growth. But I'm just trying to understand how you structurally can sort of approach this issue to sort of possibly improve mix as we go forward. Klas Dahlberg: Yes. And again, as Peter is saying, I mean, automotive is an important part, and that has not been growing, as you know, and even shrinking as we can see in the S&P figures. And we have found a business, as you can see also in our report within building and construction, wire and cable is a segment that is also growing and where we have also been able to capture business. So I mean that's our day-to-day operation to find new ways because we can change the market conditions in that sense. We have to work on the things we can influence, of course. Operator: The next question comes from Carl Deijenberg from DNB Carnegie. Carl Deijenberg: I came a little bit late into the call, so apologies if this question was already brought up. But I have to ask again, I mean, when I look at the S&P production figures for the North American market for Q3, I think they indicate roughly plus 3% year-on-year. And you're talking about flat volumes, but of course, it sounds like some of the other segments are sort of offsetting with positive growth relative to automotive. And I think when I look at the production numbers for Q2 as well, it seems like there's been a little bit of a discrepancy on, let's say, the production numbers relative to your reported organic growth if I try to back it out on the automotive side. So yes, very simple question. Is there a simple answer to this question? Is the OEMs or your customers bringing this more in-house now when production levels are fairly low? Or is there something else? Peter Rosén: There are at least 2 things that separate the official S&P production numbers from the volumes that we look at. One is the timing. There's normally 20, 25-day timing difference from production of a car and material that we supply. So there's a timing difference. The other part is, which I think is fairly unique for this business is that a lot of our customers have their own compounding business. And we do see that when volumes are down in the market, they tend to bring it in-house. So when you see an S&P production number, that doesn't automatically mean that it's transferable or translatable to ours because we also have customers who sort of shrink the market where we can compete, what we normally call captive conversion or in-sourcing. And that also has... Carl Deijenberg: Yes. Understood. And I think that's fairly interesting. If you can talk a little bit more about that. I mean, what kind of, let's say, in-house levels are we at right now relative to, let's say, a pre-COVID scenario or something like that? I mean just understanding sort of the magnitude, which have fallen into this topic. Would it be possible to give a fairly -- yes, high-level view answer to that would be... Peter Rosén: High level. It's difficult to measure exactly because we don't have statistics where we see the exact movements in the total market and what goes in and out at customers. But our view is that we've probably hit the -- let's call it, maximum in-sourcing at this point. When we see volumes flowing back into the market where we can compete, that is difficult to put a timing on. But our view is -- our current view is that we'll probably hit maximum in-sourcing at this point. Carl Deijenberg: That's very much appreciated. And maybe just finally on that topic rounding it off. I mean, obviously, we don't know what '26, '27 is going to look like. But do you have any sense of what kind of production numbers you would have to see in the industry for that, let's say, in-sourcing to reverse back into your hands? What kind of demand levels? Is it growth of mid-single digits on the production numbers? Or -- because I guess that could be a fairly significant swing factor for you, if I just look at the numbers relative to the -- yes, what we've seen in the production numbers here. Peter Rosén: Very good question. I sort of wish we had an exact number to say that at this point, it will start to flow back. But we -- currently, we don't know. And that's also one of the things that brings uncertainty into future orders, as Klas mentioned in the beginning. Operator: [Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Klas Dahlberg: All right. Thank you, operator, and thank you all for participating in this call. And we hope to see you all at our Capital Market Day in Stockholm on the 4th of November. You are all very welcome to join us there. So thank you very much, and enjoy the weekend.
Operator: Good afternoon, ladies and gentlemen, and welcome to Eni's 2025 Third Quarter Results Conference Call hosted by Mr. Francesco Gattei, Chief Transition and Official Officer. [Operator Instructions] I'm now handing you over to your host to begin today's conference. Thank you. Francesco Gattei: Thank you, and good afternoon. Welcome to our Q3 2025 results call. Our results are a further confirmation of the successful execution of our distinctive and consistent strategy and innovative business model. We continue to generate growth and value, both from our traditional energy activity, such as E&P and also from emerging opportunities in the evolving energy market. In particular, the 8.5% year-on-year growth in production results directly from our consistent long-term focus and investment in E&P. We are delivering material progress against ambitious strategic objectives and Q3 was a further proof of tangible momentum in this respect. I will comment on our financial results in a little more detail shortly. However, it is very pleasing we have positive news to report from each of our main operating segments. Combining the excellent financial and operating performances and the ongoing progress in valorizing our businesses, we're also able to announce a further improvement of our balance sheet and a higher share buyback. Focusing on a few of the strategic highlights, I would especially pick out. At the beginning of August, Azule Energy, our business combination with BP in Angola and Namibia, began production from its operated Agogo West Hub development with the FPSO coming on stream only 29 months after FID, almost a year ahead of our plan. Indeed, this quarter was notable for the contribution from our upstream satellite start-ups with Vår reaching 400,000 barrel per day production with significant incremental production from the operated Balder X development that started up at the end of Q2 and Johan Castberg ramp-up, driving 45% year-over-year production growth. In October, we announced a joint venture FID on our Coral North floating LNG offshore Mozambique with startup expect in 2028. This leverages our successful Coral South development in production since 2022 with a remarkable 99.4% availability. And together with the 2 vessel in Congo, it will reinforce our leadership in this technology. I would also flag the progress we are making with YPF towards FID on Argentina LNG, employing the exact competencies I discussed in terms of floating LNG in Mozambique and Congo to access a material new integrated resource opportunity. A further successful example of Eni skills and strategy is in Ivory Coast, where in September, we completed the sale of a 30% stake of our operated Baleine field to Vitol, in line with our dual exploration approach. The world-class Baleine field was only discovered in 2021, but has already reached over 70,000 barrels per day from the first 2 phases with a planned Phase 3 to take gross production to over 200,000 barrels per day. Coral North, Argentina LNG and Baleine Phase 3 form just a part of a deep hopper of high-quality project in our development and pre-FID portfolio. In the quarter, we signed an agreement with GIP, a strategic partner in relation to a 49.99% stake in any CCUS holding, our consolidated global CCUS operation, confirming the significant growth and value creation potential in this transition business, unlocked by a further example of a version of our satellite model. Finally, in September, Eni received approval for its application to convert part of our Sannazzaro refinery into a biorefinery. It will add along with 3 sites in operation, 3 under construction and further identified opportunities, including our Priolo chemical sites to the targeted tripling of biofuel production capacity to 2030. This emphasized the meaningful growth in diversified income streams our transition segment is delivering. Turning now to our results. Q3 reflects remarkable progress in our key businesses and another excellent financial outcome. Pro forma adjusted EBIT of EUR 3 billion was 12% higher than Q2 and just minus 6% down year-on-year in U.S. dollar terms despite the 14% fall in crude oil prices. In the Upstream, production was 1.76 million barrels per day, up 6% year-on-year on a reported basis and 8.5% on an underlying supported by a new start-up and ramp-ups, good regularity and production optimization in the base. Pro forma EBIT of EUR 2.6 billion was consistent with the prevailing scenario with EBIT associated split reflecting the rise in production I highlighted at the Vår and Azule. In exploration, we have already added over 800 million barrels of new resource year-to-date. GGP reported another good quarter at EUR 279 million in pro forma EBIT in a quarter that is usually quieter, remaining focused on maximizing value and optimizing the gas and LNG portfolio. Our significantly reconstructed midstream business has become a highly consistent deliverer of financial performance. In our transition activities, Enilive reported EUR 233 million of pro forma EBIT, corresponding to EUR 317 million of EBITDA, around 23% up year-on-year in a quarter that is typically our best one for marketing, but also where we saw a recovery in bioomargin to pre-2024 levels. Plenitude pro forma EBIT of EUR 98 million was softer year-on-year, reflecting the effect of some of the retail incentives coming off, but partially offset by strong growth in renewable capacity. In transformation, refining returned to profit, helped by better industry margin and improved utilization, while chemicals, despite the continuing weak scenario, began to show some benefit from the restructuring now underway, albeit it is very early days. Adjusted net income of EUR 1.25 billion, effectively in line year-on-year came despite the $10 barrel fall in crude price and weaker U.S. dollar. That is a testimony to the growth and performance improvement in the business and a more efficient tax rate at 42% that reflects the impact of high-grading upstream production mix, the transition towards a more sustainable diversified overall income mix and the benefit of our restructuring and performance improvement initiatives. Cash flow from operations once again reflects efficient conversion of our earnings into cash, and we saw a Q3 working capital draw, reflecting our focus on efficient use of the balance sheet. Indeed, we have already realized a EUR 2.1 billion benefit to the balance sheet through prompt cash initiative in response to the weaker scenario. Gross CapEx in the quarter was EUR 2 billion, taking us to EUR 5.9 billion year-to-date. Net CapEx has totaled less than EUR 1 billion year-to-date. Outstanding agreed valorization yet to close primarily related to the agreed Ares investment into Plenitude for which we have completed all the condition precedent and with closing expected in early November, the sell-down in Congo and the GIP stake in CCUS, this totals almost EUR 3.4 billion. After EUR 560 million in share buyback and paying the quarter 3 dividend, net debt was EUR 9.9 billion, down again quarter-on-quarter and leverage stood at 19%. Taking into account the still outstanding announced portfolio action, pro forma leverage was 12%, equivalent to 11% gearing, a level at the minimum of the industry range. Looking ahead towards the full year, we are able to further improve some of our targets. We now expect full year production to be between 1.71 million, 1.72 million barrels per day, up from 1.7 million barrels per day, a 3% underlying increase versus 2024. We expect GGP pro forma EBIT for the full year to be over EUR 1 billion. We expect cash initiative and self-help and mitigating the impact of weaker scenario to deliver around EUR 4 billion benefit, up from EUR 3 billion previously. We confirm gross CapEx below EUR 8.5 billion, but we expect net CapEx on a pro forma basis to be less than EUR 5 billion, down from the EUR 6.5 billion, EUR 7 billion that we previously guided to. And we are raising expected cash flow from operation pre-working capital to EUR 12 billion from EUR 11.5 billion previously, representing an underlying EUR 1.3 billion improvement versus our initial guidance for the year, while we are narrowing our expectation of year-end pro forma leverage to 15%, 18%. Reflecting the strong underlying business performance, the balance sheet metrics and the proven capability of the company to execute its strategy in a very accretive way, we are raising the 2025 share buyback to EUR 1.8 billion from EUR 1.5 billion, of which EUR 840 million has been completed as end of September and around EUR 1 billion to date. This, as we have already done since 2022, effectively share the upside in financial performance we have generated in the year, preserve a conservative position in response to the uncertainty ahead and ensure our ability to invest consistently over the cycle for growth and shareholder value. In fact, Q3 represents all the major elements of our distinctive strategy in action in one place. We are competitively growing our key businesses. We are launching new projects while also securing further opportunity through our industry-leading exploration and technological know-how in the upstream and opening up new opportunity in the transition. Meanwhile, we are managing risk reward, realizing value through our dual exploration satellite strategy, allowing us to bring in down debt and share upside with shareholders. And with that, I am ready along with Eni top management here on the call to reply to your questions. Unknown Executive: Thank you, Francesco. Hello, everybody. We've got a queue of questions. [Operator Instructions] And we're going to start with the first question that comes from Biraj at RBC. Biraj Borkhataria: I have 2, please. The first one is in the Upstream. One of the surprises today was the really strong production figure. And at least according to my model, that's the highest figure you reported since the pandemic. So could you just unpack the moving parts there quarter-on-quarter outside of the strong performance from Vår? And in particular, I believe there was a TSC adjustment this quarter. Wondering whether you could quantify that and tell us if there's any sort of follow-through into Q4 and '26? And then the second question is on Chemicals. Just noted no improvement in the sort of underlying results despite the crackers being shut down. So what should we expect going forward? Should those losses start to reduce from Q4? Or are there sort of additional shutdown costs coming through? Francesco Gattei: Okay. I leave the answer about production and comparison versus previous quarter to Guido Brusco and clearly, the Versalis to Adriano Alfani. Guido Brusco: So the increase quarter-to-quarter, both sequential and year-on-year are due to, as you rightly pointed out to Norway, Johan Castberg and Balder X, but also the accelerated start-up in Angola with Agogo and better performance in the ramp-up of our project in Mexico, Ghana, Nigeria and also overperformance in Ivory Coast. This, along with strong operational continuity in all geographies and an optimized major turnaround plan, particularly in North Africa. So the combination of all these 3 elements resulted into this remarkable performance. Francesco Gattei: Now Adriano. Adriano Alfani: Yes, Francesco. First, thanks for the question. About the shutdown of the chemical plant, as we previously said in different investor call, we always say that the benefits of the shutdown of the cracker start to be materialized 100% after more or less 9, 12 months that we shut down the crackers. So considering that we have stopped Brindisi at the end of Q1 and Priolo at the beginning of Q3, we expect to see some benefits starting from the second half of 2025 that is in the ballpark of EUR 40 million, EUR 50 million compared to the first half of 2025. But most of the improvement we will start to see from the significant improvement from the second half of 2026 that will be materialized in more than EUR 200 million on a yearly basis. That said, the scenario remained very weak, and this is also the reason why despite the improvement on our cost base due to the restructuring, we are not seeing a major improvement in our results quarter-on-quarter because what we are saving from restructuring is compensating the lower scenario. Unknown Executive: Thanks, Biraj. We're going to move to Santander and Alejandro Vigil. Alejandro? Alejandro Vigil: Congratulations for the strong results. The first question is about the outlook in terms of production for the coming quarters because we are seeing a very strong exit rate of about 1.8 million barrels per day. If this could be a good indication of the level for 2026 of volumes? And the second question is about the LNG business. You are very active in new capacity in terms of LNG, the Argentina, Mozambique, the joint venture in Indonesia. Just if you can elaborate about your view about this potential risk of overcapacity and how you're managing your portfolio of contracts? Francesco Gattei: I will give it to Guido the answer. Guido Brusco: So yes, clearly, our exit rate is strong. We are envisaging an exit rate in the quarter between 1.78 million and 1.80 million. We still have quite a strong and visible pipeline of high-quality projects. We still have 2 start-up coming by the end of the year. One is the Congo LNG and also we have a gas project in Angola operated by Azule. We also have project already in execution, as mentioned by Francesco, Coral North and others in the UAE, Hail and Ghasha and some in North Africa, along with projects which are coming in Indonesia, but those are, of course, in the plan period and not in 2026. As far as the LNG portfolio, we have a target of 20 million tonnes per annum. And this target, we want to combine also with a very diversified portfolio of opportunity. Currently, we have LNG assets in Indonesia. We will have soon in Mozambique with Coral North. We have in Congo and we'll expand it in Nigeria, in Angola. And we are complementing this with portfolio with U.S. Recently, you may recall, we've signed a 2 million tonnes per annum contract with Venture Global. And of course, last but not least, Argentina. Argentina is a 12 million tonnes per annum project in the second largest and world-class asset, which is Vaca Muerta. We are doing it with YPF, and we are targeting to have an FID sometime next year. Unknown Executive: Alejandro, I got that mixed up because we're now going to Alessandro. Alessandro Pozzi, Mediobanca. Alessandro Pozzi: I have 2. If I can go back to the production. I'm aware the guidance for next year is provided with the full year results. But I was wondering, given the very strong exit rate, should we -- and also the additional start-ups you will have in 2026, should we assume a further increase from Q4 into 2026 before factoring in the new JV with Petronas? And while on the topic, can we maybe have an update on where we are in terms of negotiations with Petronas? Guido Brusco: So you can imagine, there are a lot of moving parts, but we can confirm what we said at the last capital market update. We have an underlying of 3%, which, of course, we confirm over the plan. Sometimes, this is not a progressive growth because project comes over cycle and -- but we can confirm that growth. As far as concerned, the Petronas deal, we are in very advanced negotiations, and we are planning quite soon to sign binding documents for the joint venture. Alessandro Pozzi: Can you confirm the contribution to the production for next year? Guido Brusco: This is part of the underlying 3% growth year-on-year. As I said, there are many moving parts. There are new projects, new entry like the JV of -- with Petronas. There is also -- there are also some further M&A operations. There are also -- of course, there is also the decline of the field. So overall, we confirm the 3% underlying. Unknown Executive: Thanks, Alessandro. We are going to move back to London now with Josh Stone at UBS. Josh? Joshua Eliot Stone: Two questions, please. Firstly, on the buyback. Can you just talk about the factors that went into your decision to lift it this quarter? Because clearly, your business has been performing better. But at least until recently, oil prices are on a declining trend. So was there any consideration made about maybe holding back some buyback for next year to conserve cash? And to what extent was that factored into your new buyback level of EUR 1.8 billion? And then the second question, Namibia. Just hoping to get some latest thoughts there after your recent well results at the Land finding gas condensate. And maybe if you could just share your latest learnings about the asset and what potential next steps could be in terms of appraisal and whether this could be a potential fast-track development in your view? Francesco Gattei: I will answer about the buyback and then give the floor to Guido for the Namibia questions. On buyback, you have seen that the policy that Eni has already, let's say, confirmed for a number of years is substantially to start with a buyback announcement during the Capital Market Day and then a policy of, let's say, driving or sharing the upside in different form. The upside is the upside related to scenario increasing the CFFO, but also upside related to the capability to perform the strategy faster to benefit of more valuable M&A and deleveraging. Actually, this has occurred 3 times in the last 4 years. And many of these cases was not related to the improvement of scenario that actually declined, but then the capability to do better in terms of execution. This year, we have already announced in July, if you remember, this potential improvement. It's, let's say, a quite unique position in the market. Nobody is able to raise its distribution in this time and then nobody is able to reduce debt during the same period, while executing a full effective strategy in terms of project and growth in different parts of the business. So we are extremely, let's say, happy to share this opportunity and this value creation with our shareholders. And we think that the EUR 300 million was a fair evaluation of the improvement. And clearly, this also proves that we are quite confident on the capability to manage any kind of downturn or soft price in the next year. And then I'll leave back to Guido. Guido Brusco: Yes. On Namibia, as you know, we drilled 3 wells, very successful. The first one, Sagittarius discovered hydrocarbon with no observed water contact. The second Capricornus, we've tested and we were surface constrained with a flow rate of in excess of 10,000 barrels per day. And the third one, Volans showed a high condensate to gas ratio, but -- and we found 26 meters of net pay of rich gas condensate. So 3 successful wells, which they've not only found significant hydrocarbon, but they are also located at a very short distance from each other, in conventional deepwater, less than 1,500 meters. So clearly, they offer an excellent prospect for future development. Unknown Executive: We're going to move to Al Syme at Citi. Al? Alastair Syme: Argentina LNG Phase 3, one of the big changes in Argentina has been this incentive regime for large investments or RIGI. What do you think this legislation does to improve the profitability? And I guess, maybe put another way, would the project work without that legislation? And then secondly, I just wanted to ask, given you've done this big asset transaction, Baleine and Congo FLNG for, I think, $2.65 billion. I'm wondering what the invested capital is -- that you're essentially selling, sort of what multiple of invested capital have you been able to sell this asset at? Francesco Gattei: On Argentina, I give the question to Guido, then I will answer. Guido Brusco: In Argentina, investment in shale are been made since more than 10 years. So in 2013, it started the investment cycle in Argentina, and this is far before the RIGI legislation. RIGI legislation, of course, is a big enabler, particularly for the export of the LNG. And so that's the legal framework, and we are confident with this legislation and with this framework to make an investment decision in the country. Francesco Gattei: About the Congo LNG, as you know from also the other transaction that we have already completed with Vitol. This is based on an effective date that is 1/1/2024. And therefore, there are investments in the meantime, but we do not provide this kind of level of details that will be clearly also part of the final settlement at the closing time. Unknown Executive: Thanks, Al. We're going to move to Irene Himona at Bernstein. Irene? Irene Himona: My first question is on Enilive, where clearly, you're seeing very strong biofuel margins, improvements in your throughput and utilization. Can you give us a sense of how those are evolving in Q4, please? And then perhaps if you can split the marketing versus biorefining contribution to EBIT in the quarter? And then my second question, going back to tax, but not the P&L tax, more the cash paid tax, which fell almost halved sequentially. Is there any guidance at all on that? Is it -- are we likely to see a reduction in that cash tax rate aligned with the P&L reduction? Francesco Gattei: About the -- I will answer about the tax, and then I will give to Stefano Ballista for the Enilive. You've seen that in the last year or years, there is an improvement in the tax rate, both on the -- clearly the reported tax rate and the cash tax rate. This improvement is mainly related to a transformation of the company with the contribution of different geography in the upstream and therefore, the capability substantially to have more production and more results coming from lower tax regimes in this segment. Clearly, the contribution of the transition business, the possibility of the increase of return in Italy related to the fact that there is a transformation activity going on with the possibility to recover the deferred tax effects and also the contribution of satellites that are cash neutral from this point of view. So all this is a structural change that impacted both the nominal tax rate and the cash tax rate. So we have already said that we are expecting in terms of tax rate an improvement versus what we originally thought. So now we are moving in the range between 46% and 48%, while about the tax rate related to the cash tax rate, we are moving around the 28% to 29%. And now Stefano, please. Stefano Ballista: Irene, thanks for the question. Yes, the strong result of Enilive in this quarter have been driven mainly by the significant improvement of the biofuel scenario, coupled with a very good asset performance capturing this increased value. In terms of value, we can think about the sort of 80-20 in terms of overall contribution. Deep diving on biorefinery and looking at the scenario. What's going on is a progressive rebalancing of the supply-demand dynamics. This is fully in line with the direction we expected. There are some key reasons, some structural key reason pretty much on demand. Demand is improving. On a yearly basis, in Europe, we see above 6 million tonnes on a yearly basis compared to the 4.5 million last year. And this improvement has been, let's say, concentrated in the second half of the year. The reason is related to sustainable aviation fuel. We mentioned in previous call, the need for getting logistics in place in order to deliver SAF to customers. This is exactly what's going on. On top, actually, there is also a drive of extra demand coming from the expectation of the deployment in several countries of the Renewable Energy Directive #3. An example, a key example is Germany. It has to be approved, but the proposal is very relevant. The most relevant thing is the ban, the proposed ban of double counting by itself, this means above 1 million ton of extra demand on top of the number I said before for next year. So these are the 2 key structural reasons. On the supply side, I want to mention another structural reason. It has been confirmed the duties for sustainable aviation fuel coming from U.S. There was a doubt in the first half of the year, this duty are there for HVO due to clear the tax credit that is in U.S. It has been confirmed it's going to be applied to SAF as well, and this is another reason strengthening the market. Unknown Executive: Very good. Thanks, Irene. We're going to move to Peter Low at Redburn. Peter? Peter Low: Maybe the first, just on disposals. Can you just confirm the expected time line for the remaining ones, so kind of Congo to Vitol and then the Plenitude stake sale. But then beyond that, should we think of those as being the end of large disposals? Or are there other positions across the portfolio you're working to monetize? And then just on the net CapEx guidance, you've lowered it for the full year, but it looks like gross CapEx is broadly unchanged. Can you perhaps walk through the moving parts that have allowed you to lower that net CapEx guidance? Francesco Gattei: Yes. About the portfolio, we can, as we have already mentioned, confirm that we are very close to cash in the EUR 2 billion related to Ares acquisition of a 20% in Plenitude. All the condition precedents were completed. We do expect to have this contribution in a period of weeks. This will imply substantially a benefit on our leverage in the range of more than 4%. On the other side, we are still clearly waiting all the natural process authorization for the other transaction, the one that is related to Congo that takes some more time. So this is still ongoing, but it is a process that is maturing progressively. And about the contribution for next year, clearly, this year was extremely, let's say, rich in terms of opportunity. We have benefit from disposal that we matured last year in terms of closing, and we completed for the cash in this year. And also, we were able to fast track some of our disposal within the year. This acceleration is also at the basis of the improvement in the net CapEx results. You're right that the gross CapEx are substantially in line with expectation. But clearly, they were revised down during the first quarter once we announced the first estimate for the cash initiative that includes also CapEx reduction. In terms of what are the future, the future is that the dual exploration model is a living model. So it's continued to generate opportunity. You know that we explore with high stake, and there is also some results already emerging in different geographies. You know also that in Indonesia, we have a 10% disposal on the assets that will not be included in the business combination. And clearly, we are also evaluating other opportunities that could come in terms of valorizing our portfolio and aligning capital. Another element that will be cashed in within the end of the year, I was forgetting is the contribution of the CCUS, so the deal with GIP. Unknown Executive: Thanks, Peter. We're going to move to Michele Della Vigna at Goldman Sachs. Michele Della Vigna: And again, congratulations on the very strong results. Two questions, if I may. First, I wanted to start with biofuels. Very clear comment on RD. I was just wondering on SAF, if the mandatory blending does not increase from 2% until 2030, don't you see the risk that with new capacity coming on stream that market could soften over the next couple of years? And then I was wondering if you could give us perhaps a bit more visibility on what drives that EUR 1 billion upgrade in the cash initiative. And in case the macro deteriorates in 2026, how much flexibility do you see on your CapEx budget? And where do you think you could potentially cut some of your net investments? Francesco Gattei: Stefano for the biofuel. Stefano Ballista: Yes, Michele, thanks for the question. On SAF, for sure, is driven by the mandatory mandates, given the penalties -- underlying penalties. So this is, let me say, it's a given. On top of Europe, now at 2%, we got higher target like in U.K. already in place. Clearly, an increase sort of step-up of the target along the time line is going to help demand on SAF. This is something that could be addressed. On top, actually, there are demand like in Japan, this is a global market. In Japan, they approved the 10% in 2030. There are some discussion even in other country in order to get SAF mandatory at defined percentage given it's the only way to decarbonize the aviation sector. On top, actually, there are some sign on voluntary demand. This is going to be driven also by, let me say, the supportive incentives that at specific level will be put in place. An example is the Heathrow Airport, where half of the gap between jet, biojet and jet is supported with a limited amount clearly by the institution. This kind of approach is going to support demand. And then lastly, let me add, there is the CORSIA program. It's a program that has to be fulfilled by all the ICAO countries, all the countries that participate to the ICAO. Up to now, it's just voluntary. It's going to be mandatory from 2027, and this is going to drive demand above in countries that today doesn't have any obligation. In terms of overall demand supply, a biorefinery that can produce -- HVO can produce SAF. So there is flexibility is a core lever to address market evolution. We don't know exactly the growth, the demand of SAF, but there are clear mandates on overall HVO growth. And given current project in place and even current decision, let's say, of delay in terms of projects from other players on top of technical difficulties that other players are getting into in this new business and given current trajectory of overall biofuel, HVO and SAF, we see the market definitely a bit tight in the medium term. Francesco Gattei: Contrary, for the -- sorry, for the difference related to the estimate on cash initiative 2025, the previous one that was EUR 3 billion and now it's EUR 4 billion is substantially a mix of different factors. One is that we derisked some of the actions that we risked in the first half. You have to consider that we have a way to optimize or evaluate substantially our storage activity on oil, some ETB, so our trading activity on trading of oil. We have some additional value coming from swap of bond from fixed to variable, et cetera, et cetera. And the main contribution in this round in this last quarter is related to the additional initiative related to trading, another EUR 100 million that is EUR 300 million, another EUR 100 million that is related to this swap -- liquidity swap on our cash strategic pool and this EUR 400 million -- more than EUR 400 million that is related to the derisking of the previous cash initiative. So almost EUR 800 million are related to these 3 different items. About next year, I can tell you that the flexibility, the plan is under -- still under preparation, early phase of preparation. But generally, we are working with -- in the first year of the plan in a 20%, 25% flexibility. So we are speaking on a gross CapEx, something in the range of EUR 2 billion. Unknown Executive: Thanks, Michele. We're going to move to Henry Tarr at Berenberg. Henry? Henry Tarr: I had one really, which was around the GGP business and the sort of consistency of profits there. We've seem to have had much better profitability sort of through the summer and kind of consistent upgrades over the last couple of years. Is -- do you think this is a durable level of profit for this business? Or do you think it's related to -- so are there sort of structural changes post the change in your supply makeup that mean that this is a more durable supply or stream of profits? Francesco Gattei: Cristian Signoretto will answer. Cristian Signoretto: Well, yes, you're right. I mean, the third quarter has been a good quarter. And I would say, in this case, the major driver of the performance was what I would call the locational spreads. So in Europe, but also globally, we have taken advantage of premium market vis-a-vis the flexibility that we have in our assets in order to move the gas and LNG where the premium was actually higher. I think as we said, as Francesco said at the beginning, I mean, we have reengineered the business. Clearly, the lack of the Russian gas and our development of our new gas projects and LNG projects upstream have really changed the shape of our portfolio. We tend to be much more attentive to make sure that we can create enough optionality and flexibility in our portfolio in order to make sure that the new volatility environment that we are facing, and I think we will be facing in the future will be structurally creating headroom and opportunities for us to tap on. So I'd say, I mean, this is a trend that we will see continuing in the future. Unknown Executive: Thanks, Henry. We're going to move to Martijn Rats at Morgan Stanley. Martijn Rats: Yes. A lot have been covered, but just 2, if I may. So I noticed that Rosneft has a 30% stake in Zohr. And I was wondering if you could say a few words on how -- if that has any impact on you as the operator of the project. Maybe not, but I just wanted to kick that off. And then the other one I wanted to ask about your European gas sales volume. They were down sort of 15% this quarter year-on-year. European gas demand is not very strong, but it's not that weak either. Is that due to the portfolio changes that you just alluded to? Or is there another specific reason for that decline? Francesco Gattei: Cristian, if you would like to answer, and then I will go back to the sanctions. Cristian Signoretto: Well, the drop in the European sales this year have fundamental reason is linked to the fact that we have terminated the contract with which we were selling gas to BOTAS in Turkey via the Blue Stream. This was linked to, let's say, the pipeline itself. So I mean, this is a business that we are trying to unwind also in terms of participation in the pipeline. So that is the biggest contributor to the sharp -- to the drop in the sales into Europe. On the other hand, I mean, as I told you before, I mean, the demand in Europe is shrinking. We are adjusting our portfolio to the new reality. We are much more focused on creating more value from the single molecule than clearly getting more molecules into the market. Francesco Gattei: And about the impact of the new sanction introduced by the U.S. administration, it's still very early because clearly, there are details that have to be analyzed and clearly, the full impact to be completely assessed. What we can clearly say is that we will ensure full compliance with the sanction. But we have to also take into account that we have a very limited interaction with these 2 companies in of our assets. And generally, we are speaking about minority stakes and nonoperated stakes. So we believe at the end that there shouldn't be any material impact on ongoing operation due to this sanction activity. Unknown Executive: Thanks, Francesco. Thanks, Martijn. We're going to move now to Mark Wilson at Jefferies. Mark Wilson: You speak to how this quarter is really seeing strategic initiatives coming through, certainly with the satellites in Norway and U.K., and that's been a number of years in the making. So I'd like to ask about what appears to be clearly another strategic angle, and that's the use of floating LNG. I'd argue you appear to be the leader in that concept now with the second Coral vessel sanctioned, Congo [ FMG ] coming on stream, just 33 months in Argentina, initial development being 2 vessels of an even larger capacity. We know there's certain security benefits and clearly, speed if Congo FLNG is anything to go by. But could you speak to the CapEx, OpEx and emissions intensity benefits versus production of FLNG versus onshore? And any improvements expected between the 2 Coral vessels? And I did note in the previous answer, you spoke to getting more value out of a single gas molecule. So I think that relates to it. Francesco Gattei: Yes, Guido can provide all the details. Guido Brusco: Clearly, we have built a technological hedge on floating LNG. We are currently the largest operator of floating LNG and results, both in terms of delivery and performance are outstanding. Just to name a few of them. On Coral South, we delivered the project on time, on cost despite the COVID and the uptime of the floating LNG is just outstanding. I was mentioned by Francesco in his speech, 99-plus percent. In Congo, we have 2, one in operations and one coming, and we've just sanctioned Coral North recently with the start-up expected in 2028. In terms of security, it's pointless to say that is safer and basically provides and disconnect completely from any turbulence from onshore, and we are seeing it how successful was the choice in Mozambique. In terms of cost, costs are -- I mean, we are in the deepest -- in the, I would say, steepest part of the learning curve. So if I compare cost from the first floating LNG and the cost of the project in -- of the future project in Argentina and the current project in Coral North, the reduction is significant. The industry is making significant progress in driving down to the point that we are reaching level comparable, if not better, in some geographies of the onshore LNG plant on a million tonne per annum basis. In terms of -- you said the emissions, of course, we are applying the best available technology. And in some cases, it's not the floating LNG, but I just want to mention one in Angola on the FPSO Agogo, we are basically -- we are actually capturing CO2 and reinjecting CO2 in the reservoir through the gas injection, which is used for gas recovery. So even on an emission basis, we are doing significant progress and driving down emissions on a unit production basis. Francesco Gattei: I will also add that it is an opportunity to exploit associated gas reserves in certain, say, conditional fields where this gas potential will not be improved, cannot be recovered. And this potentially could become a cap on oil production. This is exactly the case of Congo. So it's not just a matter of cost, but it's a matter of value towards the opportunity and the optionality that this technology will add to your capability to exploit resources. Unknown Executive: Thanks very much, Mark. And I think a subject we'll end up returning to. So we're going to move from Mark to Italy to Massimo Bonisoli at Equita. Massimo, are you still there? Massimo Bonisoli: Two questions left on Enilive. The first on new Sannazzaro biorefinery. Can you explain how the configuration feedstock and product profile differ from your existing biorefineries like Venezia or Livorno? And the second one is on the antitrust fine on Italian biofuel distribution. If you could elaborate on any potential impact this ruling may have on the profitability and competitive positioning of your fuel distribution business following the fine? Francesco Gattei: I will ask Pino to answer to the first, and then I will answer to the second one. Giuseppe Ricci: Thank you, Francesco. About Sannazzaro, Sannazzaro is a brownfield biorefinery because we will recover an existing hydrocracker unit very recently realized in Sannazzaro in 2010, very high pressure. And in this way, because of the high pressure and the good configuration, we will be able to maximize the flexibility to produce SAF. Production of SAF in Sannazzaro is an upside because there is the direct connection by pipe to the big Malpensa airport that is a big hub for the Central Europe. And about the feedstock, the flexibility of feedstock will be the same of Livorno or the other refineries, a mix of western residue and vegetable oil coming from not in competition food areas, including our agri business. The logistics system will provide different channels of supply of feedstock and distribution of products in order to maintain the flexibility. The unit is expected to be completed by 2028 in order to be in production at the end of this year. Francesco Gattei: About the fine that was proposed decided by the AGCM on biofuels. First of all, what we can say that clearly, we appeal against this decision that we judge as substantially incorrect. The biocomponent is aligned in terms of pricing because as you have already -- you know very well and from the fact that there is a very limited number of feedstock and a very, let's say, small market. This is substantially aligning the cost of this element to the different operators. So everything is happening in a very transparent way and the cost of obligation for all the players in the market are substantially similar. Secondly, the change of information that was considered in breaching of the competitive rule was, in fact, a legitimate change between the party on fuel supply agreement that requires this quarterly communication. In terms of competition, clearly, this is nothing to do with competition. As we said before, this is an element that is a key issues for the market, the growing market in terms of capacity is the capacity of the feedstock, the key element of risk. We are working on the capability to develop our own agri hub, and this component is a mechanism to derisk in terms of both quantity and value, the contribution of our own internal production. So we think this is something that we are trying to defend through building an integrated chain also on this side. Unknown Executive: Thanks very much for that question, Massimo. We're going to move now to Nash at Barclays. Nash, are you there? Naisheng Cui: Two questions from me, if that's okay. The first one is around technology. I was very impressed at your Technology Day in Milan earlier this year. I just wonder if you can talk about your progress over there, your deployment of technology, AI and how does that add momentum for your operation and the financial performance into next year and beyond? Then my next question is on working capital movement. Given some of the volatilities we have seen, I wonder if you can give us a bit of color on working capital in Q4 and Q1, please? Francesco Gattei: I leave to Lorenzo Fiorillo, Head of our R&D Technology Group business to answer about the artificial intelligence, and I will come back for the working capital. Lorenzo Fiorillo: Thank you, for the question. What I can say that we use AI since a while, it's not just in the last years. Internally, we are more than 200 use cases we are developing. We found a lot of advantages in using AI application within the company in optimization, find solution and helping us in creating better scenario. The use of a big number of data and important technology and technical expertise as well as digital competencies internally and with high-performance computing, for sure, is a fantastic habitat for us to develop this kind of tool, which is very helpful for us. The progress for us is to continue on agentic model for AI, and this is the way we are going to develop in the next years. Francesco Gattei: About the last quarter, the next quarter, we do expect substantially a very limited drawdown in terms of working capital. This quarter was substantially aligned and neutral. Overall, in the full year, we have a positive working capital in the range of EUR 2 billion. On next year, clearly, we have to assess all the working capital activity based on the new plan that requires also a definition of the scenario first and clearly, all the activity that we are performing in the different businesses. Unknown Executive: Thanks, Nash. We're going to go to the last 3 questions now. So the first one of those is Bertrand Hodee. Bertrand, are you there? Bertrand Hodee: Yes. I have 2 very short questions left. The first one is on Coral North. So you just took FID in September. But when looking at the annual report 2024, in fact, you already booked 329 million barrels of equivalent of proved reserve. Even if your share has risen from 25% to 50% in the project, as Exxon pulled out, looks to me that you've already booked the full reserve of Coral North in '24. And the second question is, so EUR 1.8 billion of buyback for fiscal year '25, EUR 0.8 billion been already bought back. And so there's EUR 1 billion left. How should we split those EUR 1 billion between the remainder of the year '25 and '26, please? Francesco Gattei: I leave the answer to Coral North to Guido. Guido Brusco: Yes, of course, yes, you are right. We booked last year. This year is the JV FID. We took the joint venture FID. And in terms of share, as you rightly pointed out, it is a bit disproportionate compared to our share of the project, which is 25% because we've reached a swap agreement with one of our partner between the onshore and the offshore molecules. Francesco Gattei: About the buyback, we generally do not provide guidance in terms of, let's say, weekly or next or planning plan of buying because clearly, this is a sensitive matter. Clearly, we publish every week what is the amount that we have bought, and you have seen, I would say, some steps or the pace of this buyback activity. As you correctly said, there is still EUR 1 billion to be bought in front of us. We have 3 months of 2025 and then 4 months in 2026. I think that there are different combinations, but will not change too much. Unknown Executive: Thanks, Bertrand. We're going to move to Chris Kuplent at Bank of America. Chris? Christopher Kuplent: I've got one question remaining, Francesco, and it's quite a high-level one. I remember you often arguing why go over and beyond on a CFFO payout promise when you have so many great opportunities to invest. And I just wanted to double check where you are on that theme, in particular, because if I add up the dividend, the new buyback, I end up in sort of plus 40% territory. Is that -- are you signaling something into the coming years that you are now more comfortable being in that 40% plus range than you were previously? Francesco Gattei: First of all, the percentage that you're referring to, the 41%, 40%, I think, is substantially the same number also because we have a quite positive expectation on the quarter that is coming. So I don't think this is an element of concern. On the other side, as you have seen, we are able to find solution opportunity or value inside the organization that you are able to raise on a quarterly basis. I refer in particular in this case as the cash initiative on the capability to execute the strategy on the production performance. So I think that generally, I see more upside. And therefore, I confirm that we are moving within the 35%, 40% range. I confirm that we continue to be selective in opportunity. I confirm that we have still a long list of opportunity that allow us to be extremely capable to select with the best one for the right time. And so I think that we are able to tick all the different boxes to reach our goals and confirming also an attractive distribution plan for our shareholder without modifying our view on what is the right amount of distribution that we should provide in order to ensure growth and capability to defend our balance sheet. Unknown Executive: Great. Thanks, Chris. We're going to move to the last question now. If anybody has more questions, we can deal with those directly afterwards, but I'm conscious we've moved over the hour. So the last question is Matt Lofting at JPMorgan. Matthew Lofting: Apologies for being late joining. I wanted to just come back on the strength of the cash flow generation by the company this year. I think you sort of stated this morning that the underlying improvement or upgrade versus the original plan at the beginning of the year is sort of close to EUR 1.5 billion. And it struck me that it was a higher proportion of the sort of the original plan start point. Could you sort of break down what some of the key wins have been from that perspective? And perhaps then secondly, also, if we take a step back and put it in the context of full year plan cash flow expectations, I'm interested in the extent to which you sort of see that underlying improvement is running ahead of your 4-year plan baseline or whether it's a case of sitting within the 4-year plan, but having accelerated the delivery of that cash? Francesco Gattei: Sorry, but I should ask you to make the second question again because the line was extremely noisy. So if you can repeat the second question, please? Matthew Lofting: Yes. Francesco. I was just interested if you could share any thoughts on the extent to which that EUR 1.3 billion underlying improvement represents an upside or an incremental delivery of cash flow compared to your 4-year plan baseline or whether it's the case that you're delivering cash flow faster within that 4-year plan? Francesco Gattei: Okay. Thank you. Now I can tell you sure that about the performance, the improvement of the underlying that clearly take into account of the scenario impact of this EUR 1.3 billion, we have practically EUR 500 million that are related to the Upstream. Clearly, upstream is a result of the improvement in terms of production that you are referring to, capability substantially to have a different mix that is generating more value. And clearly, in this plan, there is also some benefit from the different tax regime in the different new production contribution that are coming up. There is GGP. GGP, we have revised the guidance during the year, and this clearly is transferring value from the EBIT also to the cash generation. We are here in the range of EUR 300 million. On Enilive, there is again EUR 300 million. This EUR 300 million of Enilive is split between improvement in terms of marketing and from biofuel is related to the capability to have a good performance from our biorefineries. There is also a small improvement in terms of Versalis because clearly, unfortunately, on Versalis, we are seeing the negative side, but this is because it's a scenario that is classically hiding the contribution that Versalis is gaining from the shutdown and from the anticipated shutdown. So overall, these are the key elements that are showing improvement. Clearly, what we can say about next year is early to say. I would say that production enhancement upgrading of E&P is continuing. GGP performance is subject to the volatility, but also to the capability to have a larger optionality in the different contracts in the different assets. So this is another element that should help to capture upside also next year. On Enilive, clearly, we are expecting to have a continuous improvement in particularly a better scenario that we would like also to capture through the budget. And we do expect clearly on Versalis a more visible evidence of the recovery that is related to the new configuration of assets. So I think these are the elements. Unknown Executive: Thanks very much. That's -- and thank you, Francesco. That's bringing to an end the conference call. I'm conscious we have run a bit late, but I wanted to include as many people as possible. Those people who weren't able to ask a question, please do get in contact with the team here, and we'll be delighted to help. That's it. Have a great weekend, and thanks for joining us. Francesco Gattei: Thank you.
Operator: [Audio Gap] our current forward-looking assumptions are described in our earnings release and our Form 10-K. Joining me today are Lee Gibson, CEO; Keith Donahoe, President and CFO, Julie Shamburger. First, Lee will start us off with his comments on the quarter, then Keith will discuss loans and credit and then Julie will give an overview of our financial results. I will now turn the call over to Lee. Lee Gibson: Thank you, Lindsay, and welcome to today's call. I'm going to start by discussing the repositioning of our available-for-sale securities portfolio. During the quarter, as market conditions allowed, we took the opportunity to sell approximately $325 million of lower-yielding long-duration municipal securities. And, to a lesser extent, mortgage-backed securities and booked a net loss of $24.4 million. These securities had a combined taxable equivalent yield of approximately 3.28%. Most of these sales occurred in September. The net proceeds from these sales partially funded loan growth during the quarter with the balance reinvested in agency mortgage-backed pools that had primarily 5.5% and 6% coupons and, to a lesser extent, Texas municipal securities with coupons ranging from 5% to 5.75%. The sale of these securities will not only enhance future net interest income, but it also provides for additional balance sheet flexibility as we grow. We estimate the payback of this loss to be less than 4 years. As previously disclosed, we issued $150 million of subordinated debt at 7% fixed to floating rate notes in mid-August. Linked quarter, our net interest income increased $1.45 million, and our net interest margin decreased 1 basis point due to the issuance of the subordinated debt during the quarter. When considering our net income, earnings per share and other financial results, excluding the onetime loss on the sale of securities, we had an excellent quarter. Linked quarter noninterest income continued to perform well, and loans increased $163 million, with $81 million of that growth occurring on September 30. Keith will provide additional commentary about our loan portfolio and third quarter loan growth. The repositioning of the securities portfolio, combined with the late third quarter loan growth sets up an optimistic outlook for net interest income. If the current favorable swap markets remain, we will look for additional opportunities to enter into swaps. Overall, the markets we serve remain healthy, and the Texas economy continues to be anticipated to grow at a faster pace than the overall U.S. growth rate. I look forward to answering your questions, and will now turn the call over to Keith Donahoe. Keith Donahoe: Thank you, Lee. Third quarter new loan production totaled approximately $500 million compared to the second quarter production of $290 million. Of the new loan production, $281 million approximately funded during the third quarter, including the $81 million Lee referenced, which closed on the last day of the quarter. We expect the unfunded portion of this quarter's production to fund over the next 6 to 9 quarters, likely weighted towards the back end of those quarters given the construction nature of those opportunities. Excluding regular amortization and line of credit activity, third quarter payoffs totaled approximately $116 million, a significant improvement from second quarter payoffs totaling approximately $200 million. Third quarter commercial real estate payoffs included 15 -- approximately 15 loans secured by retail, multifamily, industrial, skilled nursing facilities and some commercial land. Commercial real estate payoffs continue to be largely driven by open market property sales. However, 2 retail properties were refinanced with other bank lenders offering fixed rates using spreads below our target. After back-to-back strong production quarters, our loan pipeline dipped to approximately $1.5 billion mid-quarter but has rebounded to $1.8 billion today. While lower than the prior 2 quarters, it remains elevated compared to the same period in 2024. The pipeline is well balanced with approximately 42% term loans and 58% construction and/or commercial lines of credit. C&I-related opportunities represent approximately 22% of today's total pipeline compared to approximately 30% last quarter. This reduction is largely due to closing a new $20 million C&I relationship which originated in our East Texas market. Credit quality remains strong. During the third quarter, nonperforming assets increased approximately $2.7 million but remain concentrated in the previously disclosed $27.5 million multifamily loan that was moved into the nonperforming category during the first quarter. We continue to expect this to be -- this loan to be refinanced or rightsized before the end of the year. And overall, as a percentage of total assets, nonperforming assets is at 0.42%. With that, I will turn the meeting over to Julie. Julie Shamburger: Thank you, Keith. Good morning, everyone, and welcome to our third quarter call. For the third quarter, we reported net income of $4.9 million, a decrease of $16.9 million or 77.5%. Diluted earnings per share were $0.16 for the third quarter, a decrease of $0.56 per share linked quarter. As of September 30, loans were $4.77 billion, a linked quarter increase of $163.4 million or 3.5%. The linked quarter increase was driven by an increase of $82.6 million in commercial real estate loans, $49.3 million in commercial loans and $49.1 million in construction loans partially offset by a decrease of $10.4 million in municipal loans and $6 million in 1 to 4 family residential loans. The average rate of loans funded during the third quarter was approximately 6.7%. As of September 30, our loans with oil and gas industry exposure were $70.6 million or 1.5% of total loans compared to $53.8 million or 1.2% linked quarter. Nonperforming assets remained low at 0.42% of total assets as of September 30. Our allowance for credit losses increased to $48.5 million for the linked quarter from $48.3 million on June 30. And our allowance for loan losses as a percentage of total loans decreased to 0.95% compared to 0.97% at June 30. Our securities portfolio was $2.56 billion at September 30, a decrease of $174.2 million or 6.4% from $2.73 billion last quarter due to the partial restructuring of the AFS portfolio. The restructuring included sales of $325 million of lower-yielding, longer-duration securities. The sales, along with maturities and principal payments more than offset the purchases of $288 million. As of September 30, we had a net unrealized loss in the AFS securities portfolio of $15.4 million, a decrease of $45 million compared to $60.4 million last quarter. The improvement occurred primarily due to the restructuring of the AFS portfolio and, to a lesser extent, an improvement in the remaining AFS portfolio. There were no transfers of AFS securities during the third quarter. On September 30, the unrealized gain on the fair value hedges on municipal and mortgage-backed securities was approximately $905,000 compared to $5.2 million linked quarter. The decrease is primarily driven by the unwinding of fair value hedges associated with the restructuring in the AFS portfolio. This unrealized gain partially offset the unrealized losses in the AFS securities portfolio. As of September 30, the duration of the total securities portfolio was 8.7 years compared with 8.4 years at June 30. And the duration of the AFS portfolio was 6.5 years compared to 6.2 years at June 30. At quarter end, our mix of loans and securities was 65% and 35%, respectively, compared to 63% and 37%, respectively, last quarter. Deposits increased $329.6 million or 5% on a linked quarter basis due to an increase in broker deposits of $288.6 million and a $137.1 million increase in commercial and retail deposits, partially offset by a decrease in public fund deposits of $96.1 million. On August 14, we issued $150 million of 7% subordinated notes. Our 3.875% subordinated notes issued in 2020 with an outstanding amount of $92.1 million will begin to adjust quarterly at a floating rate equal to the then current 3-month term SOFR plus 366 basis points in mid-November of 2025. Our capital ratios remain strong with all capital ratios well above the threshold for well capitalized. Liquidity resources remained solid with $2.87 billion in liquidity lines available as of September 30. We repurchased 26,692 shares of our common stock at an average price of $30.24 during the third quarter. On October 16, 2025, our Board approved the additional 1 million shares, authorization under the current repurchase plan, bringing the shares available for repurchase to approximately $1.1 million. There have been no purchases of our common stock since September 30. Our tax equivalent net interest margin was 2.94%, a decrease of 1 basis point on a linked-quarter basis, down from 2.95%. And our tax equivalent net interest spread for the same period was 2.26%, also a decrease of 1 basis point from 2.27%. For the 3 months ending September 30, we had an increase in net interest income of $1.45 million or 2.7% compared to the linked quarter. Noninterest income, excluding the net loss on the sales of AFS securities increased $260,000 or 2.1% for the linked quarter, primarily due to an increase in trust fees. Noninterest expense was $37.5 million for the third quarter, a decrease of $1.7 million or 4.4% on a linked-quarter basis, primarily driven by a $1.2 million write-off on the demolition of an existing branch recorded last quarter and a decrease in software and data processing expense. Our fully taxable equivalent efficiency ratio decreased to 52.99% as of September 30 from 53.70 as of June 30, primarily due to an increase in total revenue. At this time, we expect noninterest expense to be in the $38 million range for the fourth quarter. We recorded income tax expense of $189,000 compared to $4.7 million in the prior quarter, a decrease of $4.5 million, driven by the loss on sales on AFS securities. Our effective tax rate was 3.7% for the third quarter, a decrease compared to 17.8% last quarter. We are currently estimating an annual effective tax rate of 16.6% for 2025. Thank you for joining us today. This concludes our comments, and we will open the line for your questions. Operator: [Operator Instructions] Your first question comes from Michael Rose with Raymond James. Michael Rose: Sorry if I missed this, but I wanted to go back to the restructuring. I know there's obviously going to be some moving parts here just given that the loan growth happened kind of on the last day of the quarter, half of it, roughly, you did the restructuring. Just wanted to get kind of a level set of if I normalize all that, what's a good kind of starting margin that we should be contemplating for the fourth quarter just given, again, the late quarter growth, the benefits of the securities restructuring as we go forward. Just looking for a little color there. And then what your rate expectations are? Lee Gibson: The NIM in the fourth quarter, I expect to be up slightly. We have the sub debt costs in the third quarter that will have the full impact in the fourth quarter. But with -- if loans don't grow at all in the fourth quarter, which we're not anticipating, the average loans will increase $125 million during the quarter. And then we'll have the full impact of the $325 million of security sales restructuring that will take an effect, along with repricing of over $600 million of CDs that we anticipate will have an average savings of around 34 basis points on. The only headwind to the NIM in the fourth quarter is, I mentioned, the full impact of the 7%. And then we also have the repricing of the $92 million that Julie mentioned which today would be a rate of 7.52% compared to the current rate of 3.875%. So overall, I expect the NIM to be up slightly. I expect net interest income to improve nicely. And I think we're set up for a lot of positive things in the future when it comes to net interest income and the NIM. I don't know if that gives you a flavor for what we're looking at. Michael Rose: Yes, it's helpful. There's just obviously, a good amount of moving parts here. Lee Gibson: There's a bunch. Michael Rose: Maybe just moving on, we've seen some deal activity here in Texas over the past couple of months. I know you guys have kind of previously stated wanting to potentially do a deal yourselves. Just wanted to see if there's any kind of update there in terms of what you may be looking for? And then maybe separately, if there's some opportunities for hiring in light of those recent deals or maybe market share gain from clients. Lee Gibson: What we're looking at really hasn't changed. There are a few institutions that we have some interest in that potentially might be for sale. And in terms of hires, that is something we're looking at, and we've made a few hires. But yes, with some of the disruption that's occurring, especially with some of the larger out-of-state banks buying, some of the less than $10 billion banks here in Texas. There's definitely been some disruption, and we hope to jump on that opportunity and make some additional hires there. Michael Rose: Okay. Great. I'll step back. Lee, congratulations on the announcement. Operator: Your next question comes from the line of Wood Lay with KBW. Wood Lay: I wanted to start on loan growth, obviously, a really strong quarter, and it sounds like a lot of that growth actually came on the final day of the quarter. So I was just curious on the pipeline entering the fourth quarter, how it's looking and if there was any pull-through of the pipeline in this quarter? Lee Gibson: Yes. The pipeline is strong. It did take a dip. That's somewhat to be expected given the strong production quarters we've had. As we talk about internally, we have folks that are running hard to catch something when they catch it, they run hard to get it closed. And during that period of time, they get in what we sometimes refer to as bunker mentality, so they're closing the transaction and not looking for the next one. But I was really excited to see that after we took a dip in the pipeline that it bounced back up to $1.8 billion, which I feel is a really strong number. If you go back 12 months ago, I think we were running about $1 billion typically on a on a pipeline. So we're strong. We feel good about pull-through. Generally speaking, we're still seeing 25% to 30% of the pipeline moving through to a success rate. Sometimes that gets a little bit skewed by time because some of these have taken a while. They've been in the pipeline a while. So -- but we feel good. The one thing that's always out there is, especially as you get towards the year-end, there may be some unknown payoffs that occur, but we still feel pretty good about our guidance number today. Wood Lay: Got it. That's helpful. And then based on the current pipeline, are there segments that you're seeing a particular strength in? And just what's the overall pricing competition dynamic like? I feel like most banks this quarter just talking about how intense competition is. So are you seeing that from you all's perspective? Julie Shamburger: Yes. There's a lot of competition out there, both from the CRE standpoint and C&I. So we're not immune to it. We are being disciplined in our pricing approach. And generally speaking, since the second quarter, pricing hasn't changed a lot. We're still looking at term -- if it's a fully funded transaction, those are -- and it's a high quality. You're getting down to a 2% spread over SOFR. We have seen some banks willing to go below -- we slightly dipped below 2 on one transaction, but we are also selling a swap as part of the deal that helped get us back to what we would consider kind of the floor for us. On the construction side, we're still seeing construction debt that is going or moving -- lending at somewhere between as low as 2.50%, but generally speaking, somewhere around 2.65% to 2.75%. Wood Lay: Got it. And then lastly, as it pertains to the securities restructure, a part of those proceeds going to loan growth. To the extent that loan growth remains strong in the future, should we expect additional restructures to sort of help fund that growth? Lee Gibson: Well, 2 things. I spoke to the fact that this restructuring provided us even more flexibility as we have a lot of securities now that are at gains. And so we're in a position now that we can fund loan growth, increase spreads and actually sell securities near our book or above it. If the market allows and conditions are such that it makes sense to do some additional restructuring in the available-for-sale portfolio, we're certainly going to take a look at it. As Julie mentioned, the markets improved quite a bit. Spreads have also tightened there quite a bit, especially in the muni market. So we're going to continue to look at that carefully. But I would say most of the heavy lifting in the AFS portfolio has been done, but there is still some that we will take a look at and make decisions on as appropriate. Wood Lay: Lee, congrats on the upcoming retirement. And Keith, congrats on stepping into the role. Operator: Your next question comes from the line of Jordan Ghent with Stephens. Jordan Ghent: I just had a question on the buyback. So you recently increased the authorization. And just kind of what should we expect with buyback activity going forward? Julie Shamburger: Yes. So we did increase, as you mentioned, the last time we increased was back in July of '23. And since that date, we've purchased 868,000 shares, give or take a few. And so I think we're going to approach it the same way that we historically have. When we see the price dip and it's opportunistic, we will be out there actively purchasing shares. We've historically purchased open market shares and then done several 10b5-1 plans at the quarter end. So we did not do that this last quarter. But that's pretty much our strategy. We just try to -- we want to have it in place when it's opportunistic to purchase. So no strategy just to be terribly active at any one point, but just to watch the market. Jordan Ghent: Okay. And then just kind of going into the fee income. So it looks like trust fees have just had a steady climb over the last year. Kind of where do you guys see that going over maybe the next year or so and as a portion of fee income? Lee Gibson: We have a really good team in place that we've put in place over the last 2 years. and they're having a lot of impact, especially here in East Texas. And so we anticipate seeing double-digit revenue growth in that area next year as well. So we have -- we were expecting continued success. They're extremely busy, and they're taking on new clients all the time. So that's an area of noninterest income that we're really encouraged about and excited about. Julie Shamburger: Yes. And to add to that, Lee, we are -- one of the missing things for us right now is to really go into the metro markets with the wealth management. So we are exploring that, and we think we're going to make some good headway in 2026 on that. We may not attack each metro market with the same vigor, but we've got a pretty good footprint in Fortworth that I think could be a good support and starting point for wealth management in the metro market. So we're -- I'm really excited about that in the future. Jordan Ghent: Perfect. And then maybe just one more question. How many rate cuts are you guys assuming through year-end and maybe even into '26? Lee Gibson: I'm pretty certain that next week, we'll see movement, potential that there's another move, the last Fed meeting this year. Next year, I'm anticipating probably at least 2 cuts. It really just depends -- what the Fed determines. And of course, we're going to have new leadership mid next year. And my guess is that the new leadership is going to be more on the side of cutting additionally based on what the executive branch is saying. So it could be more than 2 cuts next year. A lot of it is probably going to depend on inflation and the employment. And the inflation numbers came in nice this morning, lower than expectation. but it's still above their 2% target. Now whether they change that with new Fed leadership, that's up in the air. Operator: [Operator Instructions] Your next question comes from the line of Anja Pelshaw with Hovde Group. Unknown Analyst: I'm asking questions on behalf of Brett today. I was hoping you could talk about the growth in DDA if it was somewhat seasonal or if you think it was sticky. Julie Shamburger: Yes. I guess the answer is it's not necessarily seasonal what we were just talking internally. So through some Erafile business, we have picked up some large depositors through that process. So we're -- we do think that's going to moderate probably in the fourth quarter. Some of that came in through one particular customer that is ramping up sales right now and getting deposits. So we do think that will moderate some through the end of the fourth quarter. Unknown Analyst: Okay. And you've talked about the loan pipeline, but I guess I was talking -- I was hoping you could expand on the growth so far from the new lenders. Julie Shamburger: So out of the Houston market, is that what you're referring to? So we're seeing good positive traction. One thing that -- just to keep clear, we've had 4 new hires in that market that are specific kind of to C&I business. And one of them came in, I think, December 30 of this past year. We had another one add in the first quarter, right towards the end of the first quarter, and then we've had one added at the end of the second quarter, and then we had another one added right in end of July, early August. So we haven't been able to see truly a full year of production yet, but it's been positive. They are gathering deposits. as well as loan growth right now. The C&I uptick, one thing we've talked about is really pushing our mix on C&I. Right now, we are -- at the beginning of the year, we were about 15% of our book is C&I. We have seen a slight uptick. We're about 16% today. And that -- some of that growth is actually coming out of our existing East Texas market. So we're excited about what's happening in Houston, but we've long been doing C&I in the East Texas and Southeast Texas markets, and we're seeing some good traction with that. Lee Gibson: Overall, in Houston, we've seen really positive loan growth probably in the 15% range this year. Julie Shamburger: And some of that's coming on the back of CRE lending. Operator: This completes our question-and-answer session. I will now turn the call back to Lee Gibson, CEO, for closing remarks. Lee Gibson: ing to be my final earnings call as I'm going to be retiring at the end of the year. So I wanted to take this opportunity to thank the analysts that cover Southside for your thoughtful questions, keen insight and your overall excellent coverage. I also want to thank our shareholders for your continued support and encouragement. And I want to let you know how excited I am about Southside's future as Keith Donahoe takes the helm, assisted by CFO, Julie Shamburger, and an extremely capable senior management team. Thank you, everyone, for joining us today. We appreciate your interest in Southside Bancshares, along with the opportunity to answer your questions. We look forward to reporting fourth quarter results to you during our next earnings call in January. This concludes the call. Thank you. Operator: Ladies and gentlemen, thank you all for joining. You may now disconnect.
Operator: Good morning, everyone, and welcome to Grupo Televisa's Third Quarter 2025 Conference Call. Before we begin, I would like to draw your attention to the press release, which explains the use of forward-looking statements and applies to everything discussed in today's call and in the earnings release. Please note, this event is being recorded. I would now like to turn the call over to Mr. Alfonso de Angoitia, Co-Chief Executive Officer of Grupo Televisa. Please go ahead. Alfonso de Angoitia Noriega: Thank you, Elsa. Good morning, everyone, and thank you for joining us. With me today are Francisco Valim, CEO of Cable and Sky and Carlos Phillips, CFO of Grupo Televisa. Before discussing our third quarter operating and financial performance, let me share with you what we believe are the key milestones achieved this year, both at Grupo Televisa and TelevisaUnivision. At Grupo Televisa, let me touch on 4 major achievements. First, our strategy to focus on attracting and retaining value customers in cable has allowed us to grow our Internet subscriber base in the first 9 months of the year compared to the end of 2024. Second, we keep executing on implementation of OpEx efficiencies and the integration between Izzi and Sky to extract further synergies. This has already contributed to expanding our consolidated operating segment income margin by 100 basis points in the first 9 months of the year to 38.2% driven by year-on-year OpEx reduction of around 7%. Third, we continue to keep a disciplined CapEx deployment approach to focus on free cash flow generation. So far this year, we have invested MXN 7.5 billion in CapEx, which is equivalent to 16.8% of sales. In the fourth quarter, CapEx deployment should remain at similar levels to those of the third quarter. Still, our CapEx budget of $600 million for 2025 implies a reasonable CapEx to sales ratio of less than 20% for the full year. We have been able to achieve this mainly because we have had successful negotiations with suppliers, resulting in more favorable terms. And fourth, during the first 9 months of the year, we have generated around MXN 4.2 billion in free cash flow, allowing us to prepay a bank loan due in 2026 with a principal amount of around MXN 2.7 billion. This debt repayment comes on top of the $220 million principal amount of our senior notes already paid on March 18. Additionally, at the end of the third quarter, Grupo Televisa's leverage ratio of 2.1x EBITDA compared to 2.5x at the end of last year, mainly driven by our free cash flow generation. And at TelevisaUnivision, I will mention 3 key milestones. First, engagement and growth for ViX remains solid with strong momentum across both our free and premium tiers. Moreover, the Gold Cup semifinals and final and the compelling entertainment in sports slate that included the third season of La casa de los famosos, Mexico and our broadcast of Liga MX and the NFL helped drive a high single-digit increase in MAUs and robust demand for advertisers and ViX. Second, the efficiency plan to reduce operating expenses at TelevisaUnivision by over $400 million in 2025 is delivering outstanding results. In the first 9 months of the year, our total operating expenses have declined by around 12% year-on-year for total savings of around $300 million. This shows a disciplined execution of our cost savings initiatives, including lower content, technology and marketing costs and the normalization of our DTC related investments. And third, looking at TelevisaUnivision's leverage and debt profile, the company ended the quarter at 5.5x EBITDA an improvement from 5.9x in the fourth quarter of 2024, driven by growth. Moreover, so far this year, TelevisaUnivision successfully refinanced $2.3 billion of debt. As discussed in our second quarter earnings conference call, the company successfully issued $1.5 billion of new 2032 senior secured notes and refinanced over $760 million of term loan A now due in 2030. In addition, more recently, TelevisaUnivision extended its $500 million revolving credit facility and its $400 million accounts receivable facility. These transactions strengthened TelevisaUnivision's balance sheet, enhanced its liquidity and extended its maturity profile with its nearest maturity now almost 3 years away. Deleveraging remains a core strategic priority for TelevisaUnivision and management remains committed to further strengthening the capital structure of the company over the coming quarters. Having said that, let me turn the call over to Valim as he will discuss the operating and financial performance of our consolidated assets. Francisco Valim Filho: Thank you, Alfonso. Good morning, everyone. As Alfonso mentioned, we had an excellent quarter in this third quarter. First, let me walk you through the operating and financial performance of our cable operations. We ended September with a network of almost 20 million homes after passing around 20,000 new homes during the quarter. Our monthly churn rate has remained below our historical average of 2% for 2 consecutive quarters as we continue to execute our strategy to focus on value customers while working on customers' retention and satisfaction. Our broadband gross adds continues to improve on a sequential basis, allowing us to deliver 22,000 net adds during the third quarter compared to net adds of around 6,000 in the second quarter and disconnections of about 6,000 in the first quarter. In video, we also experienced a strong gross adds than in the first 2 quarters of the year and managed to reduce churn. Therefore, we lost about 43,000 video subscribers during the third quarter compared to 53,000 cancellations in the second quarter and 73,000 disconnections in the first quarter of the year. Moreover, we expect the improving trends to continue going forward, influenced by our recently announced multiyear partnership with Formula 1 to provide live coverage of all Grand Prix via Sky Sports channels available through Izzi and Sky. Beginning in the fourth quarter of this year until 2028 season, Formula 1 is the one of the fastest-growing and most passionate sports events in Mexico and around the world, and we definitely see this as a competitive advantage relative to our peers. Moving to mobile. Our net adds of 94,000 subscribers during the quarter continued to gain momentum, beating the 83,000 net adds of the second quarter and doubling those of the first quarter. Our innovative MVNO service developed by ZTE, offering enhanced user experience is already making our bundles more competitive and allowing us to increase our share of wallet from our existing customers. During the quarter, net revenues from our residential operations of MXN 10.6 billion, which accounted for around 91% of total cable revenue decreased by only 0.7% year-on-year. This marked the best quarter of the last 2 years at our residential operations from the revenue growth performance standpoint and compares well to a decline of 3% in the first half of the year. On a sequential basis, net revenue from our residential operations grew by 0.4%, potentially signaling an ongoing gradual recovery. During the quarter, revenue from our enterprise operations of MXN 1.1 billion, which accounted for around 9% of our cable revenue increased by 7.7% year-on-year. This also marks the best quarter of the last 3 years of our enterprise operations from a revenue growth performance standpoint and compares favorably to growth of 3% in the second quarter and a decline of 4.5% in the first quarter of this year. Moving on to Sky's operating and financial performance. During the third quarter, we lost 329,000 revenue-generating units, mostly coming from prepaid subscribers that have not been recharging their services. In addition, beginning in the second quarter, we started to charge an installation fee of MXN 1,250 to all satellite pay TV subscribers to increase the return on investment for this service. This translated into a slowdown of video gross additions for Sky that has been steady over the last 2 quarters. Sky's second quarter revenue of MXN 3.1 billion declined by 18.2% year-on-year mainly driven by a lower subscriber base. To sum up, segment revenue of MXN 14.7 billion fell by 4.4% year-on-year, while operating segment income of MXN 5.7 billion declined by only 0.7%, making it the best quarter of the year as we appear to be very close to reaching operating segment income stabilization. Our operating segment income margin of 38.5% extended by 140 basis points year-on-year, mainly driven by the efficiency measures that we have been implementing and synergies from the ongoing integration between Izzi and Sky. Regarding CapEx deployment, our total investment of MXN 3.6 billion account for 24.3% of sales during the third quarter. This shows a material sequential increase in CapEx deployment, but it is in line with our updated CapEx budget for 2025 of $600 million. Finally, operating cash flow for Cable and Sky, which is equivalent to EBITDA minus CapEx was MXN 2.1 billion in the third quarter, representing 14.2% of sales. Alfonso de Angoitia Noriega: Thank you, Valim, best quarter of the year indeed. Now let me take you through TelevisaUnivision's third quarter results. The company's third quarter revenue of $1.3 billion declined by 3% year-on-year, while adjusted EBITDA of $460 million increased by 9%. Excluding political advertising, revenue fell by 1% year-on-year, marking a sequential improvement compared to both the first and second quarters of this year. On the other hand, also excluding political advertising, adjusted EBITDA increased by 13% year-on-year, underscoring the scalability of a profitable DTC business and the sustained impact of cost reductions initiatives launched at the end of last year. Moving on to the details of our revenue performance. During the quarter, consolidated advertising revenue decreased by 6% year-on-year or 3% excluding political advertising expenditure. In the U.S., advertising revenue was 11% lower as growth in ViX continued to partially offset linear declines. Within ViX, the Gold Cup, semifinals and finals helped drive a high single-digit increase in MAUs and robust demand from advertisers. In Mexico, advertising revenue increased by 3% year-on-year, primarily driven by private and public sector ad sales that powered ARPU growth for ViX. Results this quarter benefited from a compelling entertainment and sports slate that including the performance of the third season of La casa de los famosos Mexico, dramas such as Monteverde and Amanecer and our broadcast of Liga MX and the NFL. During the quarter, consolidated subscription and licensing revenue increased by 3% year-on-year, driven by ViX's premium tier and higher content licensing revenue. In the U.S., subscription and licensing revenue grew by 11%, supported by ViX and results included a mid-single-digit increase in linear subscription revenue and higher content licensing revenue due to timing of content delivery. In Mexico, subscription and licensing revenue fell by 17%. Excluding the impact of the renewal cycle, subscription and licensing revenue in Mexico grew by 5% driven by ViX. To wrap up, Bernardo and I remain confident that our focus on value customers, efficiencies and ongoing integration between Izzi and Sky at Grupo Televisa and further integration and operational optimization at the TelevisaUnivision now that our DTC business has gained scale and achieved profitability will allow us to create greater value for our shareholders throughout this year. Now we are ready to take your questions. Operator, could you please provide instructions for the Q&A. Operator: [Operator Instructions] Our first question comes from Marcelo dos Santos with JPMorgan. Marcelo Santos: The first question is if you could comment a bit the CapEx outlook for 2026. How do you see this trending? And the second question is regarding the insurance claim you received. Was that related to Hurricane Otis? And is there something left to be received? Alfonso de Angoitia Noriega: Thank you, Marcelo. I'll ask Valim to answer both questions. Francisco Valim Filho: We gave -- Marcelo, we gave a guidance of around $600 million, and we should be within that range. Regarding the insurance claim, I think that's the last portion of the claim on the Otis Acapulco situation. So we shouldn't be seeing anything more from that event. Marcelo Santos: Valim, just one question. The CapEx for 2026, so for next year you're... Francisco Valim Filho: 2026, no 2026 is so far away, Marcelo. No, no, no. Alfonso de Angoitia Noriega: Let's finish 2025, then we can talk about '26. Operator: Our next question comes from Matthew Harrigan with Benchmark. Matthew Harrigan: You've actually reached a point in the U.S. when you look at the entire TV industry, there's more consumption on streaming than on linear. And I know your linear is much more durable than your English language peers. But you've got tremendous local programming positions, particularly in news and some of the largest U.S. EMAs. Are you really taking a lot of our -- hopefully, eventually almost all the news content on local stations and the distinctive content on the local stations and moving that to ViX over time because it feels like it would be a shame to lose the local identity. You have those stations because eventually, linear is going to fall off even for Hispanic audiences. And then secondly, clearly, a very dynamic situation in the U.S. and Mexico right now. Are you doing anything more on the BC side in relation to advertising for investments? And also, I can't help but ask, what's your general perspective on the U.S. and the imaginations with the administration on the tariff side and the prospects for near-shoring and everything going on. I know this is kind of ridiculously open-ended question. But just any thoughts on the stability of the economic relationship with the U.S. Alfonso de Angoitia Noriega: Yes. Thank you, Matthew, for your questions. I think, as to your first one, local news is very important for us. We are very strong in the local places where we produce news and local programming. We are exploring the possibility of including that in our streaming platform. We haven't yet included all of that content, but we're exploring that. The good thing is that, as I was saying, the local content is very strong. So very popular. As to your second question, we have made media for equity deals with great companies with great startups. We have assembled a great portfolio, I would say, and more companies are coming to us as they realize the importance of our platforms. And this is because of the strength of our platforms, we can position and grow their products and especially their brands when they're launching. Companies like Kavak, like Rappi, have become our ambassadors. At the beginning, we had doubts about the strength of linear television and most specifically in Mexico. But now they have become ambassadors of ours. We will continue to do these deals as we generate value with unsold inventory. And these companies become regular clients. So it's basically a funnel for these start-ups to grow, to position their brands, to position their products. And we take equity, which is great at very good valuations, and then they become regular clients and this is basically unsold inventory. So we're very happy with the portfolio we have been able to put together, and we'll continue to do this. As to your last question, I think that the Mexican government President, Sheinbaum has done an extraordinary job in dealing with the negotiations, the trade negotiations. I think that Mexico and the U.S. are key partners. If you look at the border region, it's one of the largest economies in the world by itself. The border, the legal border crossings that happened every day are in the millions. So I mean it's an integrated region. It's an integrated economy. So I believe that eventually, we'll be able to get to the right deal for Mexico and for the U.S. Operator: Our next question comes from Alex Azar with GBM. Alejandro Azar Wabi: Few ones on competition, Valim, on cable. If you can share a little bit of color on short-term and medium-term dynamics, especially when seeing how competitors are adding 1 million, 1.5 million net adds per year. It seems that in 2, 3 years, the market is going to be fully penetrated. So that would be my first question. And the second one is on Sky. With the levels of net disconnections you have year after year, how should we think about the EBITDA contribution in the next couple of years from Sky? Alfonso de Angoitia Noriega: Thank you, Alex. Valim? Francisco Valim Filho: Thank you, Alfonso. Well, I agree 100% with you. With this amount of net adds on a yearly basis, the market is very close to being fully penetrated. That's why our strategy is not going after volume because we know that we will be fighting for prices at the lower end of the pyramid. So our aim is to focus on the higher-end clients. That's why we have -- we are the only company in Mexico increasing ARPU consistently across the board. So I think that's the focus. So we think there's obviously a diminishing returns of this fight for the volumes of subscribers. And that's why our strategy moved away from that, and we have been successful in doing that. Regarding Sky, Alex, the way I see Sky is very straightforward. This is a business that will eventually disappear. Why? The penetration of the fiber networks and the amount of OTTs and the availability of a linear TV through cable and fiber operators is something that will obviously position Sky to only subscribers that are outside of those covered areas. So it will by definition then keep on declining. So how we perceive it, we perceive it as a cash flow from existing subscribers minus the programming cost, minus the technological cost of the satellite and all that is involved in that and then it generates a positive cash flow. That's the business and it has been generating positive cash flow and for the foreseeable future, we'll see positive contribution from Sky as a cash flow perspective. Obviously, it has this negative optics on our revenue, but just the way we see it is we've kind of segregate that from everything else and see that as an inflow of cash flow and everything else is more a stable growing businesses. Alfonso de Angoitia Noriega: Yes. And to add to your first question, to add on what Valim was saying, in Mexico, we have a 4-player market, but it's a pretty rational market, except for Telmex, which has kept its entry price unchanged for, I guess, more than 10 years, while also increasing Internet speeds and offering Netflix now for 3 -- for 6 months. They don't seem to be really interested in the profitability of Telmex as they extract value from the lease of fiber owned by other subsidiaries of theirs. And the other Megacable raised prices by around MXN 30 per month from the beginning of the year. So there, you can see that the industry is raising prices, except for Telmex. Totalplay also announced price hikes from April particularly from broadband customers that are heavy data users. So even though it's a 4-player market, it's a rational market and if you look at the prices and ARPU, we feel comfortable, and we feel confident that this will remain like that. Alejandro Azar Wabi: If I can just add a follow-up on Sky remarks. When you say Sky probably will disappear. I'm just thinking that there must be some part of the population that where fiber is not around, and they -- if Sky becomes the only thing that they can use, especially for video. Do you guys have an approximate of that? I don't know. Alfonso de Angoitia Noriega: No, you're absolutely right. I mean there are rural areas where a satellite provider makes sense. I don't know. Francisco Valim Filho: No, I don't think they will disappear per se. It's obviously a diminishing volume like we have been seeing and we'll keep on seeing. But just to give an example, in Central America, we have close to 100,000 subscribers basically flat because in those areas, there are less competitors offering a fiber network or a cable network. And it is very stable. And like Mexico, where we are all deploying network and expanding our infrastructure. So yes, I don't think it will disappear, not just there will be a day that will be just shut down. I think it will still have -- and I think there are just several hundred thousand people living in areas where there's no other option for entertainment and Sky will keep on being a solution. But that's why we don't see this as a -- I understand some people see this as a problem. We actually see this as an upside given the fact that we're generating positive cash flow. Alfonso de Angoitia Noriega: Yes. I think Valim is absolutely right. We see Sky as a cash flow. And the more we extend, we prolong the life of the subscribers, it's going to be an amazing driver for our cash flow. Operator: Our next question comes from Ernesto Gonzalez with Morgan Stanley. Ernesto Gonzalez: Look, I know it's early but going back to the discussion on broadband penetration in Mexico. Do you have any -- or can you share any expectations for cable growth rates next -- sorry, next year? Do you believe that you can accelerate growth for the unit. And the second question is on the sustainability of margins for Cable Sky but also TelevisaUnivision. They were strong in the third quarter. So I wanted to get a sense of how much more room they have to grow going forward. Francisco Valim Filho: Well, I think that -- back to your point Ernesto, I think that it's key to understand that obviously, as penetrations go higher, the level of net adds will diminish for every player in the market. And you have already saw that. As you see quarter after quarter after quarter, we already see a diminishing number of net adds being added to the different players. So that's a diminishing return in other countries like Brazil, for example, where the penetration is significantly higher even than Mexico. You see there's this dynamic as well and companies find ways by selling more products to the same existing customers to keep revenues growing but obviously, you're not going to be seeing high double-digit numbers because of the dynamic of the market. So like Alfonso just said, this is a very rational market. Nobody is flashing, prep is down. The promotions are very reasonable. And everybody is actually making money in this market like our cash flow generation that we have just presented. This is significantly -- is very significant. So I think that's a dynamic in mature market that you'll see. And what happens is you add more products, better products, more speeds and that's how you keep on increasing ARPU. And that's why we think the strategy of going after the high-end customers, they have more disposable income available as opposed to the other end of the pyramid. And I think regarding margins of cable... Alfonso de Angoitia Noriega: No. I think he asked about TU... Francisco Valim Filho: No, no, no. The answer is not over. Alfonso de Angoitia Noriega: Okay. Go ahead. Francisco Valim Filho: So the idea here is we think that we keep on improving margins. This is an ongoing, never stopping exercise that will go internally. And we find that through many different ways, mostly through technology. Obviously, we still are collecting a few synergies from Sky mostly through technology and improvement in how we provide services and processes. So there is an ongoing effort to increase margins. I'm talking about cable. Alfonso de Angoitia Noriega: Yes. Yes. And about -- I mean, TU amazing margins. I think that was a result of the cost cutting and all that we did in terms of costs and expenses in the fourth quarter of last year, which are being reflected in this year. We believe that we have the highest margins in the industry. And that has to do with that cost cutting, $415 million. And also, it has to do with owning the largest library of content in Spanish in the world, more than 300,000 hours of content. It also has to do with the very efficient way in which we produce content, especially in our studios in Mexico. And that allows us to have these amazing margins. So I think those margins in the mid-30s are sustainable. Operator: This concludes our question and answer session. I Would like to turn the conference back over to Mr. Alfonso de Noriega for any closing remarks. Alfonso de Angoitia Noriega: Well, thank you very much for participating in our call. And if you have any questions, please give us a call. Have a great weekend. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Welcome to Sdiptech Q3 2025 Report Presentation. [Operator Instructions] Now I will hand the conference over to CEO, Anders Mattson and CFO, Bengt Lejdstrom. Please go ahead. Anders Mattson: Hi, everybody, and welcome to our Q3 presentation and Q&A. I am Anders Mattson, CEO of Sdiptech, and I will be presenting the results together with CFO, Bengt Lejdstrom, here today. I will start with the highlights of the quarter before we go into the more general content with the financial results. So in the quarter, we have implemented and streamlined our portfolio and Sdiptech will become a more coherent and better aligned group going forward. Until today, we have consisted of 41 companies in our 4 business areas. We have historically been growing our adjusted EBITA at a good level, but we have, at the same time, been quite volatile. Our portfolio has partially been based on installation companies, companies with exposure to cyclical end markets like construction and quite a few companies with a margin around 10% in the group. And these companies were usually or most of them required before our strategic shift into. So if we look at the financials here for this total portfolio in Q3, we had approximately 19% in adjusted EBITA margin and 12% return on capital employed. If we look in the middle, so what have we done? We have assessed on our key strategic priorities. We prefer product-based companies. We like markets with strong underlying growth drivers. And we would like to see a clear niche, which is usually protected a good way and that's also the reason why we [Technical Difficulty] in many of our business units. So based on this assessment, we have made a decision to divest 11 companies from the group. We have already started the process of finding new homes to these companies, and we have good progress with several of divestments so far. As these 11 companies only stand for roughly 3% of the year-to-date adjusted EBITA, their P&L effect is minor. On the balance sheet, the result will be a write-down of SEK 500 million in goodwill and other intangible assets. And Bengt will come back to this later in the presentation. So if we look to the right here, from today and going forward, we will consist of 30 companies and a better aligned portfolio. We believe we will be able to more proactively drive organic growth with this portfolio. And from our point of view, it's also a better allocation of capital towards our strategic priorities going forward. Financially in the quarter, as I said, is a minor effect. Adjusted EBITA will be reduced by SEK 7 million from SEK 242 million to SEK 235 million. but our adjusted EBITA margin will go up from 19.4% to 21.3%. And return on capital employed will increase from 12% to roughly 13%. So in the presentation going forward now, I will present numbers according to the core portfolio. So summary of the quarter from a financial perspective, net sales increased with 9%. That was 4.5% organic growth and roughly 9% due to acquisition. We were glad to see solid demand from all our business areas. It was positive to see a slow recovery from some larger business units where orders have been pushed forward in the year from Q1 to Q2 and now in Q3, we finally got some sales realized. Adjusted EBITA increased with 9% at 2.4% organic and rough from acquisitions. The increase in sales made EBITA grow as well. So it's not only because of cost adjustment. And year-to-date, we are still behind last year's numbers, but positive with the organic growth in the quarter. We have also been able to maintain the margin of 21.3% in the quarter, which has been quite challenging due to tough market conditions, both on price and also actually to getting the customer to commit to the orders. We had a strong cash flow generation in the quarter as well of 94%, which resulted in SEK 255 million in cash. And that was primarily a result of improved inventory levels from a high level in the last quarter. If we're going into the net sales, the net sales increased with 9% to SEK 1,102 million. And as I said, there was a good demand, solid demand from all our business areas. And the 4.5% organic growth is something we are, of course, satisfied with in the quarter. As I also talked about previous quarters, we have experienced a slow first half of the year, especially from some larger business units in the group. So it's a positive sign that I mentioned as well that we have been able to deliver and recognize sales in the quarter. We have also had a strong contribution from acquisitions. And some of the acquisitions is influenced by strong growth drivers linked to security around data center as one example, and that is in our smallest business area, Safety & Security. In the graph to the right, we have separated the core portfolio since 2023. And from this date, you can see we have achieved a CAGR of 13% in sales growth. If we're looking at the sales split, the sales split of the portfolio looks now a little bit different. After the separation of the core, Sweden has decreased in size and now it's only between 5% and 6% in total sales from the portfolio. U.K. is still our biggest market. We believe we are successful in the U.K. We like the trend with the long-term investments in infrastructure assets. Other Europe is now roughly at 20%. This is a geographic area we foresee to continue to grow in. If you look to the right, turnover by type, proprietary products is the dominant type of revenue for us as a group. Installation has been reduced as a result of the core portfolio. The installation and service that you still hear -- you still see now is primarily on our own products. And we have several companies with a strong service offering that enables stability in the earnings. And that's usually both service on hardware, software and manual labor hours as well. But again, on our -- primarily on our own products then. Coming into the adjusted EBITA. Adjusted EBITA increased by 9% to SEK 235 million. That is, for us, a stable profit growth with 2.4% organic growth. We also had a strong contribution from acquisitions with 10%, and it's coming primarily from companies within Safety & Security and also from companies within Energy & Electrification. And again, that's the trend around security for data center that has been driven this acquisition quite good in the quarter. The margin at 21.3%, we have been able to maintain from last year. As I mentioned before, it's been a price pressure in the market. So being able to maintain this margin is a result of a good cost control, both from activities within purchasing, but also from overall overhead cost development. If we look at the diagram to the right, we see a stable and high level in adjusted EBITA in percentage since 2023. If you also then look at the CAGR, the CAGR of the EBITA is at 11%, and we know we can do better than this. But in this graph, it's affected by a slower pace of acquisitions since last 1.5 year and it's also a weaker, as we know, organic growth since the beginning of 2024. So looking at the development in our 4 business areas, I think it's important to mention that we believe our 4 business areas serves us well as a group. They are broad enough to enable good M&A opportunities within each and every business area. And they also align our focus to the markets with strong underlying growth drivers, which is very important for the long-term development for us as a group. In Q3, all 4 business areas had solid demand. It's also positive to see that our smallest business area, Safety & Security, had a strong development in the quarter. If you look at Supply Chain & Transportation, we have begun to recover in this one after a weaker first half of the year. Several customers in this business area postponed their orders, actually from Q2 during the summer into Q3 and some into Q4. But in Q3, we released some sales, and it was also a good scalability, which led to margin improvements in the business area. Safety & Security, as I already mentioned, had a strong quarter, and there was several smaller units benefiting from favorable market trends, the one I already mentioned around data center, but also around emission control, pollution control, which is a strong area for us. And the new acquired companies in this business area also affected positively. Within Energy & Electrification, performance was mixed. A few units were driven by continued strong demand from energy efficiency, while some units were still affected from some very tough comparison from last year. That was from Q1, Q2 and also now in Q3. In Water & Bioocconomy, several units performed well, although margins were impacted in this business area by some cost pressure. And we are working to -- but we also need to be balanced to foresee future opportunities and future growth in regards to our cost base. And with that said, I hand over to you, Bengt. Bengt Lejdstrom: Thank you, Anders. Yes. And let's have a little bit deeper look into the cash flow and cash conversion for the whole group. As Anders was mentioning, we had a very good cash conversion of 94%, much of that coming from the inventories that were built up during the summer for seasonal sales that have started now and will continue into Q4. Improved the whole situation with inventory levels. We also saw some lower tax payments compared to last year. So all in all, a good quarter. And as you can see there on the chart that typically, we are between 70% to 90% in cash conversion. That's from operations and from working capital ups and downs. And we're now on a last 12-month basis, right in the middle at 81%, comparable with last year's 83%. We also start to show in our reports now the free cash flow per share. We haven't reported that for a very long time, but we report it now. And we had a very good free cash flow. That means all cash coming in from the business and also after the working capital adjustments, but then deducting the amortization of different leasing contracts as well as deducting the capital expenditures for different type of investments in the companies. So really, the only thing not included is when we acquire companies or pay earn-out debts to already acquired companies. So that cash flow was very good. And apart from the good cash flow from the operations, we saw a lower CapEx level in this quarter as we have done also for the full year. We work very closely with the companies, of course, to decide what type of the investments they should do. And we do that by looking at a classical DuPont chart, you could say that we -- where we look at both their EBIT margins and their capital turnover and see what kind of return on capital employed they have and from that decide what's most prioritized. So yes. And also the free cash flow for the last 12 months, as you see here at the last bullet is also very strong coming then both from the operations and from lower capital expenditures. Looking then at some additional metrics. We have the profit after tax, of course, an important measure. And -- but this quarter, it's a bit affected quite heavily actually by this write-down of goodwill when -- and it's all of SEK 500 million, this write-down of goodwill and other immaterial assets. When we moved these companies that will be divested out of the business areas, we could then make a full impairment test of their values. As you know, we do our impairment tests on goodwill, et cetera, based on our business areas because they are our cash-generating units. And all our 4 business areas have been able to defend very well the values that are in there. There is no risk for write-downs of the business areas. But when we then subtract out these specific companies, we have enabled them to look at them individually and in fact did total write-down of SEK 0.5 million. But if we exclude that more bookkeeping exercise, it's not cash generating anything, not affecting the cash flow, then we see that the profit after tax was a little bit lower. The difference is mainly because of the currency effects. We had SEK 14 million of currency loss in the quarter. And as you could see and hear from Anders previously that it affects both top line and profit, of course, this 4%, 5% all in all FX effect. But in our finance net, it affects us with SEK 14 million in the quarter. And that also affects us on the last 12 months. Then total, the finance net is affected with SEK 50 million, most of that coming from currency effects. And as you saw on the chart on our distribution of sales that currency effect could, of course, be quite substantial as the Swedish currency becomes stronger as we have more than 90% of our revenues kicking in from other currencies. Then another measure then taking that profit after tax and take it per ordinary share after dilution, you see then a very hefty minus in the quarter, minus SEK 11.14 per share. But if we then exclude this write-down, it's 2 -- a little bit more than SEK 2 per share, and it's of the same reasons as I just explained. And that also goes for the last 12 months compared with last year. Then taking a look on the leverage. We saw a quite big increase in the financial debt leverage compared with last year and also compared with the year-end last year. And that's because we have paid out earn-out debts. These earn-outs have been provided for in the balance sheet ever since we acquired the companies. So the payout of earn-outs do not affect the net debt in total, the bottom line, but it affects the financial net debt. So that has -- we have paid out about SEK 150 million in the quarter and almost SEK 400 million in the year, year-to-date. So that's, of course, a lot of money going out, but it's going up and it's having performed very well since we acquired them. So it's a good thing to pay earn-outs. The total net debt compared with the adjusted EBITA has decreased since new year since we haven't made so much acquisitions, but it increased from last year September because we have acquired SEK 85 million of profit in the last 12 months. And of course, that affects the balance sheet and since the organic growth hasn't been top notch during that period. That affects the profit and results in an increased -- slightly increase in the net debt leverage. Then as the last financial metric here presented, we look at the return on capital employed, the ROCE. And as Anders mentioned, it was 12% now. It's counted as, of course, on the average capital employed for the last 4 months and then compared with the EBITA profit we have had. And that decreased because we have increased the capital employed from the acquisitions and the organic growth, as I said, has been -- last 12 months have been slightly negative. If we just look at the outgoing balance of capital employed after the write-downs of goodwills, we are at almost 13%. And if we only look at the core businesses, taking their capital employed and their profits, then we're at 13.5% now. So as we divest these companies one by one, then, of course, then the capital employed is reduced and this ROCE will increase slowly, but steadily. If we look upon the operational return on capital employed, that is the average from our operating units, we're at 51%, which is, of course, very good, we believe. Okay, with that, back to Anders. Anders Mattson: Okay. Thank you, Bengt. So coming into acquisitions, which is a very important aspect of our business model. Year-to-date, we have acquired SEK 40 million in EBITA, and we hope to close one small deal before year-end. We have some ongoing discussions that is quite far in the process. So that's the aim for the year. I think it's important to mention our guiding principles here in regards to M&A. Regarding the pipeline, we continue to build the pipeline to meet the customers and customers -- sorry, companies to come to the discussion about the final acquisitions, and we do that, and we have a strong, solid pipeline in place continuously building that one. In regard to valuation, we're disciplined here. We know that it's easy to go away in valuation. And we have -- during this quarter, we have stepped away from 2 deals that I was part of as well due to the valuation was going too high for us. And on the leverage side, as we have said, our aim is to reduce the leverage in the future. So of course, that together with our disciplined evaluation is affecting as well the numbers of acquisition and the number of EBIT we have done so far in the year. I can also add here that we have started to look into Germany. We did it already last quarter, but it's a good progress and a lot of exciting companies in that region for us now and also for the future, we believe. Okay. So last slide before we go into the Q&A, a little bit of the takeaways from the quarter from us. I think the solid underlying demand is positive. A majority of our companies had a stable demand in Q3. It is still uncertainty out there in the market. And the condition for many of the businesses in Q4 is unstable. We see that 2026 is a positive sign for us, but it's still uncertain. And that's what we see right now. And we don't want to say anything more about 2026 than that here today. On the second bullet here, on our strategic actions for the long-term value creation, we have taken some very important steps in the [ quarter line ], our portfolio. We have been talking about that for quite some time, and it's -- I think it's good for us for Sdiptech to finally have done this decision now going forward. Many of the companies, we will divest. We have ongoing discussions with and progress in a good way. We have not set any strict deadline when it needs to happen, the divestment. But both from our perspective, from the company's perspective, we would like to be efficient and fast in the process. So that's what we are driving at. We have -- during the autumn as well, we have looked into our strategy, and we have made some adjustments, and we will present that on a Capital Market Day in end of November. And on the last note then, the acquisition pipeline. It is a solid pipeline that we have. Discussions ongoing, but we keep a strong discipline in our valuation and also around our investment criteria, especially with our aim to decreasing the leverage over time in the future. So that was, I think, everything from us as a presenter, and I think we can open up for our Q&A session as well now. Operator: [Operator Instructions] The next question comes from Max Bacco from SEB. Max Bacco: Well done in the quarter. Three questions from my side, 3, 4 questions. Perhaps starting with the cash flow. As you said, very strong here in the quarter, partly due to lower tax, but also lower CapEx and then quite neutral impact from net working capital. So the first question on cash flow, I think you mentioned this, Bengt. But here in the end of 2025 in Q4, do you see potential for further support from net working capital in terms of the cash flow? Or yes, what's your thought on that, if you start with that one? Bengt Lejdstrom: Exactly. Now typically, Q4 could be quite good from a working capital perspective since we have some seasonal oriented comp. There's no moving equipment and heat work and so on. And they have been building stocks during the summer and starting now then to sell it and turn it into accounts receivables, of course, but then also get the cash in from those invoices. So -- last year, it was actually above 100%, the cash generation. So it's not that high this year, but still Q4 is typically good for net working capital. Max Bacco: Okay. Sounds promising. And then you actually touched upon this also during the presentation that in the quarter, CapEx was a bit lower and that you have a very strict process with the subsidiaries when deciding how to allocate capital. And perhaps thinking a bit more long term than just next quarter, but historically, Sdiptech has been at some 4% of sales in terms of CapEx. Do you see a potential to reduce that number going ahead and perhaps allocate more into acquisitions instead and deleveraging? What's your thought thoughts on that going forward? Bengt Lejdstrom: Yes. I mean it's typically perhaps difficult to say the exact number for the future. But I think if we have been sometimes around 4 and even above, I think we're more around of sales now in CapEx spending. So -- but as I said, it's always depending on the actual situation and what's most profitable for that company, for example. But yes -- but we have tightened up the process quite a bit. Anders Mattson: I can add to that as well, then. Yes, I think what Bengt said there, it's important for us to see the CapEx and the need for the total portfolio and to prioritize in the coming years in a better way. And that's something we have looked into ourselves in our strategic work as well. Max Bacco: Okay. Sounds good. And then changing topic. I mean as you have explained yourself, quite a lot of things going on right now in Sdiptech, I mean, everything from improvement measures in several core subsidiaries. You still have an active M&A pipeline, you have ambitions to divest several companies. And I guess you're preparing as well for Capital Markets Day here in the end of November. Just curious how you allocate responsibilities internally? And do you consider yourself to be able to execute on all parts without, I guess, losing momentum and/or sacrificing quality? What's your thoughts on that? Anders Mattson: Yes, I think from -- I agree, it's a lot of -- on the agenda, but I think we have structured it quite good. The M&A team is not responsible for the divestment. So they are focusing on building the pipeline and meeting and executing on the M&A side. We have other internal individuals responsible for the divestment. And it's going quite good actually with -- we are not going on big broad processes. We are identifying smart, we think, key potential buyers to the businesses, and we drive that process quite efficiently. And from the other perspective is that we are still working on establishing the new business area organization. In August, Daniel started as the new Head of Supply Chain & Transportation. And we are quite far in the process to recruit somebody in the U.K. as well for Energy & Electrification. And I think that will, of course, be very important going forward to have that stable organization in the business area side as well. But so far, it looks -- feels good on that side. Max Bacco: Okay. Perfect. And then one final question, turning a bit more short term again, Just if it's possible, if you could help us how we should think about Q4 here in the next quarter in terms of comparable numbers, both for core and noncore? I mean at first glance, it looks like that noncore or other operations seem to have a quite weak Q4 last year. I guess it's some seasonality into it as well, whereas core had a more -- it looks like more decent quarter Q4 last year. Did you share that view on things? Anders Mattson: Yes. Yes, I can -- definitely, it's correct. In our situation, we look at the divestment process. So it might be that some of the companies might be divested now during Q4. And then, of course, it's going to affect that comparable numbers then. From the core, I think Bengt was touching upon that as well, that it's important that our companies with a bigger seasonal effect deliver now. And it's a little bit -- as we said, it's a little bit unsecured at the moment. We have some more slight negative, so to say. But overall, it's a positive sign for the future. But it's -- right now for Q4, we have said not to guide anything more than this at the moment. Operator: The next question comes from Simon Jönsson from ABG Sundal Collier. Simon Jönsson: First, just I want to say, it's a nice addition with the free cash flow per share KPI. Things like that are appreciated. And then I also have a question, like Max, on the acquisition pace. You -- it sounds like you expect maybe one more smaller acquisition this year. And it sounds like you remain quite active in new deals. So I just wonder how you think about new acquisitions versus your preferred gearing levels sort of what you're comfortable with and where you think your limits might be in terms of gearing and how much you can do on the acquisition side in near term. So I guess that's maybe not Q4, but in coming quarters or so. Anything on that would be helpful how you're thinking? Anders Mattson: Yes. So I think on the first perspective of this, it's important to be active. We prefer to say no to deals than not having the deals to not sit at the table. So we are, yes, definitely building the pipeline and meeting the customer and trying to get to the deal, so to say. But regarding the exact numbers, we will touch upon that, and we have discussed that internally in regards to our Capital Markets Day that we will come up with targets, I think, around some potentially new financial targets there. But right now, we are at 3.2%, as Bengt showed you, but I think we would like to go down from there and not to go up. So that's the balance. We still would like to acquire those value companies that are out there when we can get them at a good valuation, but still ambition is to drive down leverage. But we don't want to make it too fast and not make any stupid decisions when we have the good targets out there. Simon Jönsson: All right. Good answer. Then I just have a follow-up on the margins on the segments, specifically on Water & Bio. You commented briefly on the margins in that segment were impacted by cost pressures. Could you maybe elaborate a bit more specifically due to the margin decline year-over-year and how we should expect that those pressures going forward? Anders Mattson: Yes, we have a company, which is having a lot of big workforce. So from a salary perspective, salary increased quite significantly in the beginning of the year in -- especially in the U.K. And we are having some longer contracts with insurance customers, which is very hard to adjust for those kind of compensation or salary conversations. So there's a tough year for that company specifically in the U.K. And then -- but that's really the majority. And then we have also in other companies, we have been taking some decision to build up a little bit more because it's -- we need that for -- to be able to deliver for a possible upside in the coming quarters. It looks good from a revenue side in projects and orders. Operator: The next question comes from Martin Wahlstrom from Redeye. Martin Wahlstrom: The first one is related to the dynamic you say, where you postpone orders from H1 to H2. Could you give any more color on the split between kind of what lands in Q3 and what lands in Q4? Anders Mattson: I think we have a good -- let's say, part of that was actually now coming into Q3. But yes, it's still -- some of those orders, it's -- I'm thinking specifically of the 3 companies in the group. They have been promised orders. It didn't come in Q3. So yes, potentially, it will come in Q4. The good thing when we have the U.K. companies that they have the budget year in actually end of March 2026. So it's still on the right side in the budget, so to say, for some other companies. But no, it's difficult to say that, specifically how much of it came in Q3 and how much is going to be realized in Q4. Q4 is more about what I think we answered before as well, the seasonality in some of the winter needs to come, and we need to be able to deliver for the season or in season as well. Martin Wahlstrom: I see, I see. And then one final question is related to if you could give some more color on the distribution in your acquisition pipeline when it comes to kind of the split between business areas and geographies going forward? Anders Mattson: So from business area perspective, it's, let's say, it's equally among the 4 business areas. We have had some good discussions within supply chain, but also in Safety & Security in the recent quarter. So I think that's good. It's important that we work with all 4 business areas in acquisitions. From geography, it's actually nothing special there. It's our main geographies. It's U.K., it's the Nordics, it's Italy as well. And then as I said as well, we are going into Germany, and we have some good discussions with German or Dutch as well companies. So the DACH countries. It's -- so that's new and fresh into the pipeline, but nothing more or more significant than other geographies at the moment. Operator: The next question comes from Linus Alentun from Nordea. Linus Alentun: Just a quick couple of questions here from me. Starting off in Water & Bio, what would you say is a normalized margin here once we see a rebound? Bengt Lejdstrom: Well, I could perhaps step in there. Anders Mattson: Yes. Bengt Lejdstrom: Yes, we have seen -- typically, they have been around 24%, 25%. And then as the companies we now count as the core companies in that business area. Now it was 21% in this quarter for the reasons that Anders mentioned. So we're working to get it up there again. So whether it will be 23% or 24%, 25%, that's, of course, still to be seen because there are many different unique situations to take care of. But at least we're working to improve from the current 21%, that much we can say. Linus Alentun: Okay. And on '26 here, you mentioned in the report that, that is when you see a broader recovery. What makes you confident in that? Is there anything -- any indicator you've seen turning more positive or... Anders Mattson: No, I think it's the discussion with the companies. We are in a budget process as well, and we've been asking -- or in our discussions with the companies, it is positive momentum for business areas or business units and orders and they are looking into projects for next year and new potential customers. So no, it's from that perspective, talking to the companies and seeing there what they see for the orders and for the potential in the coming year. Linus Alentun: Okay. Super. That's super clear. And just one last question here. If I remember correctly, you had some swaps here that are contributing negatively in the net financials. What's the time line? When will they stop affecting here? Bengt Lejdstrom: Yes, we have 2 types of hedging arrangements. One is for interest and those interest swaps are right now negative. They were positive before when the interest rates were higher. Right now, we pay an extra 0.2 or so percent on the debt. But they will be closed from end of next year. And so 1, 2 years, you could say. So it's not a very big downside, but still, we pay about 20 basis points more than we should because of those hedging. But they have been giving a good return because they were better before. The other side, we have hedging arrangements on currencies. And there, we tried to hedge our currency exposure in the balance sheet to some extent. And not -- we're still net asset positive, which means that when, for example, British pound sterling is weakening towards the SEK, all in all, we get then a cost in the P&L, but not as much as we would if we hadn't those FX swaps and hedges. Linus Alentun: Okay. Super. So 20 bps there. Operator: [Operator Instructions] There are no more phone questions at this time. So I hand the conference back to the speakers for any written questions or closing comments. Bengt Lejdstrom: Yes. And I could kick off then with the questions. We have received 3 questions in the chat here. I think one we have already answered that was regarding the EBITA margin in the Water & Bioeconomy business area. And the second question was that some of the companies we are now intending to divest among the other companies. They have quite well-performing companies with good margins and product based to some extent. Why divesting such companies? Anders Mattson: Yes. I think I can add to that question is that -- so what I said, what we look for in the companies we would like to buy in our strategic priorities is around 3 things. We would like to have a strong promise that actually have their own products. They sell and they make service to them. We also want to have not cyclical end markets. It has been a challenge with some of the companies, which is very cyclical and working, trying to proactively work with organic growth is quite difficult if you don't have the mindset, that's what it is with those companies. And the third thing around the niche. If you have niche, you can protect it and you can drive growth from that niche. And all of these companies that we're giving examples of here, they have some aspect or they are not meeting that criteria. So it's been -- for us, been challenging, and we would like to allocate that money into more our prioritized businesses and future businesses. And we believe many of these businesses, as we said, it's not because they are performing financially bad, it's more that -- to allocate that capital to something that we believe in the future is better according to us. Bengt Lejdstrom: Thank you, Anders. And then the last written question, as I see, it's regarding the write-down if -- was that a one-off? Or could that potentially continue to be more write-downs Q4 and also next year? But what we have done now is to the best of our knowledge, as it's typically called and also to write down the value. So we don't foresee that we need to do any more write-downs. And of course, it's depending on how much money, high considerations we will get for the companies once we divest. But we believe at least that the value of these companies represent their market value and potential than consideration that we will get. So it shouldn't be any major at least. It could be -- go both ways. We could both have some profits or we could have some smaller losses when we divest, but it shouldn't really be any big numbers. But no write-down of goodwill as such because of any impairment. I think that was all of the written questions. So back to you, Anders. Anders Mattson: Yes. I think then thank you for the written question and asked question. And yes, thank you all for listening in, and we are looking forward. And hopefully, we will meet some of you at the Capital Markets Day in November, which will be held here in Stockholm, and we are looking forward to that. So with that, thank you, everybody, for today.
Operator: Good morning, and welcome to the General Dynamics Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Nicole Shelton, Vice President of Investor Relations. Please go ahead. Nicole Shelton: Thank you, operator, and good morning, everyone. Welcome to the General Dynamics Third Quarter 2025 Conference Call. Any forward-looking statements made today represent our estimates regarding the company's outlook. These estimates are subject to some risks and uncertainties. Additional information regarding these factors is contained in the company's 10-K, 10-Q and 8-K filings. We will also refer to certain non-GAAP financial measures. For additional disclosures about these non-GAAP measures, including reconciliations to comparable GAAP measures, please see the slides that accompany this webcast, which are available on the Investor Relations page of our website, investorrelations.gd.com. On the call today are Phebe Novakovic, Chairman and Chief Executive Officer; Danny Deep, Executive Vice President, Global Operations; and Kim Kuryea, Chief Financial Officer. I will now turn the call over to Phebe. Phebe Novakovic: Thank you, Nicole. Good morning, everyone, and thanks for being with us. Earlier this morning, we reported earnings of $3.88 per diluted share on revenue of $12.9 billion, operating earnings of $1.3 billion and net income of $1.059 billion. Across the company, revenue increased $1.24 billion, a strong 10.6%, led by a 30.3% increase in our Aerospace segment and a 13.8% increase in Marine Systems over the year ago quarter. Importantly, operating earnings of $1.3 billion are up $150 million or 12.7% Similarly, net earnings increased $129 million or 13.9% and earnings per share are up $0.53 or 15.8% over the year ago quarter. On a year-to-date basis, revenue of $38.2 billion is up 11% over last year. Operating earnings of $3.9 billion are up 15.7%. Net earnings of $3.07 billion are up 16.4% and earnings per share are up 19%. As an aside, we beat consensus estimate by $0.18 on higher-than-anticipated revenue and modestly better operating margins. My reaction to the quarter is best reflected in thoughts about the sequential comparison. In the second quarter of this year, we had very good results, which were well received by investors. This quarter was even better. The 2 quarters enjoyed similar revenue, but operating margin improved by 30 basis points, and we generated significantly higher free cash flow, as you will hear in greater detail from Kim. Robust order momentum continued in the quarter, yielding record backlog. In short, we had a superb quarter from my perspective. With that, let's move into a discussion of the operating segments. First, Aerospace. Aerospace performed very well in the quarter to say the least. It had revenue of $3.2 billion and operating earnings of $430 million with a 13.3% operating margin. Revenue is a dramatic $752 million more than last year's third quarter, a 30.3% increase. The revenue increase was led by new aircraft deliveries, higher special mission volume and the services business at both Gulfstream and Jet. Similarly, operating earnings of $430 million show a staggering 41% increase over the year ago quarter. The 13.3% operating margin is 100 basis points better than a year ago. We delivered 39 aircraft in the quarter, 11 more deliveries than a year ago, including 13 G700s. It is important to note that this is the first quarter where we had no deliveries of the high gross margin G650ER compared to 9 in the year ago quarter. We also made 3 initial deliveries of the G800 in the quarter. This plane will provide the majority of delivery growth in Q4. For the year-to-date, Aerospace revenue is up $1.82 billion, an increase of 24.2%. Operating earnings are up $386 million, an increase of 43.9% all very impressive, especially when the comparator year 2024 showed remarkable growth over 2023. Turning to market demand. We saw accelerated interest across all models in the third quarter, led by the North American market. This led to very strong order intake and loaded the pipeline for a good fourth quarter. This remains, by all accounts, a very resilient and robust market for new business aircraft. In summary, the Aerospace team had a very good quarter and look forward to a strong finish to the year. So let's move on to the defense businesses. As a collective, we once again saw strong growth in Marine Systems and good operating performance across the portfolio. Let me walk you through each segment in turn. First, Combat Systems. Combat Systems had revenue of $2.3 billion for the quarter, a modest 1.8% increase. Earnings of $335 million are up 3.1%. Operating margins at 14.9% are up 20 basis points over Q3 last year, demonstrating nice operating leverage. On a sequential basis, while revenue decreased 1.4%, earnings rose 3.4% on a 70 basis point improvement in operating margin. Year-to-date, revenue of $6.7 billion is up 1.7% and earnings of $950 million are up 3.3% Overall, demand is strong across Combat, particularly in our ordinance and international combat vehicles business. Artillery orders in the missile subcomponent work we do for the primes has increased in our Ordinance business. Internationally, demand for all classes of combat vehicles across the European theater has been increasing and orders are following, particularly in those countries in which we have indigenous production. We saw robust order intake with over $4.4 billion awarded in Q3, resulting in a book-to-bill of 2:1 for the quarter. Orders came from across the portfolio and internationally, primarily Europe. Our Combat System backlog at roughly $18.7 billion reflects a strong demand. All in all, a strong performance quarter for Combat that sets them up nicely for improved growth rates. Turning to Marine Systems. Yet again, our Shipbuilding Group is demonstrating strong revenue growth. Marine Systems revenue of $4.1 billion is up $497 million, 13.8% against the year ago quarter. Columbia-class construction and Virginia-class construction led the way with increased throughput. Operating earnings of $291 million are up 12.8% over the year ago quarter with a 10 basis point decrease in operating margin. However, we are seeing metrics showing improved performance across the business, which should lead to improved operating margins little by little. Sequentially, results are about the same as the prior quarter. Year-to-date, Marine revenue of $11.9 billion is up 14.7% and earnings of $832 million are up 13.2%. So across the business, we have seen rapid growth of revenue and earnings, but margin performance around 7%. As I have said before, improvement here represents our most meaningful opportunity. And lastly, Technologies. It was another good quarter with revenue of $3.3 billion, which is down 1.6% over the year ago quarter. Operating earnings in the quarter of $327 million are essentially the same on a 10 basis point improvement in operating margin. The year-to-date comparisons are better. Revenue at $10.2 billion is up 3.5% and earnings of $987 million are up almost 5% on a 10 basis point improvement in operating margin. Order activity was particularly strong in the quarter with a book-to-bill of 1.8:1. That resulted in backlog at the end of the quarter of $16.9 billion, up $2.7 billion sequentially. Through the first 9 months, the group achieved a book-to-bill ratio of 1.3:1. This positions the group well for better revenue growth than they have had in the last 2 years. Prospects remain strong with a large, qualified funnel of more than $113 billion in opportunities that they are pursuing across the group. It is interesting to observe that our slower growing segments in more recent periods have enjoyed very robust book-to-bill this quarter and year-to-date. That concludes my remarks about the defense businesses. Before I hand the call over to Kim, I'd like to have Danny share his observations from an operating perspective and provide additional color. Danny Deep: Thank you, Phebe. Let me start with Aerospace. We have seen strong performance across the board, including orders, manufacturing and deliveries as well as customer service. From an order standpoint, Phebe mentioned a robust quarter across the portfolio. To give you some additional perspective, in the first 9 months of 2025, unit orders are up 56% versus this time a year ago. From a productivity standpoint, we are seeing good learning across all our lines with manufacturing hours on the G700 and G800 coming down quarter-over-quarter throughout this year. We have seen measurable improvement in the supply chain with on-time deliveries to pre-COVID levels. And in terms of airplane deliveries, the progress has been pronounced with our delivery cadence steadily increasing. Through the first 9 months of this year, we've delivered 113 airplanes as compared to 89 airplanes for the same period in 2024. So overall, plenty to be pleased about from an operational standpoint. Turning to our defense businesses. I'll highlight a few key items of interest. In our Marine group, at Bath Iron Works, we are seeing positive momentum in terms of ship-over-ship learning reflected in both the number of hours to produce as well as the schedule to produce them. At Electric Boat, our productivity and schedule metrics are slowly but steadily improving as we see the investments in tooling and fixtures, automation, robotics and most importantly, our shipbuilders all taking hold. These improvements have stabilized margins and put us in a position to consistently grow them over time once the supply chain improves. With respect to the supply chain, we have seen improvements in some areas, but others are still struggling to meet the significant increase in demand. In the Combat Group, we have seen considerable uptick in demand in our European operations from bridges to combat platforms, and our long-term presence and manufacturing footprint in several European countries positions us well to serve this increased demand. In our Technologies group, we are seeing the benefits of the strategic investments that our Mission Systems business has made in differentiated defense electronics to serve priorities and strategic deterrence, subsea warfare and next-generation command and control. As we transition from legacy programs, which are nearly completed to programs with highly differentiated content, we expect to see continued growth with robust margins for this year and into the future. Across all our businesses, our continued focus on operational performance is bearing fruit as evidenced by our third quarter results, and we expect continued margin strength and strong cash generation in the future. Let me now turn the call over to Kim to discuss relevant financial data. Kimberly Kuryea: Thank you, Danny, and good morning. The third quarter was another strong quarter from an orders perspective. The overall book-to-bill ratio for the company was 1.5:1. All 4 segments experienced a book-to-bill of at least 1.2x. Our Defense segment's book-to-bill was a robust 1.6x their revenue. Aerospace continued its momentum with a book-to-bill of 1.3x for the second quarter in a row, even as revenue increased in both quarters. Year-to-date, the book-to-bill for the company was a solid 1.5:1. This robust order activity led to a new record level of backlog at $109.9 billion at the end of the quarter, up 19% from a year ago and 6% from last quarter. Looking at the segments, Marine and Technology each ended the quarter with a record level of backlog. Our total estimated contract value, which includes options and IDIQ contracts, also ended the quarter at a new record level of $167.7 billion with each of the Defense segments reaching new highs. Moving to our cash performance. It's an even better story than orders. Last quarter, we discussed our efforts to drive cash to the left given our back-end loaded cash forecast for 2025. Well, we realized the fruits of those efforts in the quarter. Our business units really outperformed our cash flow generation estimates for the quarter, driven by solid cash collections. Let's get to the specifics. Overall, we generated $2.1 billion of operating cash flow. All segments contributed to the better-than-expected results with particularly strong cash generation in Combat Systems and Technologies. Including capital expenditures, our free cash flow was $1.9 billion for the quarter or 179% of net income. Coming off strong cash collections in the third quarter, we now expect about half as much free cash flow as we generated in the third quarter in the fourth quarter. Our estimate includes an increase in capital expenditures as we continue to invest in our businesses, especially at Electric Boat and somewhat larger tax payments in the final quarter of the year. As a result, we anticipate a free cash flow conversion percentage in the low 90s for the year. This guidance includes some goodness from the reversal of the R&D capitalization, but the rest of that benefit will be realized over the next few years. Having said that, the uncertain duration and future potential impacts of the government shutdown creates a lack of clear visibility into our cash forecast for the remainder of the year. We are taking prudent actions to conserve cash and liquidity. If a resolution can be reached in the near term, we would expect to be able to achieve the forecast that I just discussed. However, in the event of a protracted shutdown, it is unclear how and when our cash flow will be impacted despite our careful efforts to diligently manage cash. Looking at capital deployment. Capital expenditures were $212 million in the quarter or 1.6% of sales and $552 million year-to-date. We are targeting over 2% of sales for the full year CapEx, given the expected investments in the fourth quarter that I mentioned a moment ago. We paid $403 million in dividends and repaid $696 million of commercial paper during the quarter. Year-to-date, we have returned $1.8 billion to shareholders in dividends and share repurchases. We ended the quarter with a cash balance of $2.5 billion. That brings us to a net debt position of $5.5 billion, down $1.7 billion from last quarter. After quarter end, we did reenter the commercial paper market to support our liquidity during the government shutdown in the event of slow or nonpayment issues. Interest expense in the quarter was $74 million compared with $82 million last year. That brings interest expense for the first 9 months of the year to $251 million, up slightly from $248 million last year. Finally, the tax rate in the quarter was 16.7%, bringing the rate for the first 9 months to 17.2%. This rate is approaching our outlook for the full year, which remains around 17.5%. Now let me turn it back over to Phebe. Phebe Novakovic: Thanks, Kim. So in light of the things we've just discussed, let me give you some thoughts for the remainder of the year. On a company-wide basis, we see annual revenue of around $52 billion and margins of around 10.3%. The puts and takes around the businesses are sufficiently modest that I will not get into them here. Overall, we are increasing our EPS forecast to between $15.30 to $15.35. Some of you may regard this as a cautious forecast given the performance year-to-date. Let me remind you that we're in the midst of a government shutdown with no end in sight. The longer it lasts, the more it will impact us, particularly the shorter-cycle businesses. So forecasts in this environment are difficult at best and less reliable than one would hope. This concludes our remarks, and we'll be happy to take your questions. Nicole Shelton: Thank you, Phebe. [Operator Instructions]. Operator, could you please remind participants how to enter the queue? Operator: [Operator Instructions] Your first question comes from the line of Myles Walton with Wolfe Research. Myles Walton: Phebe, on the orders front within Aerospace, second quarter that they've been quite strong. And I'm curious, how much of this do you think is customers seeing that delivery pace is sort of coming together, realizing that they better get in line, lead times where they are? And maybe how much of it is maybe just more because the certification happens, the orders come in? Phebe Novakovic: I'd say there were a whole host of factors that drove the orders. I think primarily, it's the strength of the economy. It's been -- our order book has been pretty resilient. And in fact, the pipeline remains resilient and pretty robust. So I'd say it's that. It's a combination of that plus the fact that we've got a number of new models. Delivery cadence is improving. So I think it's all the factors that you mentioned. And I will note that it is across the portfolio, led primarily by the 800. Myles Walton: Geographically, is there an area of particular strength? Phebe Novakovic: North America. Operator: Your next question comes from the line of Robert Stallard with Vertical Research. Robert Stallard: Phebe, there's been some reports that the customer, the U.S. customer is talking to defense companies about potentially investing more of their own money, the CapEx and R&D in exchange for the work they do and also potentially putting restrictions on their ability to return cash to shareholders. And I wonder if you had any views or experience of this so far. Phebe Novakovic: I think we've all read the same reports. I would note that we have invested heavily over the last 7 years in our business because we anticipated the growth in all of our shipyards in our Combat Systems business and in technology. So we have a very, very clear record of heavy investing in our portfolio because we did see this growth coming. And some of it was predictable and some of it, I think, is just the natural cycle of defense spending driven by the threat, which is increasingly obvious. So I think we all read the same reports. We haven't seen anything like that yet, but we're pretty comfortable that we have invested, and we will continue to invest where we see it prudent to support the growth. Robert Stallard: Okay. And then just a quick follow-up for Kim on the very strong free cash flow in the quarter. Were there any unusual defense advances in there, particularly from Europe, which helped the number? Kimberly Kuryea: No, there were not, not in this quarter. Operator: Your next question comes from the line of Ken Herbert with RBC. Kenneth Herbert: Phebe, I wanted to follow up on your comments and Kim's comments. On the shutdown, you said protracted. How should we think about timing from what would be a protracted shutdown from your view? And are you seeing anything yet specifically you can point to that's either impacting cash collection or contract timing or anything else as a result of the shutdown? Phebe Novakovic: On cash collection, not yet. On contracts, in some instances, the contracting people have been sent home. So that will push contracting into whatever week or month that the government resumes. I think from our point of view, we've looked at this as a rolling basis since it is unknowable. When the shutdown ends, then we are looking on a weekly basis and rolling forward to anticipate what each one of our contracts look like to the extent that we can. So we're -- it does introduce uncertainty in the quarter. And if it goes into next year, that increases the likelihood that it will have additional impact on particular lines of business that begin to run out of funding. So there's an awful lot of, I think, uncertainty. And in that uncertain environment, I think we're taking a prudent approach. Kenneth Herbert: Okay. And when you talk about protracted, I'm guessing based on your comments, we should think about something resolved this quarter, probably not a material impact, but if it spills into '26, that would be obviously a different story. Phebe Novakovic: I think we'd have to assess where we are contract by contract. But clearly, the longer this goes on, the greater the risk and particularly in the supply chain. Operator: Your next question comes from the line of Ron Epstein with Bank of America. Ronald Epstein: Phebe, maybe the first one for you on Gulfstream. So unlike a lot of other companies in the market, you guys have a suite of new products out there, and you're really gaining the benefit from that. How are you thinking about product development now? Because my understanding is Gulfstream has always had sort of a steady investment in product development and kind of year-over-year and just doesn't ramp up, ramp down, it's very steady. Is that still the case? And how are you thinking about it going forward? I know we got all this behind us and sort of like the last question you probably want, but how are you thinking about it? Phebe Novakovic: Well, look, as you well know, we have -- this has been a long-term strategy of ours to replace the entirety of our fleet with all new product designed to meet every one of our customers' missions, and we've done that. I think the most recent announcement of the 300 shows that. As we go forward, we will be upgrading our products in due course. And that's probably all that we're going to say at this point. These are all brand-new airplanes, and they've got a lot of running room, and they've met with very, very strong positive customer reaction. Ronald Epstein: Got it. Got it. And then one for Danny, if you will, on the shipbuilding. Shipbuilding has been sort of a bugaboo for the industry. When you think about making the shipbuilding business more efficient, how are you thinking about it? I mean labor, I think it's been one of the big problems for the entire industry. But I mean, from your point of view, I mean, what are the levers you're pulling today to try to really get the efficiency out of the shipyards up? Danny Deep: Yes. So let me start with the supply chain. I think in my comments, I mentioned that we've seen some improvement in the supply chain, and there's other areas where it's still lagging. But those improvements are significant. Just to give you a sense -- and that will have the biggest impact on our ability to drive productivity and schedule and start to grow margins. But to give you a sense of how the supply chain has evolved and a lot of it from the investments the government has made in the supply chain in terms of productivity, employee retention and just increasing capacity. But we've seen a 40% increase in the last 2 years in the sequence critical material. And that's really helped -- that helps with productivity. And if you look at it across all of the supply we get, it's been a 75% increase. We'll receive almost 5 million parts. So I'd say the #1 thing that will impact our efficiency in our shipyards is the supply chain stabilizing. And as our shipbuilders come down the learning curve from an efficiency standpoint, and we're starting to see that we're starting to see good ship-over-ship learning. And we make investments in all the same things that is happening in the supply base with respect to robotics and automation and employee development and training. That's where we really see the biggest bang for our buck. Operator: Your next question comes from the line of Kristine Liwag with Morgan Stanley. Kristine Liwag: Congratulations on the record backlog in defense and growth in aerospace. But I guess, Phebe, focusing on technologies, look, we've seen continued strength in the backlog, but we're also seeing a notable step-up in the unfunded backlog. I was wondering if you could provide more color on what's driving this? Is this related to DOGE or the government shutdown? And when would we expect this to either convert to funded or eventually convert to higher revenue for the segment? Phebe Novakovic: I don't think that there's any root cause other than just timing that drives that increase. We're not -- I'm not aware of anything in particular. We are continuing to work with our customers. We always work with them in a normal course, and that's continuing now on ways in which that we can all improve our efficiency. But I wouldn't point to any particular element in that. And recall, we book -- and Nicole can walk you through this offline, but we book backlog a little differently than a lot of them, and we're pretty conservative about it. But I would say that driving that backlog is the demand that we're seeing pretty much across the portfolio. DDIT, in particular, had a very, very strong book-to-bill a little in excess of 2:1 in the quarter, and they've continued to have very strong bookings as a lot of their investments have begun to pay off in cyber, Zero Trust environment, AI. So we're in pretty good stead in that market. Kristine Liwag: And if I could follow on Ron's question about product development in Aerospace. We've seen in the past few years kind of some interest in Supersonic. I was wondering, would that be on the table for a next new program for Gulfstream? Phebe Novakovic: Well, first of all, there is 0 way I'm going to venture into what we're going to do next, but I will say something about Supersonic. We have yet to see a business case that even remotely works. So yes. Operator: Your next question comes from the line of Peter Arment with Baird. Peter Arment: Nice results. Phebe, maybe just to stay on Gulfstream. Just given the resilience of this -- the bookings environment and the backlog and how well you guys are doing, does that provide pressure on kind of where production is? Or do you need to take rates up? Or do you feel like you've got the right cadence with the current rates today? Phebe Novakovic: Well, our rates are driven by the backlog and demand. So far, we're comfortable in our rates will increase in a regular order. But if you -- if we continue to see increasing demand and increasing backlog, we'll have to increase our rates. That's pretty much, I think, our standard operating cadence. And nothing's changed in that regard in how we -- with respect to how we react to increases in demand. So we'll continue to increase, I think, year-over-year for the next couple of years. That's sort of our plan. Peter Arment: Got it. That's helpful. And just as a follow-up, could you give us the latest on where things stand on construction for the first Columbia class, just given all the reports out there and maybe how things are either showing some improvement and getting ready for additional volumes that are coming? Phebe Novakovic: So we have the jigs fixtures facilities to continue to produce. We'll continue to invest and particularly in productivity improvements and additional footprint as needed. The first Columbia is about 60% complete by the end of this year. We'll have all the major modules at Groton ready for assembly and test and then systematically work through each one of those testing items, pretty rigorous, as you can imagine, first-of-class testing program that will work in coordination hand in glove with the Navy. But we're moving -- we're working very hard to move that ship to the left along with our customer and along with the supply chain. So we've -- and we've seen some improvements again from the supply chain, as Danny, I think, clearly articulated. So this next year will be pivotal. Operator: Your next question comes from the line of Seth Seifman with JPMorgan. Seth Seifman: I wanted to ask one about Combat. And so I was kind of thinking about the future there and the fact that there are some headwinds in vehicles, including Stryker and some tailwinds maybe from munitions and in Europe and kind of wondering if that business was going to grow. But based on the comments you made earlier and kind of the backlog growth we saw in the quarter, it sounds like there's potential for Combat growth to accelerate out of this year. Is that a fair way to think about it? Phebe Novakovic: That's how we're looking at it. I think you quite accurately pointed to the headwinds and the tailwinds. International vehicle demand is increasing and at a higher rate and munitions demand, both internationally and domestically is increasing as our -- we are a supplier to the primes on missile parts, and that also is increasing. But there is some headwind with respect to U.S. combat vehicles. That is until we accelerate the delivery of the new tank. So it's a mix, but we see some nice growth driven by our international business. And let me tell you, I want to give you a little bit of perspective on that international business. So we have indigenous businesses that have been the backbone of their country's supply chain for the last -- or industrial base for the last 25 years. And in these businesses, they are -- have indigenous engineering design and manufacturing, and they are run by host country national. So these are -- when we produce vehicles coming out of Europe to Europe, they are European engineered, European designed and European manufactured. And we think that's a very, very good and has been a successful business model for us as demonstrated by we've got the largest installed fleet in Europe. So we're pretty comfortable with the competitive positioning of that business. Seth Seifman: Great. Great. And maybe as a follow-up, can you talk a little bit about where we stand in the replacement cycle for G650. To what degree has that been driving recent orders for G800? And I assume it's more 800 than 700. And to what kind of pipeline is there for that as we kind of look ahead? Phebe Novakovic: So as you know, we phased out the 650, and you're quite right, replaced by the 800. The 800 has had an awful lot of customer interest. It led the orders demand in the quarter. And we have a pretty robust pipeline. So we -- that transition from the 650 to the 800 went very, very smoothly. The introduction of the 800 and has gone well and deliveries are increasing. I mean, this week, we just delivered our sixth G800. By the way, we also, this week, delivered our 72nd G700. So I think that's an indication of more regular cadence in the delivery profile as the supply chain has stabilized. Operator: Your next question comes from the line of Sheila Kahyaoglu with Nepris. Sheila Kahyaoglu: Maybe if I could ask a follow-up on that topic, Phebe. Just how do we think about -- you have so many development programs, and you've done a great job with the shift from the 650 to the 800 and yet the margins are going to be stable even with the 650 going away. So how are you thinking about the G800 learning curve, the 700 as well? If you could provide us an update on those blocks and how we should be thinking about that? Phebe Novakovic: Well, we're coming down the learning curve on both of those airplanes. 650 was a mature high-margin airplane. So it will take a while for the 800 to reach those similar gross margins. But we like the prospects on both of the -- on all of our airplanes, frankly. And the keys are getting the increasing stabilization of the supply chain, and they've gotten much, much better. I'd say the introduction of the 800 demonstrated the strength of the supply chain as they become more reliable and are better able to keep up with demand as compared to the 700. That supply chain, too, has stabilized. So we'll continue to see gross margin improvement as we come down our learning curve. Sheila Kahyaoglu: Can I ask a follow-up again on Aerospace, if it's okay, on deliveries and just R&D. On the delivery profile for the 700, 800, do we think about that cumulative being the 650? Or is it plus that? And then R&D, how much of a tailwind do we see from R&D as you've certified some of these major programs? Phebe Novakovic: Our R&D will be about the same for a while. We've got developmental programs, and we still have airplanes to get through certification. The 800 is really the replacement for the 650. And that is what we are seeing as the 650 customers are buying the 800 as a replacement. The 700, I think, is a market expander. It is a new offering in an element of the market that we didn't have before. So I think net-net, that's a positive growth profile going forward. Operator: Next question comes from the line of Doug Harned with Bernstein. Douglas Harned: On -- going back to Combat, you talked about the value of having the indigenous operations in country in Europe. When you look forward, given the growth potential in Europe, do you expect to be doing more investment there? And could this be beyond just ground vehicles into other areas? Phebe Novakovic: We have the facilities and the infrastructure to produce at the moment. I don't see getting out of our core. I don't see moving past tactical bridges or high-end combat vehicles. I think one of the things we have differentiated ourselves is having the discipline to stick with what we know, do what you know well and get better and better and better at it as you serve your customers, your people, your shareholders best by doing that. So we'll stick to our knitting. Douglas Harned: And then going back to Columbia Class. I mean the delays, there's been a lot of discussion about delays. Can you talk a little bit about what has driven those? Have those been related to design changes, supply chain, labor and you mentioned a little bit about addressing these issues, but can you talk a little bit more about mitigation and where we might end up if things get better there? Phebe Novakovic: So I'd say the single largest impact on the cadence of manufacturing and delivering -- ultimate delivery of the first Columbia has been the supply chain, the fragility of the supply chain as it's tried to ramp up from very low rate production, which has been in for the last 25, 30 years and quintupling that production. That has been the single largest challenge. And the government has recognized that and for the last several years has provided some nice robust funding to mature that supply chain and to expand it. And we're beginning to see some of the fruits of that effort pay off. We also, as you know, and this happened through most of U.S. industrials had a significant demographic shift as experienced workers retired, and we had a generational change with younger workers coming on board. I would say that we've -- we had invested in our training programs and with the government's help are continuing to invest in our training programs. So that we -- when the new shipbuilders come out of the training program, there are a higher level of proficiency than they had been in the past. That's all good. With the government -- working with the government, we've also been able to increase wages in a wage competitive environment. So -- and we're very comfortable that we've got the manpower and the facilities. We've continued to invest in facilities. And as Danny was alluding to, particularly on the productivity side. So I think there is a lot that's beginning to coalesce and come together to reduce risk in this program and bring it to the left, and that is our objective, working very closely with our customer. Operator: Your next question comes from the line of Richard Safran with Seaport Research Partners. Richard Safran: If it's okay, I just have a -- I'm going to ask one 2-part question on contracting. And right off the bat, I'm not asking for anything on specific contracts. Generally speaking, could you comment on changes to the contracting environment you're seeing with the new administration? There was some chatter about award fees and incentive fees. And I'm just wondering what you're seeing in new contracts. And then second, just with respect to international, are you seeing more of an influx of direct commercial awards versus FMS? I was just kind of curious as to what the mix is given all the new awards you've been getting. Phebe Novakovic: So I don't know that I've seen wholesale change in contracting other than there's been an emphasis on speed. And in some customers, we've seen faster contracting and in others, a little bit more prolonged. So I can't say that across the entire portfolio that we've seen any wholesale changes. I think that we've got a sophisticated buyer, and we are working with them right now on several large contracts. So I don't know that I can offer any holistic or observations on that front. We have seen, again, if you step back and look at the entirety of the federal workplace, we've seen the retirement of -- at least in the markets that we play in, retirement of experienced contracting personnel with an increase in newer contracting folks. They'll have to come down their learning curves. But I suspect that will -- they will do so in time. With respect to international orders, there is quite a robust pipeline for FMS, but it is slow to materialize. We know the demand is out there. When it comes through the FMS process is always a question. In Europe, we have direct commercial sales and sometimes -- ex U.S. and other places in Mid East. And we'll see as the munitions demand ramps up. That could be a combination of both direct commercial sales and foreign military sales. Operator: Your next question comes from the line of Gautam Khanna with TD Cowen. Gautam Khanna: I wanted to follow up on Rich's question actually with respect to Marine. And I know you guys are in talks for 5 Columbia class and the next Virginia-class block. I wanted to get your expectations around timing and the form of that contract. Do you think you'll get all of them ordered at once? Or is it going to be incremental? -- maybe when? And if the contract terms might actually be a little more favorable with the government taking on a little more risk than they were willing to in the prior administration. Phebe Novakovic: Well, the operating assumption is that those contracts are executed this year. We're certainly not going to get into any particulars of those contracts. They'll be very large, highly complex contracts. And once we sign them, we can and will be a little bit as we have been in the past, transparent about what the incentives and obligations are in those contracts. But we've had and we'll continue to have and see even more working -- close working relationship between the government and us as we try to solve mutual problems, how do we get shipbuilding throughput increased and while maintaining the quality. So we remain optimistic that together as partners will drive a lot of that change and move these deliveries to the left. Kimberly Kuryea: And Eric, I think we have time for just one more question. Operator: Your final question comes from the line of Scott Mikus with Melius Research. Scott Mikus: Historically, you've talked about Colombia driving $400 million to $500 million of annual sales growth at Marine. It's been significantly higher than that in the past couple of years. Obviously, very strong growth on tough comps again this year. So if we're going to progress to 2 plus 1 on Virginia and Colombia, should Marine sustainably be growing sales at least $1 billion per annum until we hit that cadence? And then once we do hit that cadence, is that when Marine margins get back to the 8% to 9% range? Phebe Novakovic: So I think the way to think about this is that we anticipate similar growth that we've seen over the last few years. And when you think about -- so I don't see that at least in the near term changing, but it's been very robust growth. But when you think about margins, I think Danny walked you through kind of what are the main drivers. And it's primarily stabilizing that supply chain and increasing our throughput so that we can both offset any supply chain perturbations. And I think that's the best way to margin improvement, and it is very importantly, the best way to accelerate the throughput. I don't know if you want to add anything on that, Danny. Danny Deep: Yes. No, I think you've captured it. To the extent that the supply chain stabilizes, I think that's where we will see meaningful margin expansion. Nicole Shelton: Okay. Well, thank you, everyone, for joining our call today. Please refer to the General Dynamics website for the third quarter earnings release and highlights presentation. As a reminder, we will resume our normal reporting schedule of Wednesday at 9:00 a.m. for our fourth quarter call. If you have additional questions, I can be reached at (703) 876-3152. Thank you. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Welcome to the HEXPOL Q3 presentation. [Operator Instructions] Now I will hand the conference over to the CEO, Klas Dahlberg and CFO, Peter Rosen. Please go ahead. Klas Dahlberg: Thank you, operator, and hello to you all, and thank you for joining this call, and welcome to the HEXPOL Q3 presentation. This is Klas Dahlberg speaking, and I'm here together with our CFO, Peter Rosen. If you please turn to Page 2. I will start with a business update. Peter will take you through the financials, and I will summarize the quarter. After that, we are happy to answer your questions. If we then go to Page 4, please. I will start by going through the Q3 performance. We see that most markets continue to be affected by the geopolitical uncertainty, but it's pleasing to see that the European market continues to be rather stable, while the North American market is still challenging. We had only minor direct impact from tariffs, whereas the indirect impact on end customers affected the overall demand, especially in North America. It's also pleasing to see that including acquisitions, volumes were actually higher than last year. And excluding acquisitions, they were in line with last year, but with an unfavorable mix. Looking at our main segments, we saw that the automotive end customer segment continued to be slow, primarily in North America. That was partly compensated for by increased demand in building and construction and also in wire and cable. Our most recent acquisition, Piedmont in the U.S. and Kabkom in Turkey contributed positively to the quarter. Sales prices as well as prices on major raw materials were stable, both versus last year but also sequentially. High uncertainty continues triggered by U.S. tariffs and U.S. trade policy, and that is impacting us indirectly, as mentioned before. In North America, that is the main reason why we could not grow the overall sales and results compared to last year. In the quarter, we delivered sales of close to SEK 4.7 billion with a negative FX effect of some SEK 300 million. Piedmont and Kabkom added some SEK 240 million in sales that was offset by lower organic sales in Rubber Compounding Americas. Compounding Europe showed rather stable organic sales. We reached an EBIT of SEK 688 million and a margin of 14.7%, impacted negatively by FX of some SEK 50 million and an unfavorable mix. The operative cash flow continued on a good level, and we reached SEK 740 million in the quarter. If you please turn to Page 5. If we look into the different business areas, starting with HEXPOL Compounding, the overall organic volumes were in line with last year. The lower sales were impacted by negative FX of some SEK 290 million, but also by the mix. The automotive end customer segment was down primarily in North America, but that was partly offset by increased demand in building and construction and wire and cable. The price on major raw materials were sequentially stable and also versus last year. And the lower operating margin was affected by an unfavorable mix. Rubber Compounding Americas is, as you know, an important part of the HEXPOL Group. And we are very happy to welcome Ken Bloom back to HEXPOL as the Interim President for Rubber Compounding Americas. Ken has a clear mission to take the next step capturing and growing that business. If we then jump to HEXPOL Engineered Products, if we exclude a negative currency impact of SEK 22 million, we actually had a small increase in sales compared to last year and also good development across all product areas, leading to a stable EBIT. We are firmly committed to sustainability and our focus continues. We are on a good path to deliver on the 75% CO2 reduction target that we set for the end of this year. We are also working on the sustainability strategy and the new targets will be completed during Q1 next year. M&A is, as you know, an important focus area for our growth plans. We have the financial resources to accelerate acquisitions. Short term, the geopolitical uncertainty impacts the M&A activity level. There is somewhat a wait-and-see mentality among some companies, and that is affecting that. And last but not least, on November 4, we will have our Capital Market Day in Stockholm, and then we will share more about our growth strategy. If we then turn to Page 6. It's time for the financial update, and Peter will start with the sales development in Q3. Peter Rosén: Thank you very much. So if I can ask you to turn to Page 7, we'll take a look at the sales development in the quarter. And as you've seen, we delivered sales of SEK 4.7 billion in the quarter, which is down 6% compared to the same quarter last year. And if we look on the drivers, we see that organic sales are down 4% in the quarter. And at the same time, the acquisitions of Piedmont and Kabkom added 5% in sales. And as Klas mentioned, there were large negative effects in the quarter, adding up to SEK 312 million. Coming back to the volumes, overall organic volumes were on the same level as last year, but sales were still down, affected by a less favorable mix. Looking at it from a geographical perspective, Europe showed stable sales in the quarter, while we saw a decrease in North America that also translates into the decrease on group level. From an end customer perspective, automotive showed soft demand, which was partly offset by increased demand primarily from building and construction, wire and cable, but also several smaller end customer segments that showed higher sales in the quarter. If I can ask you to turn to Page 8, just taking a look at the financial overview and the P&L. We delivered a profit of SEK 688 million. That includes a negative FX impact of just above SEK 50 million. EBIT margin of 14.7%, which is below what we did the same period last year. And the main reason for this is somewhat less profitable mix, but also OpEx in relation to the lower sales that we saw here in the quarter. Strong cash flow in the quarter with an EBIT of SEK 688 million, we delivered a cash flow of SEK 740 million in the quarter. If I can then ask you to turn to Page 9, taking a somewhat different view of the financial performance here in the quarter. We see that sales came in at SEK 4.7 billion with an operating profit at SEK 688 million below last year, as mentioned, and an operating margin of 14.7%, which is then below what we did last year. If I can ask you to turn to Page 10, looking at the drivers of the operating profit, we see that the lower EBIT is primarily driven by the lower sales, but also impacted by lower gross margin. The lower gross margin is affected by mix. OpEx is somewhat above last year levels, but that is driven by we've added Piedmont and Kabkom to the cost base compared to the same period last year. If I then ask you to move over to Page 11, starting to look at HEXPOL Compounding in the quarter, delivered sales of SEK 4.3 billion in the quarter, which is below what we did the same period last year. Negative FX has a sizable impact of almost SEK 300 million in the quarter. Recently acquired Kabkom and Piedmont added about SEK 230 million in sales, while as mentioned before, organic sales were down some. And these lower organic sales are seen in North America, while Europe showed sales on the same level as last year. And as mentioned, from an end customer perspective, the lower sales is seen with automotive customers, and this was partly offset by higher sales to end customers within building and construction, wire and cable and also some other smaller segments. Operating profit came in at SEK 624 million with a margin of 14.4% for the quarter. If I can ask you to turn to the next page, we take a look at Engineered Products, where adjusting for negative effects in the quarter, sales were up 3%, and this is driven by strong performance by the gaskets products. Operating profit at SEK 64 million with a good EBIT margin of 18.1%, both in line with last year levels. If I can ask you to turn to Page 13, taking a look at the working capital. You can see that we continue to manage working capital efficiently. Despite adding Piedmont and Kabkom, working capital is on the same level as last year, both in absolute terms and in relation to sales. And as mentioned also in last quarter, there are no changes to underlying payment terms. And if I can then ask you to turn to Page 14, taking a look at the cash flow. As mentioned, we delivered a strong cash flow in the quarter, SEK [ 640 ] million with smaller movements across the various items, but well above the EBIT that we delivered in the quarter. And then finally, when it comes to the financial part, if I can ask you to turn to Page 15, looking at the net debt standing at SEK 3.9 billion and a net debt-to-EBITDA ratio of 1.14 at the end of the quarter. This is higher than last year, but this is mainly driven by the acquisition of the minority share of almak as well as the acquisition of Kabkom that we've done this year. So all in all, after the third quarter, we continue to stand with a very strong financial position. And with that being said, I hand over to Klas. Klas Dahlberg: Thank you, Peter. Finally, then just to summarize the third quarter. Europe showed stable sales compared to last year. Engineered Products also showed stable sales with a good profitability. We saw lower demand in North America affected by the high uncertainty related to U.S. trade policy; however, we didn't really see a direct impact from tariffs in Q3. As mentioned, Ken Bloom is appointed as the Interim President for Rubber Compounding Americas. And we consolidated Kabkom as of the 1st of May. And as we've said many times now, wire and cable that they represent is a growing segment for us. We continue to focus on M&A, and we have a strong balance sheet allowing us to act. We continue to focus on sustainability with good progress, both when it comes to our internal targets, but also when it comes to our products. And on the 4th of November, we will have our Capital Markets Day in Stockholm. So by that, we conclude the presentation of the third quarter, and we open up for your questions, ladies and gentlemen. Operator: [Operator Instructions] The next question comes from Joen Sundmark from SEB. Joen Sundmark: So starting with a question on automotive. If I look at the S&P figures on light vehicle production in Q3, it looks like it has improved a bit compared to last year, yet you mentioned that the decline in automotive seems to be present for you guys in Q3. So do you expect that there is some kind of lagging effect here? Or is it rather your particular exposure that's impacting this? If you could shed some light on that, it would be very helpful. Klas Dahlberg: All right. So when it comes to automotive, we always look at the production. And as you say, there is, of course, a certain time difference, those figures compared to our figures. When it comes to the North American market in September, there was, from a sales point of view, an increase, and that was due to the fact they had a subsidy of EUR 7,500 per vehicle. So that triggered sales in that very month, let's say. But other than that, it's a rather slow market. Joen Sundmark: Okay. That's clear. And I know that you have a fairly short order book, but could you share some color on the current discussions on demand that you have with your customers out there and sort of what they foresee demand-wise? Klas Dahlberg: Well, as you say, we have a very short order book. And the trend we have seen is that it becomes even shorter. So we get very late orders from many of our customers. But yes, the overall situation, like I said, it's a rather uncertain situation. So we don't have good visibility when it comes to the order book. Joen Sundmark: Okay. Fair enough. And on the back of that sort of uncertainty in demand and as the margin trend have been quite negative now for a few quarters, do you see any signs of that shifting? Or how are your sort of current discussions going to address that and improve the margin profile going forward? Peter Rosén: Peter here. Just to be clear, we don't give guidance or earnings. That being said, there are a couple of things. One driver of the somewhat lower margin is the mix. And it's no secret that automotive is an important end customer segment for us. So we would prefer to see that automotive production goes up and we get some of those volumes back and which is, of course, something that we are working on. The other part is looking at our cost structures. And there are 2 things. One is looking at the manufacturing footprint. But in the short run, we haven't taken any new decisions on that. Then when it comes to the more -- the other cost side, we're looking both at manning indirect production to bring that down and allocate that according to the volumes coming in. And you will see in Q3 that the number of people were actually lower, about 60 people less this quarter compared to last quarter, Q2 this year. So we're looking at those costs as well to see what can be done to bring down the cost level and manage those. Operator: The next question comes from Henric Hintze from ABG Sundal Collier. Henric Hintze: This is Henric at ABG. So on -- I was wondering if you could give us an update on how you view the M&A landscape at the moment. For example, are potential buyers and sellers closer or further apart on pricing compared to earlier this year? Klas Dahlberg: As I mentioned in my report that what we see right now is some of the companies are also affected by this uncertainty in the market. And because of that, there is a certain wait and see at the moment. So it's not maybe so much about multiples and so on. It's more that if their total result goes down, they are a bit hesitant at the moment to, let's say, to close a deal, if I call it that. So that is what we see. But with that said, we still have quite a pipeline of companies of prospects, so to say. So that's what we're dealing with at the moment. Henric Hintze: All right. And continuing on capital allocation, if this wait-and-see attitude persists among sellers, would you consider buybacks or extra dividends if you're unable to find attractive M&A opportunities? Peter Rosén: Peter here. Priority #1 is to do the M&A, and it's a very high and very clear priority for us. That being said, a while back, the dividend policy was upgraded to be in the range of 40% to 60%. And I think that's where we are right now. So priority #1, M&A. And then we haven't increased dividend policy since I think about 2 years. So that's what we can say at this point. Operator: The next question comes from Gustav Berneblad from Nordea. Gustav Berneblad: Yes. It's Gustav here from Nordea. I thought maybe just to build on your comment there, Peter, on the cost side. As you said, you haven't really taken out anything recently. Is that more due to -- you want to wait and see where demand is heading due to the geopolitical uncertainty? Or do you feel that you do have a quite good balance where you are today and with enough overcapacity to be ready to deliver if demand returns? If you can elaborate a bit more on that. Peter Rosén: Yes, of course. First of all, I think just to point out, last -- Q4 last year, we decided to close one site in the U.S., and that project was finalized in second quarter. So I just want to say that to be clear that we've just finished one project to close a production facility. That being said, there's always a trade-off on do we want to close sites in relation to the expected volumes when they come back. Since we are a batch producer, and we also don't work with order stocks, we need to have a flexibility when it comes to production capacity because when customers come and ask for volumes, we need to have that capacity ready to produce. So we need to strike a balance between the cost and having the capacity to meet volumes when they come back. And I would say that's where we are right now. Gustav Berneblad: Okay. Perfect. And then if we move to Europe, I mean, it looks to be quite stable here year-over-year. Is it possible to give a bit more comments there? Is that stability, is that across all end markets? Or are you seeing sort of wire and cable drawing a heavier part here and being sort of a cushion, if you know what I mean? If you can just elaborate a bit there. Peter Rosén: In a sense, it's a similar pattern as we see on the group level just with smaller movements. So automotive, somewhat softer and building and construction, wire and cable and some of the other smaller end customer segment being somewhat positive. So in a sense, same pattern, but smaller movements compared to North America. Gustav Berneblad: That's very clear. And then just one last question there to build on Henric's here on the M&A side. Would you say that you're more open to close acquisitions in Asia today than you were a couple of years ago within compounding? Klas Dahlberg: So when it comes to Asia, that's too early for us to say. And I think that's also part of, as I mentioned, our Capital Market Day to come back to that subject, how -- what opportunities could be there for HEXPOL, let's say. We will come back to that, Gustav. Operator: The next question comes from Andres Castanos-Mollor from Berenberg. Andres Castanos-Mollor: Can you please comment on any impact of the bankruptcy of first branch group if it has had any impact at the [indiscernible] Group level at all? I assume it was a client. Is there any receivable at risk here? Or will you have any demand -- lack of demand, let's say, while the company solves its issues? Peter Rosén: We don't normally comment specific customers. But let's put it this, Andres. We don't expect any material impact at all from that customer. Andres Castanos-Mollor: Right. And also, I was thinking in the changes in the U.S.A., the footprint changes you've been doing there, a few plant closures, also replace the leadership of the business there. What are your priorities or objectives for the region with these changes? Peter Rosén: Sorry, Andres, I didn't hear the beginning of your question. You mentioned change footprint. Andres Castanos-Mollor: Yes, footprint changes. You have closed a few plants in the U.S.A. You have also replaced your leadership there. What are the objectives for the new interim leadership? Peter Rosén: If I'll start with the first one when it comes to the manufacturing footprint. The last 2 years, we've closed 2 sites, one in California. The reason for that was that we had 2 sites in California, and we could see that we could service the customers from one site. So that's an efficiency improvement that we closed that down, and we could maintain all those customers. The site that we decided to close last year was Kennedale, Texas, similar reason there. We saw that we could service those customers from other sites. So it was a redundant capacity that we had, and that's why we closed Kennedale. So both of those plant closures where we said that we could maintain the volumes, but we could service our customers from other existing sites. So that was to improve profitability. Klas Dahlberg: And if I may, Klas here, Andres, regarding leadership in North America, we saw a need for a change to better address the challenges we see and also to capture the opportunities in the North American market. And we think that Ken Bloom is the right person to do that. And he has experience also from HEXPOL. He knows the organization. So we are very positive about that change. Operator: The next question comes from Johan Dahl from Danske Bank. Johan Dahl: Just wanted to dig a bit deeper on the comments you made, Klas, regarding unchanged organic volumes in the quarter, if I got it correctly. I mean, excluding acquisitions, I guess you referred to unchanged volumes in the group. Does that mark a material improvement compared to what we've seen earlier in the year in your view, i.e., the year-on-year progression on volumes? Is that sort of significantly better than in Q3 compared to previous quarters this year? Peter Rosén: Johan, it's Peter here. Just to be clear, again, we're not going to give any guidance on coming quarters when it comes to volume or profitability, et cetera. That being said, if we look at the volume development, we've seen both in Q1 and Q2, we did discuss that we had lower organic volumes. This quarter, organic volumes are in line with last year -- Q3 last year. So in that sense, it's somewhat different compared to the first and second quarter this year. What that will mean -- Sorry, go ahead, Johan. Johan Dahl: Can you hear me? Peter Rosén: Yes. No, I can hear you again. Johan Dahl: That's good. No, it's just -- you have minus 4% on organic revenue growth, right? And you're saying raw material is flat pretty much and also volumes flat organically. It's a fairly massive shift in the top line if you have the average selling price per tonne going down 4%. So what I'm just wanted to pick your brains on is what's your sort of visibility in terms of how this develops going forward? Is it just a function of sort of small variations U.S. versus Europe and auto versus other segments? Or is there something else going on here? Are you selling significantly more bulk volumes, for example, commoditized products? Are you losing market share in that sense? Peter Rosén: No, you're right in your first reasoning. If we look at the 4% organic, volumes are -- organic volumes are basically flat compared to last year. If we are very specific, we're talking very, very low single-digit volume down, percentage. So a very, very small part of the 4%. Then if we look at the other part, it's not sales prices, but there is a mix effect, and it consists of 2 parts. One is a geographical shift. We do lose -- see lower volume and sales in our North American market. And price levels in North America are generally higher. So that has an impact. Then we also see that there is a, call it, a product mix shift, which is the basically automotive. Automotive, as we've said many times before, is a good end customer segment for us. So it's a combination, smaller combinations of those 3 items that make up the organic. So it's not a structural shift in that sense. No, it is not. Johan Dahl: It's just that it's a fairly big number for those sort of variations. But I totally hear your message there. And on to the topic, what you can do to affect this. Is this just a function of the way markets go? Or do you have any visibility, i.e., how you sell more advanced compounds, et cetera? Klas Dahlberg: You mean for the profitability, Johan? Johan Dahl: Well, I guess both in the end, both top line and profitability. I understand that if U.S. is weaker than U.S., it's going to impact your organic growth. But I'm just trying to understand how you structurally can sort of approach this issue to sort of possibly improve mix as we go forward. Klas Dahlberg: Yes. And again, as Peter is saying, I mean, automotive is an important part, and that has not been growing, as you know, and even shrinking as we can see in the S&P figures. And we have found a business, as you can see also in our report within building and construction, wire and cable is a segment that is also growing and where we have also been able to capture business. So I mean that's our day-to-day operation to find new ways because we can change the market conditions in that sense. We have to work on the things we can influence, of course. Operator: The next question comes from Carl Deijenberg from DNB Carnegie. Carl Deijenberg: I came a little bit late into the call, so apologies if this question was already brought up. But I have to ask again, I mean, when I look at the S&P production figures for the North American market for Q3, I think they indicate roughly plus 3% year-on-year. And you're talking about flat volumes, but of course, it sounds like some of the other segments are sort of offsetting with positive growth relative to automotive. And I think when I look at the production numbers for Q2 as well, it seems like there's been a little bit of a discrepancy on, let's say, the production numbers relative to your reported organic growth if I try to back it out on the automotive side. So yes, very simple question. Is there a simple answer to this question? Is the OEMs or your customers bringing this more in-house now when production levels are fairly low? Or is there something else? Peter Rosén: There are at least 2 things that separate the official S&P production numbers from the volumes that we look at. One is the timing. There's normally 20, 25-day timing difference from production of a car and material that we supply. So there's a timing difference. The other part is, which I think is fairly unique for this business is that a lot of our customers have their own compounding business. And we do see that when volumes are down in the market, they tend to bring it in-house. So when you see an S&P production number, that doesn't automatically mean that it's transferable or translatable to ours because we also have customers who sort of shrink the market where we can compete, what we normally call captive conversion or in-sourcing. And that also has... Carl Deijenberg: Yes. Understood. And I think that's fairly interesting. If you can talk a little bit more about that. I mean, what kind of, let's say, in-house levels are we at right now relative to, let's say, a pre-COVID scenario or something like that? I mean just understanding sort of the magnitude, which have fallen into this topic. Would it be possible to give a fairly -- yes, high-level view answer to that would be... Peter Rosén: High level. It's difficult to measure exactly because we don't have statistics where we see the exact movements in the total market and what goes in and out at customers. But our view is that we've probably hit the -- let's call it, maximum in-sourcing at this point. When we see volumes flowing back into the market where we can compete, that is difficult to put a timing on. But our view is -- our current view is that we'll probably hit maximum in-sourcing at this point. Carl Deijenberg: That's very much appreciated. And maybe just finally on that topic rounding it off. I mean, obviously, we don't know what '26, '27 is going to look like. But do you have any sense of what kind of production numbers you would have to see in the industry for that, let's say, in-sourcing to reverse back into your hands? What kind of demand levels? Is it growth of mid-single digits on the production numbers? Or -- because I guess that could be a fairly significant swing factor for you, if I just look at the numbers relative to the -- yes, what we've seen in the production numbers here. Peter Rosén: Very good question. I sort of wish we had an exact number to say that at this point, it will start to flow back. But we -- currently, we don't know. And that's also one of the things that brings uncertainty into future orders, as Klas mentioned in the beginning. Operator: [Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Klas Dahlberg: All right. Thank you, operator, and thank you all for participating in this call. And we hope to see you all at our Capital Market Day in Stockholm on the 4th of November. You are all very welcome to join us there. So thank you very much, and enjoy the weekend.
Johan Andersson: Good morning, everyone, and welcome to the presentation of Saab's Q3 Report for 2025. My name is Johan Andersson, and I'm honored to have been appointed Head of Investor Relations here at Saab. With me here in Stockholm, I have our CEO, Micael Johansson; and Anna Wijkander, our CFO. Anna and Micael will present the report, and thereafter, we will start the Q&A session. And you can either ask your questions over the phone or you can enter them in the web interface, and I will read them out loud here in Stockholm. So with that quick intro, I will hand over to our CEO, Micael. Micael Johansson: Thank you so much, Johan, and thank you all for joining us this morning for the quarterly 3 report and the first 9 months. I want to welcome Johan as well as Head of Investor Relationship. So you're most welcome to the company. And I also want to thank Merton Kaplan for an excellent job during so many quarters and back old -- looking backwards. And then I wish him luck, of course, in his continued journey within Saab. Before I go into the highlights of this quarter, I just want to say a few words about the day we had Wednesday in Linköping, where we the had honor of receiving President Zelensky and his delegation and also our Prime Minister and his delegation to host them for this important statement and letter of intent that they signed in the direction of creating a strong air force in Ukraine going forward. This was, of course, a unique day and it was an important statement which we have been waiting for to now continue our journey in exploring scenarios and planning for how an establishment and delivery so quite a few aircraft will look like in Ukraine. And it also adds to our assessment of investments that we need to do looking into that. With all due respect, I mean, there's no contract yet. Still a lot of work to do. You heard the President Zelensky and also Prime Minister Kristersson talking about sort of the financing solution and what needs to be established there. And then, of course, there are a couple of other things. But we will start doing our work to sort of support this going forward. And it was great to see our employees in Linköping spontaneously applauding and sharing when President Zelensky stepped out of the car, and we're so much committed as a company to support Ukraine going forward. That was a unique and fantastic day. And now we will work hard to sort of make this happen as well, of course. So with that, I just want to go into a few highlights then of the quarter. It has been a strong demand in the market. We still have lots of geopolitical tensions, of course, around us and strong demand from many countries in all avenues of our portfolio and we develop contracts really well. We had a strong quarter when it comes to order intake, as we've seen. But it's also timing. It's sort of on the same level as the quarter last year. But in October, only after the closing of this quarter, we have SEK 16 billion in order intake. So we're looking toward a really strong year when it comes to contracts as well. We have a number of campaigns apart for our product sort of demand in the market that we are running, of course, both when it comes to the Gripen side, and we'll come back to that; and also GlobalEye, where a number of countries have a huge interest in our system. As you know, we've been selected by France, and now we're just waiting to sort of -- them to sign the contract in that country as quickly as possible. And then we have interest actually from NATO and from Germany and from Denmark, and a number of other countries is looking into our GlobalEye system. So there is still a need to continue to invest in capacity, which we're doing in a diligent way, I think. And looking at the execution this quarter, which has been solid in sort of a normally weaker quarter, but it's really been stronger this quarter. And as you've seen, I mean, the first 9 months is now an organic growth of 21%. So we've done really well also adding the third quarter to the first two ones here. And we will continue to look at our development of our profitability, which has also been good. But we'll also never trade off versus sort of investing in capacity to sort of meet the demand in the market, of course, but also being relevant when it comes to new technologies that we have to invest in going forward. All in all, it's been a strong quarter, and we have, as you've seen now, upgrading the outlook for '25. I will come back to that in the end. But we're now sort of raising our guidelines on top line to 20% to 24% from 16% to 20%. So back to the numbers. As I said, almost SEK 21 billion in order intake, a good increase in the medium-sized story. It looks a bit different between the quarters. And I think, as I said, we added SEK 16 billion only in October, which we have press released. So it looks really good going forward as well. We have a book-to-bill of 1.3x and a very strong organic growth in this quarter, the strongest quarter we've ever had on top line and also in absolute numbers when it comes to EBIT. So the margin is now 8.7% in the quarter but 9.3% looking at the first 9 months. Cash flow is on the same level. If you look at the first 9 months, sort of minus SEK 1 billion roughly. We have still the same view as last year. We will generate a positive cash flow. We have a number sort of important payments coming in now during the fourth quarter. So I'm confident that we will meet our guidelines on that as well. A few statements about the different business areas as usual. Yes, of course, a big interest in the Gripen conversion now. We have contracted Thailand during the quarter, the first 4. And they are looking into further contracts as well, of course. The batch 2 and batch 3 of their contract is being discussed already. And then, of course, we have been selected by Colombia and we are negotiating a contract there. We have no contract yet but we are moving ahead in a good pace in Colombia. And then, of course, the interest now from Ukraine is something we will sort of take into account and start planning for, as I mentioned. We have a good strong quarter from Aeronautics. They have gone 34% up sort of compared to the quarter last year. So they had really good project execution in the Gripen program mainly. But still, the profitability level is affected by ramp-up costs that we have mainly in the T-7, the trainer aircraft in the U.S. in West Lafayette. So that is still sort of a burden to Aeronautics, but they're moving in the right direction definitely. Dynamics, again, good growth. A quarter that is normally quite weak for Dynamics has been quite strong actually. If you look at the first 9 months of Dynamics, they have grown 34% or something, maybe even 36%, if I remember correctly now. It's an extremely strong year for Dynamics. They have had a number of medium-sized orders but also a large one from the Czech Republic when it comes to the medium, short-range air defense system RBS 70. So there is still a big demand in the market and we are investing heavily, as you know, to increase capacity in this area. I think we have only in the Karlskoga sort of 40 projects ongoing to expand everything and building factories in the U.S. and in India, as you know. And they have a huge backlog now of almost SEK 90 billion as we speak. Surveillance, also a very interesting portfolio. I said that the campaigns for the GlobalEye are a number of them now. So we are intensifying that, of course. I hope that we will see this GlobalEye system, which is the state-of-the-art system, most modern one, taking a bigger position also within the Alliance with multiple countries going for GlobalEye. So that's what we're working. And the first one that we were selected upon is, of course, France that you know all about. So there is not only on the GlobalEye side, but the surface side, the surface sensors, the sensor side of Surveillance is really strong and getting more and more contracts. And they deliver quite well as well, growing 8%. And honestly, the quarter 3 of Surveillance is the strongest ever top line-wise. So they are doing well also when it comes to project execution, and they have a huge potential going forward, I would say. I also want to mention that we are divesting TransponderTech, which is communication and automatic identification system type of entity, as we have also already press released. And we will close that deal now in quarter 4. Also a very big backlog on the Surveillance side, as you can see, SEK 55 billion. Saab Kockums also have a big interest in many segments. We're working campaigns now on the submarine side with Poland, and that we're putting a lot of effort into, of course. And it makes lots of sense to have Sweden and Poland work together to protect the Baltic Sea. But also on the surface side, we have the Swedish corvette/frigate program coming out, which is called Luleå class, which we are also seeing as a big potential going forward. But there are many other export contracts where we are involved. And we have also now invested but also got the contract to look to design and test a large underwater unmanned vehicle with the Swedish Navy, which is great to see that we're moving in that direction. Because also on the Navy side, it's not only in the air you will see collaborative combat entities working with manned entities. That will also happen on the surface and subsurface going forward. We also got a task, which is a fantastic honor, to lead the project within NATO when it comes to underwater battlespace project, connecting and creating interoperability between manned and unmanned systems. So that, we look forward to execute. And the growth is really good, 17% year-on-year when it comes to the quarter, and they are really moving in the right direction. And they have a substantial backlog. I need to mention, of course, that after the quarter in October, we got an additional contract, as you've seen, on the submarine side for SEK 9.6 billion, adding to the backlog now going forward. And then finally, when it comes to our business area, Combitech. We have, of course, a very well moving forward Combitech, our technical consultant entity. They are growing also rapidly year-on-year 17%. It's all about sort of employing new people, of course, and getting utilization into the operations that create these numbers. And I think we've employed 200 people up now only in this quarter from the Combitech side, and that adds to the growth, of course. We're doing well as a consulting company. We're absolutely in the right areas, in the right niches right now, cybersecurity, critical infrastructure, critical communication, creating security operation centers for many type of industries and also from the -- in the public side, the authorities. And everything connected to total defense in terms of resilience is something that sort of generates business now for Combitech going forward. So they had a good quarter as well, definitely, and they're growing quite a lot over the year as well. So I just want to say a few words about something that's been discussed every day, every week in terms of what's happening in Ukraine when it comes to drones and what kind of drone capability do we need going forward and counter-drone capability. And also the EU Commission have launched projects now during the last few weeks, which is sort of a drone wall, making sure that we have resilience versus big drone capabilities coming from the East. And I just want to mention that this is something we really are investing in, and we already have solutions in place. We don't talk so much about this, but we have already used these solutions in NATO missions in Poland. We call one system -- the way we approach this, I say, is to make sure that we are quite agnostic when it comes to what effectors or interceptors do we use. We can use everything from Bushmaster Gun to an electronic warfare type of effectors to nets or kamikaze drones or actually RBS 70, and we are now investing in a new missiles that you've heard about called Nimbrix, which is in a segment between the guns and the RBS 70. So that's sort of agnostic. We can sort of integrate the system that would manage different types of threats. And the Loke system is sort of a brand name of the system includes, of course, a sensor capability with the Giraffe 1X, which is excellent and the most state-of-the-art radar, that you'll find everything from micro drones to larger drones and cope with many threats at the same time, a commander control system, which is really compact and then an interceptor vehicle that would have sort of the chosen effector on it. That -- a counter UAS system already established in Sweden and used in NATO missions. The loitering munition side or actually having a known swarm technology capability. We have already released that we have something that is self-organized in terms of software and using AI to have swarm of drones during different types of missions. And I think we are focusing, among other things on not only surveillance but also loitering munition. That is important because of how you would manage an aggressor going forward, not only with support weapons that called Gustav and anti-tank weapons, but you can also use drones to accomplish part of the mission and work together with support missions. So we are involved in this area and ramping up our capabilities, and we already have existing systems. A couple of highlights from the sustainability area, a very important area to us. We have this quarter established a biogas facility in our site, which is the Barracuda entity in the Gamleby, which is doing camouflage and signature management. which reduces our energy dependence on fossil fuel, of course, dramatically. And if you compare year-to-year in the first 9 months to last year, we have reduced 4% on the CO2 emissions. And we are on a good track now to support our SBTi targets, where we have said we will be 42% down 2030. And if you look at the base year compared to where we are now, we are 33% down. We have a good progress on operational health and safety. We really make sure that we have a safe operational environment within the company, and we measure this all the time. And we must report every incident to mitigate everything that could happen. And another thing is, of course, diversity and inclusion. We are happy to see that we are now moving up when it comes to our female employees in the company, now at 27%. That is a very good step, and we want to go further also, of course, when it comes to female managers. But we are moving in the right direction. And since we have employed 2,700 people net up during the first 9 months, 34% of that employment is actually female. So we're going in the right direction. I'm really happy to see this. So last but not least, I already said that at my first slide that we have -- because of the good progress this year, the first 9 months, organic growth of 21% and also good visibility, of course, into the backlog which is now over SEK 200 billion, and we know what we need to deliver the remaining part of the year, we have now said that we will take this step from 16% to 20% growth rate to 20% to 24% instead. So that's our new guidance. And we still retain the other portion, saying that EBIT will grow more than the organic sales growth. And we will generate a positive cash flow and we are confident doing that going forward. I just want to thank all our employees for doing a fantastic job during the first 9 months and supporting this growth and the commitment to creating societies and having people in societies safe is a strong sort of purpose of the company, which is supported by our employees. I'm really pleased to see that. With that, I think if I have not forgotten anything, I will hand over to Anna, our CFO. Anna Wijkander: Thank you, Micael, and good morning, everyone. Yes, as you have heard, we are delivering a strong third quarter especially from a sales growth and EBIT growth perspective. So I think now it's time to dig more into the financial numbers. And we start with the order backlog. We left the third quarter with a strong backlog, increasing it to SEK 202 billion. In particular, it was the medium-sized orders that increased during this quarter. They more than doubled actually this quarter. So we booked SEK 21 billion. And we have, since the quarter closed -- we booked additional SEK 16 billion in order intake. So the start of Q4 looks promising. 73% of our orders in the backlog are international, and its Dynamics and Surveillance that is the majority of the order backlog, 71%. If you look at to the left in the graph, you can also see that we are increasing our deliveries from the backlog for the fourth quarter with 35% compared to the last year. And we can also see that we're increasing the deliveries from backlog the year 1 and 2, that is '26 and '27 compared to last year. So that really shows that we have -- we are in a growth journey and that we are also expanding our production capacity to deliver on our commitments. Let's turn into some more comments on the drivers of our sales and profitability then. And yes, as you have heard us saying, this was our highest sales and EBIT ever in a third quarter. And we have strong sales growth, 17% reported or 18% organic for the group. And the EBIT grew 16% in the quarter. What's also good to see is that the gross margin is increasing in all business areas in the quarter due to high project activities. And looking in then to more in each business area, Aeronautics, 34% growth this quarter, driven very much from the Gripen deliveries and high activities in the business areas. Also, we see improvements in the commercial business in the sales growth. However, the EBIT is still impacted by the startup costs that we have in the T-7 factory as well as a bit higher marketing cost for all the Gripen campaigns, and also we're starting to do amortization on a capitalized R&D that's impacting the EBIT. Dynamics, again, continued the strong growth from Q2. It grow 12% this quarter and also delivered a higher EBIT margin, 19.3% in the quarter. And that is a result also of project execution, several deliveries, a mix situation. You know in Dynamics, we had a lot of delivery projects. And in this quarter, lots of deliveries from ground combat that is impacting the margin in a positive way. Also, Surveillance grew 8% in the quarter. Good project execution and EBIT level at the same level almost as last year. Here, it's very much deliveries from also the Giraffe 1X radar production that's impacting in a positive way, but also good project execution in the business area. However, on Surveillance, we can mention that there are still negative impact from the Civil business impacting their margins. Kockums, also a high activity level and a very significant growth in their EBIT margin year-over-year. That is very much driven this quarter from both high project execution and, in particular, in their export business. To mention also Combitech, they grow 17% in the quarter. High utilization, high activity, and as we heard, that they are in -- working very much in an area which is growing as well. And their EBIT margin was on par with their EBIT margin last year if we deduct the divestment that we made in the Norwegian operation last year. And from a group perspective, mentioning also that on a corporate level, we have some corporate costs that are SEK 200 million approximately higher this quarter, and that is something that we expect to continue. It was driven very much of these share-based incentive program but also somewhat higher costs for IT and security as we're growing the company. The financial summary then. I think I mentioned all items above EBIT. So I think focus more here on the financial net that turned negative this quarter. And the reason for that is mainly because of the revaluation of shares in a financial investment of around SEK 50 million that impacted the financial net, and we had also a lower result from currency hedges related to the tender portfolio if we compare it to last year. This revaluation that I talked about impacting also the tax rate this year. So compared to last year, it's a bit higher. And then all in all, the group net income is in line with last year and as well as the EPS. Let's zoom out then to 9 months and look how it looks for us after 9 months has passed. On a group level, the sales increased 20% or organic 21% related to effect on currencies. All our business areas have double-digit growth year-to-date. So that's very positive to see. Also our gross margin is improving 70 basis points, and it's all business areas that are contributing to this gross margin increase, but in particular, its Dynamics and Surveillance where we see the improvements. So after 9 months, our EBIT is up 30% and we delivered a margin of 9.3%. Year-to-date, the financial net is positive. And here, it's supported by the appreciation from currency hedges related to our tender portfolio. And following that, we also have a lower tax rate decrease due to lower share of taxable income from foreign operations. So net income and EPS improvement driven by the EBIT growth and also the improvement then in the financial net. Next, our cash flow. I think we can say that we have a strong cash flow from operations despite increased working capital that is driven by our business growth. After 9 months, we have generated SEK 7.3 billion in cash from operations. That's SEK 1.9 billion more than last year. Also in line with our sales growth, we are building working capital, and we're doing that in line roughly with the same amount as we did last year. So if you look at the operational cash flow and deduct the change in working capital, we actually have a positive cash flow of SEK 3.9 billion after 9 months. But as you know, we need to do our investments. That's something that we have communicated earlier in the Capital Markets Day and continue to communicate. It's important for our growth. And we have increased our investments. SEK 4.9 billion is the amount now. That's SEK 1.7 billion more than last year. And so we end up with a negative cash flow year-to-date. But we expect the operational cash flow to be positive this year since we are expecting several large customer payments by the end of the year. Finally, on this slide, I just want to mention also that it's very positive to see that we are improving our return on capital employed, it's now almost 15%, and that's driven both by our profitability but also by increased return on capital turnover. Finally, our balance sheet. We have a strong financial position and a solid balance sheet. Our net debt-to-EBITDA is on a healthy level, 0.1x. This quarter, we have a net debt of SEK 700 million, and that was mainly due to that we have a new -- the lease of our newly opened office in Solna here in Sweden, and that's impacting around SEK 1.3 billion in the third quarter. We have cash and liquid investments of SEK 12.2 billion. And during the quarter, we had issued total bonds of SEK 2 billion additionally. Additional to that, we have an unutilized revolving credit of SEK 6 billion. So all in all, that puts us in a strong position to capitalize on future growth opportunities both through increased investments and also enable us to do potential acquisitions. So in summary, I think a strong quarter both in sales and EBIT across the business. The group has a solid financial position and we have a strong order backlog to deliver on. So with that, I hand over to you, Johan, to open the Q&A. Johan Andersson: Thank you very much, Anna and Micael, for a great presentation. So let's start the Q&A session. And we will start with the questions from the phone conference. [Operator Instructions] So please, operator, do we have any questions from the telephone conference? Operator: [Operator Instructions] The first question comes from Daniel Djurberg with Handelsbanken. Daniel Djurberg: Then I will go to Aeronautics, I think. You had a good quarter, nice growth. A little bit lower EBIT margin versus last year's quarter, [ 30 basis point ] I believe. But it's still the -- as you mentioned, the T-7A program lingering. Can you both give us an update on this in terms of both the cost or margin impact and also how -- for how long we should expect this to linger and if it will increase in size or the opposite. Micael Johansson: Thank you. No, I think when you look at Aeronautics, I would say that a normal Aeronautics with a reasonable scale of Gripen contracts and what have you should be sort of in -- I don't guide, but we talked about this before, sort of high single-digit numbers. So the effect is still there from T-7, absolutely. We've turned around the commercial business in a good way. We're not sort of adding lots of profitability really yet, but it's still okay. So I would say still a couple of years, it don't -- it won't go in the wrong direction, it will go in the right direction. But before it's actually a good addition to our Aeronautics business, it will be sort of 3 years ahead from now, roughly, I would say. But it will go in the right direction over time, of course. Operator: The next question comes from Ian Douglas-Pennant with UBS. Ian Douglas-Pennant: So I've got several questions but I'll limit myself to one on Gripen, please. Could you expand on the comments that we've read, I think, in the press this morning that you could expand Gripen capacity very rapidly if required? I wonder if you can just educate us on this group as to what we said there and how quickly that could happen. And in order for that to happen, do you need to see deposits coming in before you consider making those investments? Or would you consider investing elsewhere? Micael Johansson: Well, as I've said, I mean, we still need sort of set a scenario, that is, if we now get sort of the financing in place, if the politicians sort that and you get support refinancing Ukraine to go into contract on the Gripen E and expanding the production will be important. The way I see it is that, and I've said that this morning that right now, we are looking at expanding production with investments that we've taken to somewhere between 20 and 30 aircraft a year. And of course, as you know, with the numbers that was stated in the Wednesday's meetings, that sort of would add a lot to that. So that we're looking into that now, how quickly can we take another step because this investment we're talking about is sort of look to be implemented sort of next year and the year after that, roughly get to that level, and then you can take another step, of course. It will be adding more to the Linköping production lines if we do that, and that's sort of a few years ahead. But it would also mean that we would sort of expand our hub in Brazil. And we are initiating, as we speak, other sort of partnership discussions in countries that would have an interest for the Gripen, of course. So this will mean that we would need another hub beyond sort of the hub we have in Brazil and expanding in Linköping as well. Well, we said that, okay, if Ukraine push the button, we would deliver the first one in 3 years' time, and that is sort of what we commit to. And then it depends on what is the stretch of the delivery schedule with Ukraine and when we have to have this capacity in place. Normally, it takes like 2 to 3 years to get sort of improved capacity in place, I would say. That's sort of the view I have on how quickly we can do this. But there is absolutely an opportunity to implement this. Will we -- yes, I would like to see sort of a more solidified financing solution in place before we take the big step to start sort of adding huge sort of investment to this. But since we're already moving in the investment direction, we can add a little bit more maybe at risk to actually make sure that we keep the lead times. That's the way I see it without quantifying exactly. Operator: The next question comes from Aymeric Poulain with Kepler Cheuvreux. Aymeric Poulain: Clearly, the demand outlook is great. And it's the third year you're going to be growing at 20% or 25%. So the question is, do you expect that rate to be maintained? Or are the supply chain challenges, especially regarding the staffing or specific material that are starting to emerge given the very strong demand situation? Micael Johansson: Well, it's a bit sort of premature to sort of talk about sort of the next years beyond, I would say, this year right now. You know we've committed to a midterm target of 18% CAGR over the time period of '23 to '27. We will come back and refresh -- revisit that, not refresh it, in the year report quarter, I would say, in February next year. And then we will have a new view from our perspective on how quickly we can continue to grow. So that's where we are right now. If you look at what is the pain points, what's the limiting factors to grow, you are touching upon the right things. We need to bring with us the supply chain and maybe sometimes invest in supply chain. But they have to invest also. To find a whole ecosystem supporting us is absolutely necessary. And there are a few pain points there but manageable, I would say, going forward. And then I am assuming long term, of course, that we will resolve the rare earth elements discussions we have with China and also start to invest to have sovereign capacity on that side. But then we're talking years ahead because that will affect every industry, I would say, if that is not sorted. But yes, that's the way I see it. Johan Andersson: Excellent. Thank you. Let's take a couple of quick ones from the web. One is, what's the difference between Gripen and E and F? And when can we see the first Gripen F? Micael Johansson: Okay. Yes. We are maybe a bit of nerds using all these acronyms. But as you know, we have the Charlie, Delta version in operations right now. And yes, we have delivered an Echo version as well. The C is -- the E is a single-seat version. The F is a dual-seat version. And we will deliver this dual-seat version to Brazil in '27. So that's where the first aircraft is being manufactured right now. This has been a design that's been done together with the Brazilian industry and Brazil and that is in line with the plan that we have. Sweden has not contracted any dual-seat versions of the Gripen F. I hope I was not too complicated here. It's simple, actually. Single seated version, dual-seated version. Johan Andersson: I think it was pretty clear. Another one. You talked a lot about your drone capabilities in your strategy there. How much are you doing and developing by yourself? And how are you looking and doing things with partners? How do you think strategically there what's important? Micael Johansson: That's a really good question. I think from a software-defined perspective, we're doing everything ourselves and then, of course, when it comes to sensors and effectors, we have also things in-house. Then we are looking into how can you scale something quickly either yourself, lots of 3D printing or storing, parts that you can actually assemble quickly and how many partners do we need there. So I think on that side, when it comes to platforms, there will be more partnerships. But it's a bit different depending on what kind of drone you're talking about, of course. Johan Andersson: Good. Excellent. And we had a quick one for Anna. Do you expect your backlog to continue to increase going forward? Anna Wijkander: With our growth that we're foreseeing, I think that is something that we can assume that today's backlog will increase going forward. Yes. Operator: The next question from the phone comes from Björn Enarson with Danske Bank. Björn Enarson: Yes. On Dynamics and the super solid backlog and -- but the mix is very, very important. Can you give us some color on how you look upon the mix situation in the backlog? As profitability can swing quite a lot. We have seen that over the years depending on what Dynamics you have. Micael Johansson: In the Dynamics area, you mean. Björn Enarson: Exactly. Micael Johansson: Well, I think I won't go into exact details on the mix as such, but of course, it's quite dominated today by support weapons and missiles. Both have a substantial backlog in that and both will add good profitability numbers. I will sort of -- we have always talked about what's the ambition level in terms of sustained EBIT level on Dynamics side. And I've always said that depending exactly on the question you asked, the mix between the different portfolio entities in Dynamics, but it should be always sort of in the mid-double digit numbers, around 15%. Now we've had good quarters now. So we are above that. And of course, that's very nice to see. But it will always be on that level, so to say. But I won't go into exactly a part of the SEK 87 billion, what's what there. But the main parts are absolutely support weapons and missile capability, and you can probably sort of draw that conclusion from contracts that we have received. Anna Wijkander: And it varies, of course, between different contracts, also within the same business unit within a Dynamics. So it differs. So that could also impact. But I think it's a good, as you say, Micael, in the mid-teens mid-15s, what you say... Micael Johansson: Mid-double digit numbers, the number between 10 and 20, not sort of between 10 and 100. Operator: The next question from the phone comes from Carlos Iranzo Peris with Bank of America. Carlos Peris: I just want to ask on the GlobalEye because it looks that it's having a strong commercial momentum recently. So can you help us to understand how big the GlobalEye opportunities could be for you midterm? Micael Johansson: Well, I mean, this is one of the mega deals that always will take sort of a Prime Minister or a Defense Minister to decide in the end. But I mean, we have campaigns ongoing. As you know, France have selected and they will start with 2. We have 3 in production for Sweden. There is an interest for a number of aircraft when it comes to Germany and NATO. We have a couple of interest also in the Middle East. So it adds up to a number of platforms with a strong potential. But I would hesitate to sort of bring too much of mega deals into our growth. And this is not part of our growth this year or sort of a big portion of our business plan going forward. We look upon mega deals in a careful way. They are adding substantially when they happen. But it has to be continuous growth anyway. So I just want to say that, yes, there are many platforms that could come into play, but I wouldn't sort of jump into conclusions because they are megadeals campaigns. And political decisions will also be involved in that. But I look very positively upon sort of the future of GlobalEye. That's what I can say. And I mentioned a few countries now that have an interest. Operator: The next question comes from Tom Guinchard with Pareto. Tom Guinchard: A question on the risk guidance here. Any changes in delivery pace across the different business areas? Or what's changed since your last guidance? If you could break that down, please. Micael Johansson: Well, I think everyone is actually picking up nicely when it comes to expediting deliveries and pushing sort of things from the backlog into sales. And also some of it is connected to that we get our capacities coming into place. And also seeing, yes, that we have added 2,700 people to the company net up this year adds lots of push into this. And we are sort of optimizing our way of working and automating production. So it's a number of things that comes together that sort of had lacked visibility in the beginning of the year. But now we are more confident that we have actually succeeded in many things that we put ourselves forward to do. So it's actually in all areas. And of course, I mean, Dynamics is growing dramatically. You see 36% growth over the first 9 months. So it's an engine in this. But also the other business areas are growing, and there's lots of potential in Surveillance, and Aeronautics have now really stepped up in terms of growth. So I wouldn't sort of point something specific, but you can see from the numbers 9 months now what's driving this and what comes into play first. Operator: The next question comes from Sasha Tusa with Agency Partners. Sash Tusa: It's Sash Tusa here. I've got a couple of questions. First is just to R&D. On a 9-month basis, it's doubled over the last 4 years. Going forward, if you have investments, particularly in counter-UAS, do you expect continued growth in R&D? Or is there just going to be a shift in the mix probably towards the counter-UAS area and away from other areas? I wonder if you could just give some color on how the R&D is expected to develop. Micael Johansson: No. What I can say is I want to grow the R&D investments as much as I can but still keeping to the guidelines that we have, the trade-off between sort of here and now, top line growth, increasing our profitability but still having the strength to grow our investments in R&D. And we need to do that when it comes to AI, autonomous systems in all domains and also, of course, in the way we develop software. We have established a common tech organization that is pushing sort of software out on the business unit in a different way with sort of solidified architectures and stuff. So we need to continue to invest, make no mistake. So if we continue to grow, it will not only be a mix and shift in that, so to say. We have to do a number of things going forward in all core areas both when it comes to sort of autonomous systems in the air, which we call collaborative combat aircraft, the unmanned underwater vehicles. We have, as you know, a collaboration with General Atomics to do an autonomous sort of airborne early warning capability. So there are a number of things that we have to do and which I look forward to do. So it will continue to grow. But I won't quantify it how much. It is always this trade-off between the different pieces I mentioned. Anna Wijkander: Just maybe I can add. We have also some capitalized R&D that we have started to depreciate now that is also impacting. And that's something positive because we are delivering in our projects and, therefore, we can -- we depreciated the capitalized R&D. So that's also going to increase during the year. Operator: Excellent. Thank you. The next question -- sorry, did you have a follow-up there? Sash Tusa: Yes, please. That's helpful. Yes, I just wondered if you could elaborate on the Luleå frigate program, which seems to be in a degree of flux. You clearly said that it's now more of a frigate than a corvette. Corvette was probably a bit of a euphemism anyway. But could you just give us some color on where that program is? And in particular, the reported bid by France to export frigates directly to Sweden, possibly as part of the offset for the GlobalEye program, how do you see that developing? Micael Johansson: I think it's a question you should ask to Swedish customer mainly. And I want to underline it's probably -- I mean, it's probably corvette, of course. I mean, maybe it's my ignorance. But listen, we have put forward a very strong offer together with Babcock, our main partner here. And I hope that, that will prevail and be the selected thing. Yes, the Swedish customer has opened up, as I know, for other sort of proposals. And it's up to them now to select. But I still think we and Babcock have the strongest proposal. Now it's up to the Swedish Navy, Swedish FMV, the defense material organization to make a selection. And exactly when that is going to be done, I'm not sure. But time is of essence, of course, since they want the frigates to be operational sort of '29, '30 something. Operator: The next question comes from Marie-Ange Riggio with Morgan Stanley. Marie-Ange Riggio: The question that I have is on your current capacity expansion. Clearly, we see that 25 is quite a record level for you. you announced some capacity expansion at your last CMD mainly for Dynamics and Surveillance. I'm just wondering, given the level of backlog that you have today and the demand that you are seeing in the coming years, are you already increasing further the capacity compared to the guidance or like compared to the indication that you gave at your CMD? Or you are still expecting basically the orders before like moving forward from those targets? Micael Johansson: I would say for the year, we are in line with what we talked about at the CMD. It's not sort of a walk in the park to get everything executed. So that is really sort of a high ambition to invest all that money into capacity increases that we talked about. And we're looking into what do we need to do next year, of course. And we'll come back to that next year. But we will continue to invest in capacity increases, obviously, because of the demand in the market. But what are we doing right now is supporting what we talked about in the support area going from sort of below 100,000 units to somewhere in between 400,000 and 500,000 units when we get all the capacity in play. And I look forward to getting the factory in Grayling, Michigan up and running in the end of next year and also then India, of course, to add to this. So we'll come back on that, but we will see more -- again, we stick to our guidelines. But we will not compromise, making sure that we have the capacity to support the demand in the market and not compromise to make sure that we invest in the right technologies to be relevant all the years to come. And this is the sort of the puzzle that we work with all the time to make that sort of really efficient going forward. But we will need more capacity investments, absolutely. But we'll keep to the CMD statements that we had. Marie-Ange Riggio: If I may, on that, I mean, are you afraid about the lead times for your policy? Because like -- are you afraid basically that the lead time about increasing the capacity can limit further growth going forward given the fact that, I mean, it will take time. If I'm correct, you have drone combat where you can increase the capacity pretty quickly. But for the rest, I think that takes a bit more time. So that's why I was saying like if you are trying to be ahead of the curve in terms of adding capacity because clearly, the backlog would support further growth or not. Can you probably just remind us a bit the lead time for any other projects that is not ground combat if you increase the capacity? Micael Johansson: If you talk about the lead times to get increased capacity into play when it comes to ground combat, it's like roughly 2 years. So we started early, fortunately. But there are different movements. As I said, there are 40 building projects ongoing in the Karlskoga area only. So they are not in the same sort of schedule as we speak, all of them. But it's roughly to get to full-fledged sort of big step-up on the capacity of support weapons, I would sort of simplify it to say it's roughly 2 years. Johan Andersson: Excellent. Thank you very much for the questions. I think we need to move on to some of your colleagues. But just take one question from the web here. Micael, in your CEO statement, you write right that Colombia has selected the Gripen and that you are in negotiations. Do you dare to set a time frame here? Or how should we view that? Micael Johansson: As I said before, I hope to conclude that during this year. That's sort of what I've said before. I'll stick to that. I won't give a week or a month or so, but we've been doing good progress and I'm pleased to see that. So I hope we will conclude this year. Johan Andersson: Good. Another one is on your drone capabilities. Should we start to see that, that also can be some larger orders here? Or will it be more of test and trials and so forth? Or in the future, would you see that this can also grow to more products and bigger-sized orders? Micael Johansson: No, I anticipate that to happen because I think also looking at what capabilities the commission has stated as flagship projects, if you want to implement that, of course, you need plenty of counter-UAS systems. And if you want to have another capability sort of more aggressively, you also need quantities. But we're not really there yet, but we're seeing contracts coming now. So I think that's an avenue that will grow, absolutely. But exactly how and when it's -- I can't say. But we're in that race. Johan Andersson: Good. Okay. I think we have a number of more questions over the telephone conference so let's spend the last 5 minutes there. Please, operator, next question. Operator: The next question comes from Renato Rios with Inderes. Renato Rios: This is Renato of Inderes. Congratulations on very good results today. Great work. It's similar to the question that was just asked regarding drones and AI. Looking ahead to, say, 2026 to 2030 or even beyond, how do you see drones technology and AI-driven unpowered products and systems moving from development to sort of recurring revenue and contracts? How significant a share do you think this could become in the medium to long term? And would be interesting to hear your view on the revenue mix, how it could look like across the ground, air and marine domains and the largest product categories. Micael Johansson: Good questions. I think looking into the crystal ball and trying to understand how quickly AI and autonomous capabilities will take an operational role and great quantity is really a difficult one, I must say. It's all connected to also the end user, how quickly are they prepared to change a bit of their concepts of operations from doing what they're doing now to using these capabilities in a new way. I mean, it's different looking at Ukraine, which are moving really quickly ahead with short iteration cycles, upgrading the drone capability on a weekly, daily basis, very decentralized to keep trying winning the war. And they take a bit of a risk, of course. It's different in an environment where you change the CONOPS of a defense force or an army to do things. It will take a little bit of time, I think, but it will definitely prevail and be there going forward. Technology was developed much quicker than I think we understand. And how much you can do on an autonomous basis and how much support you will have from AI agents, agentive AI going forward will be tremendous. But to quantify the share is -- I can't do that today. I have to make sure that we are part of that journey and that we invest in that going forward. Between the domains, I think the land domain will continue to grow and will be substantial if you look at the company from our side. Maritime and air is a bit sort of dependent on the mega deals, of course, a bit different in that domain. But then it will be a sustained business, of course, in the background as well. So I think land domain is more sort of sensors and products and weapons will continue to grow. And also, we hopefully will continue to grow a lot in the air domains as well. But that will be a bit dependent on the mega deals, honestly. Johan Andersson: Excellent. Operator, do we have a final question from the telephone conference? Operator: Yes and It comes from Afonso Osorio with Barclays. Afonso Osorio: I just wanted to come back to this Gripen deal with Ukraine. I mean the 100 to 150 jets is a massive potential order here. So firstly, what will be the total length of these contracts, assuming the delivery starts 3 years from now, as you just said? And then what would be the profitability of that contract compared to the other contracts you have within the Gripen family? Micael Johansson: Good questions that I'm sure you understand I can't sort of nail that down completely. But I mean, I've said before, I mean, that size of the contract would of course create scale and improve the profitability of the Aeronautics domain. Then it depends on many other things, what kind of availability do they need, what kind of flexibility and agility do they need, ground support equipments, training and all of that in terms of the whole contract. But you can sort of look at Brazil and then you do your mathematics on what sort of 100 or 150 contract. It's in that ballpark, but it depends on the number of things that we haven't nailed down yet to look at the size of the contract. But everything that adds that scale to the operation would, of course, add profitability. That's for sure. But I won't sort of say how much today. That's not sort of possible. We will start working this now and look what the expectations are from Ukraine comes to schedule, delivery rates and when the first aircraft needs to arrive and then offer them something that needs to be discussed. And apart from that, all these things around financing must come into play as well. So we will work that diligently, of course, no question about it. And I look forward to it. Can I say one thing before we end, which I forgot actually. You've seen probably the press release that I just want to say that we have now appointed a new position in our corporate management, strategy and technology. And it is Marcus Wandt, who is a great technology guy and a visionary guy, a good leader that will take that role. And we do this because there are cross-company initiatives that we have to have a thorough discussion about in corporate management and all the initiatives that comes from me or NATO, of course, as well. But technology is moving so fast. So we need to be sure that we have the right discussion in corporate management. So I look forward to welcome Marcus Wandt 1st of November to my corporate management. Johan Andersson: Thank you very much, Micael. And with that, good ending. We finalized this call for the third quarter, and very much look forward to the Q4 call that we will have then in beginning of February. So thank you again very much for listening in and also joining over the web. And if you have any further questions, do not hesitate to reach out to us at the Investor Relations department. And have a really, really nice day. Thank you. Micael Johansson: Thank you. Anna Wijkander: Thank you.
Operator: Greetings, and welcome to the OMA Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Emmanuel Camacho, Investor Relations Officer for OMA. Thank you. You may begin. Emmanuel Camacho: Thank you, Melissa. Hello, everyone, and welcome to OMA's Third Quarter 2025 Earnings Conference Call. We're delighted to have you join us today as we discuss the company's performance and financial results for the past quarter. Joining us today are CEO, Ricardo Duenas; and CFO, Ruffo Pérez Pliego. Please be reminded that certain statements made during the course of our discussion today may constitute forward-looking statements, which are based on current management expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially, including factors that may be beyond our control. And now I'll turn the call over to Ricardo Duenas for his opening remarks. Ricardo Duenas: Thank you, Emmanuel. Good morning, everyone, and thank you for joining us today. This morning, Ruffo and I will review our operational performance and financial results. And finally, we will be pleased to answer your questions. In the third quarter of this year, OMA's passenger traffic totaled 7.6 million passengers, an 8% increase year-over-year. Seat capacity increased by 11% during the quarter. On the domestic front, passenger traffic grew by 7%, driven primarily by the Monterrey Airport, which saw increases on routes to the metropolitan area of Mexico City, mainly to Toluca Airport, Bajio, Puerto Vallarta, Mérida and Querétaro. These routes collectively added over 300,000 passengers during the quarter, representing 68% of the total domestic passenger growth. International passenger traffic increased by 11%, mainly driven by Monterrey on the route to San Francisco, San Luis Potosi with higher traffic on the routes to Atlanta and Dallas and Tampico on the route to Dallas. Together, these routes added more than 47,000 passengers during the quarter, accounting for 46% of the total international passenger growth. Moving on to OMA's third quarter financial highlights. Aeronautical revenues increased 11% with aeronautical revenue per passenger rising 3% in the quarter. Commercial revenues grew by 7% compared to the third quarter of '24 and commercial revenue per passenger stood at MXN 60. Commercial revenue growth was mainly driven by parking, restaurants, VIP lounges and retail, mainly as a result of higher penetration and an increase in passenger traffic. Occupancy rate for commercial space stood at 96% at the end of the quarter. On the diversification front, revenues increased 8%, with Industrial Services contributing most of this growth, mainly because of additional square meters leased in our industrial park as compared to the third quarter of '24 and contractual increases to rents. OMA's third quarter adjusted EBITDA increased by 9% to MXN 2.7 billion with a margin of 74.8%. On the capital expenditures front, total investments in the quarter, including MDP investments, major maintenance and strategic investments were MXN 472 million. Finally, in relation to the negotiation process of our next Master Development Program discussion with the AFAC remain underway. We submitted our proposed Master Development Program for the '26-'30 period at the end of June, and the process remains on track. During the quarter, we continued addressing AFAC's technical observations and advancing the validation of investment projects in accordance with the schedule agreed with the authority. We continue to expect the final resolution and publication of results during December. Our expectations regarding the overall investment level remain at committed levels of MDP investment similar in real terms to the level of the previous '21-'25 MDP and maximum tariff increase in the low single digits. I would now like to turn the call over to Ruffo Pérez Pliego, who will discuss our financial highlights for the quarter. Ruffo Pérez del Castillo: Thank you, Ricardo, and good morning, everyone. I will briefly go over our financial results for the quarter, and then we will open the call for your questions. Aeronautical revenues increased 10.6% relative to 3Q '24, mainly due to the increase in passenger traffic as well as higher aeronautical yields. Non-aeronautical revenues increased 7.3%. Commercial revenues increased 7.0%. The line items with the highest growth were parking, restaurants, VIP lounges and retail. Parking grew by 9.4%, mainly as a result of higher passenger traffic. Restaurants and retail increased 9.8% and 8.2%, respectively, both driven by higher passenger traffic as well as the previously opened or replaced outlets. VIP lounges rose 9.9%, mainly due to higher market penetration, primarily in Monterrey as well as the increase in passenger traffic. Diversification activities increased 8.2%. Industrial Services, which relates to the operation of the industrial park contributed most to the growth in the quarter, increasing by 53%, resulting from higher square meters leased as compared to third quarter of '24 as well as contractual rent increases. Total aeronautical and non-aeronautical revenues grew 9.8% to MXN 3.5 billion in the quarter. Construction revenues amounted to MXN 382 million in the third quarter. The cost of airport services and G&A expense increased 14.4% versus 3Q '24, primarily due to the following line items: Payroll grew by 10.7%, mainly as a result of annual wage increases as well as higher headcount as compared to the third quarter of '24. Other costs and expenses increased by 22% due primarily to higher IT-related requirements and transportation services. Contracted services expense rose 16.4%, mainly due to higher cost of security and cleaning services following contract renewals in prior quarters, reflecting the inflationary pressures and tight labor market conditions in Mexico. Minor maintenance increased 19.8%, primarily due to timing effect of the works performed. Concession tax increased by 10.4% to MXN 290 million, in line with revenue growth. Major maintenance provision was MXN 28 million as compared to MXN 75 million in the same quarter of last year. OMA's third quarter adjusted EBITDA grew 9.0% to MXN 2.7 billion and adjusted EBITDA margin reached 74.8%. Our financing expense increased by 9.8% to MXN 299 million, mainly driven by higher interest expense as a result of higher average debt levels. Consolidated net income was MXN 1.5 billion in the quarter, an increase of 9.1% versus the same quarter of last year. Turning to our cash position. Cash generated from operating activities in the third quarter amounted to MXN 1.9 billion and investing and financing activities used cash for MXN 480 million and MXN 365 million, respectively. As a result, our cash position at the end of the quarter stood at MXN 4.4 billion. At the end of September, total debt amounted to MXN 13.6 billion, and we maintained a solid financial position, ending the quarter with a net debt to adjusted EBITDA ratio of 0.9x. This concludes our prepared remarks. Melissa, please open the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Pablo Ricalde with Itaú. Pablo Ricalde Martinez: I have one question regarding your traffic expectations maybe for the fourth quarter and maybe your early thoughts on 2026, taking into account the World Cup. Ricardo Duenas: Yes. Thank you, Pablo. So we're looking for the rest of the year to finish in our traffic overall for the year between 7% and 8% growth. And our expectation at this point in time for next year, it's traffic to be in the low to mid-single digits for next year growth. Operator: [Operator Instructions] Our next question comes from the line of Enrique Cantu with GBM. Unknown Analyst: I have a quick question. Commercial revenue per pass declined this quarter, the first contraction since early 2023. Could you elaborate on the main drivers behind this softness? And how do you plan to reaccelerate this [ known ] area of growth? Ruffo Pérez del Castillo: Enrique, so yes, commercial revenue per passenger mainly reflects -- in the quarter reflects the impact of onetime revenues recorded in the previous year. And in the following quarters, we expect commercial revenues per passengers to gradually increase in line with inflation from current levels. Unknown Analyst: Okay. Perfect. And just another one, if I may. SG&A and utility costs rose this quarter, eroding margins despite strong top line growth. Do you view these cost pressures as temporary? Or should we expect a structurally higher cost base heading into 2026? Ricardo Duenas: Sorry, could you repeat that? Maybe you're too close to the microphone. Unknown Analyst: Yes, sorry. So it's regarding SG&A and utility costs. We saw that this quarter they erode margins. Do you view these cost pressures as temporary? Or should we expect this higher cost base heading into 2026? Ruffo Pérez del Castillo: So yes, as we mentioned, there are some specific line items that are facing some pressures like cleaning and security, where the total level of cost in the following quarters should be similar to the level of cost that we are facing right now. However, we do have started to analyze different alternatives to continue maintaining cost at check, and it's part of the history of the company to be very cost conscious, and we expect pressures not to be permanent. Operator: Our next question comes from the line of Gabriel Himelfarb with Scotiabank. Gabriel Himelfarb Mustri: A quick question on capital allocation. First, for the next MDP, I think you have mentioned that almost all the capital will go to Monterrey. It will be focused on, perhaps, increasing the capacity of the airport or developing more the commercial spaces, the commercial portion of the business? And my second question, are you seeking or have you considered expanding gap -- sorry, OMA's portfolio towards outside Mexico? Ricardo Duenas: Yes. Thank you, Gabriel. Regarding the last part, we're always looking for opportunities to expand internationally. At this point in time, we don't have a concrete transaction that we could share. In terms of the MDP, it's around half of the MDP will be allocated to Monterrey, given that half of the traffic is allocated in Monterrey. We're looking to expand in most of -- in capacity that will generate commercial opportunities as well. There's pavement, there's technology, there's environmental and sustainability projects as well. Operator: Thank you. There are no questions at this time. I'll turn the floor back to Mr. Duenas for any final comments. Ricardo Duenas: We would like to thank you, everyone, for participating in today's call. We appreciate your insightful questions, engagement and continued support. Ruffo, Emmanuel and I remain available should you have any further questions or require additional information. Thank you once again, and have a great day. Operator: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good morning. Welcome to Megacable's Third Quarter 2025 Earnings Conference Call. With us this morning, we have Mr. Enrique Yamuni, CEO; Mr. Raymundo Fernandez, Deputy CEO; and Mr. Luis Zetter, CFO. Let me remind you that the information discussed at today's earnings call may include forward-looking statements on the company's future financial performance and prospects, which are subject to risks and uncertainties. Megacable undertakes no obligation to update or revise any forward-looking statements. I will now turn the call over to Mr. Enrique Yamuni. Sir, you may begin. Enrique Robles: Thank you, Saul. Good morning, everyone, and thank you for joining us today. During the quarter, we remain firmly aligned with our strategy and continued with the execution of our expansion and network evolution projects as planned. This disciplined approach has enabled us to sustain subscriber growth above market level, positioning Megacable as the second largest operator in the country by number of broadband subscribers. The achievement reflects our commitment to becoming a leader player in Mexico telecommunications sector. A key driver of this progress has been the expansion of our infrastructure. During this period, we successfully reached our goal of doubling our infrastructure by number of homes passed compared to those at the expansion announcement, making a significant milestone 3 years into the execution of this initiative. Today, our network is capable of serving 82% of our subscriber base to fiber, a tangible result of our strategic investments. We have already captured over 50% of the subscribers originally target in those territories, and we continue working diligently to increase penetration and reach the next set of objectives. In parallel, we have made substantial progress in our network evolution project, migrating subscribers to a state-of-the-art fiber network. This effort is part of our clear vision to become a full fiber operator in the medium term, enhancing our competitive edge. We are proud to offer a robust service portfolio with competitive pricing bandwidth, tailored to evolving needs of our customers and outstanding customer service. This is evidenced by our performance in key indicators such as Net Promoter Score, which continues to improve quarter-over-quarter. Operationally, we remain focused on driving value to quality service and fair prices. In this sense, ARPU increased both sequentially and for the first time in the last 12 months on a yearly basis, thus reflecting the strength of our value proposition and the positive impact of recent commercial adjustments. From a financial standpoint, subscriber growth has consistently translated into revenue growth. Our mass market segment has maintained high single-digit growth with an acceleration observed during this period. Likewise, with consolidated EBITDA has increased its growth pace, resulting in margin expansion on a year-over-year basis, a trend we expect to sustain in the coming quarters. Our capital investment levels are showing a clear deceleration trend. Excluding extraordinary investment projects, our organic CapEx has declined to mid-teens aligning with global best-in-class telecom operators aligning the foundation for a more efficient investment structure going forward. As a result of this lower CapEx intensity and continued EBITDA growth, we are approaching our cash generation target. This year, we expect to be cash flow positive before dividend payments and very close to achieving net cash flow even after dividends. It is also worth noting that throughout this investment cycle, our debt levels have not increased significantly. We maintain a solid balance sheet with one of the lowest leverage ratios in the market. This highlights the efficiency with which we have executed our initiatives and position us well to capitalize on future strategic investment opportunities. Our financial strength has been recognized again by the rating agencies as HR Ratings confirmed -- reaffirmed our AAA rating this quarter, following Fitch's rate confirmation in the second quarter. These rating actions reflect the quality of our balance sheet, the consistency of our performance and the strength of our long-term outlook. As we approach the final quarter of the year, we remain committed to execute our fiber deployment strategy, consolidated growth in new territories and drive operational efficiency. Above all, our focus is on maximizing free cash flows and solidifying our position as Mexico's most reliable telecommunications platform to preserve the strength of the Megacable brand, with millions of households and businesses across Mexico have come to rely on connectivity and entertainment. All this said, now I pass the call over to Raymundo for operational remarks. Please Raymundo, go ahead. Raymundo Pendones: Thanks, Enrique, and good morning, everyone. As Enrique just note, this was another quarter of steady progress. Our results reflect the continued momentum of the core business, reaffirming the strength of our strategy and our ability to adapt to shifting market dynamics and evolving customer expectations. Our subscriber base continues to grow both in new territories and expansion areas where penetration levels keep increasing. And more importantly, this growth in our base has consistently translating to revenue increases particularly during this period where mass market segment revenues accelerated. Let me walk you through the key operational metrics of the quarter. We ended the quarter with nearly 5.9 million unique subscribers, an increase of 9% year-over-year, equivalent to 506,000 net additions. In this quarter alone, net additions reached 122,000 slightly below last quarter's, but well within internal expectations in line with the consistency of our performance. In the Internet segment, subscribers totaled almost 5.7 million, up 10% versus third quarter '24, representing 528,000 net additions, of which 129,000 were added this quarter. This performance reflects strong demand for high-speed connectivity, even following the price adjustment implemented at the start of the quarter, highlighting the continued relevance of our value proposal particularly in price-sensitive markets. Regarding our Video segment, we closed the quarter with nearly 4 million unique content subscribers, including 3.9 million of linear TV and 124,000 users with streaming service coupled only with our Broadband solution. Within the linear TV segment, XView continued to expand, reaching almost 3.7 million users at 9.9% year-over-year increase with 333,000 net additions. In Telephony, we surpassed the 5 million subscriber mark, up 11% versus the prior year, equivalent to 490,000 net additions with 98,000 net additions during the quarter. While this service remains primarily complementary within our bundles, its expansion contributes significantly to customer retention. Turning to our mobile virtual network operator business, our revenue, total lines reached 640,000 with 21,000 net adds this quarter and 128,000 over the last 12 months. Growth remains focused on postpaid offerings continuing the upward trends since early 2023. We closed the quarter with 14.6 million RGUs, up 8% year-over-year driven by a steady subscriber growth in the mass market, whilst revenue generating units per unique subscribers stood at 2.49, ARPU improved to MXN 422.3, up from MXN 418.9 in the same period last year and MXN 421 last quarter. This figure reflects pricing optimization despite a bundled mix more inclined towards double play. Our expansion and modernization of network continues to be core drivers of our growth. Our infrastructure now extends to 107,000 kilometers, allow it to serve over 18.7 million homes, up 10% from last year. As of quarter end, over 82% of our subscriber base was already connected via fiber compared to 73% in the same period last year, a clear indicator of the progress made towards becoming a full fiber operator. Churn levels stood at 2.3% for Internet, 2.7% for Video and 2.7% for Telephony, reflecting the price adjustment carried out at the beginning of the quarter and despite the upward fluctuation within reasonable levels. It is important to mention that based on seasonal patterns, we anticipate churn to improve toward next quarters. In a nutshell, our mass market segment remains a primary engine of growth and profitability driven by expanding coverage and improved operational leverage in both legacy and developing markets. By contrast, the corporate segment remains soft, consistent with trends in earlier this year, mostly attributed to an economic slowdown in the corporate segment. Undoubtedly, competitive conditions in this market have intensified. With greater fiber availability, there has been an increase in the supply of available services, which has negatively impacted market prices for these services. On the positive side, the integration of the corporate segment has progressed steadily under the business Tech-Co model. As part of this merger, we have focused on evolving the business model shifting from generating most of our revenue from equipment sales to managed service models, which generate a larger recurring revenue base. This has had a temporary effect on the results of these 9 months of 2025. However, we expect greater stability and recurrence in revenue as these consolidation matures. Before I close, I want to emphasize that these quarterly results were achieved through disciplined execution and quality service despite an increasingly competitive and price-sensitive market as our network reliability coverage expansion and bundles continues to differentiate our value also. Looking ahead, we remain focused on preserving momentum to the fourth quarter, with churn expected to soften in the next quarters, territory penetration to move forward an infrastructure deployment to meet customer needs, we are confident in our ability to deliver resilient results as of year-end. Thank you for your attention. I will now turn the call over to Luis for the financial review. Luis Zetter Zermeno: Thank you, Raymundo. Good morning, everyone. Let me walk you through our financial performance for the third quarter 2025. During the quarter, as Enrique and Raymundo mentioned, we continue to execute our long-term strategy with discipline and consistency, enabling us to deliver solid top line growth and strong profitability. Taking a closer look at our financial performance for the quarter. Total revenues reached MXN 8.9 billion, a 9% increase against the MXN 8.2 billion recorded in the third quarter 2024. This performance was mainly supported by the mass market segment that grew 11% year-over-year, the highest growth in the last 6 periods driven by ongoing subscriber growth and a gradual ARPU improvement. In the same period, corporate segment revenues contracted 5% compared to the third quarter of 2024, mainly explained by the economic deceleration in this segment, coupled with a higher competition. As a result, mass market operations contributed with 85% of total revenues in the quarter and the remainder on the corporate segment. On the cost side, cost of services for the quarter totaled MXN 2.4 billion, up 6% year-over-year, mainly due to a deeper revenue mix composition in the corporate segment, favoring higher margin income streams. Well SG&A reached MXN 2.5 billion, increasing 9% primarily from higher labor costs. Both lines remain under control advancing at the same level or below revenue. Turning to profitability. EBITDA reached MXN 3.9 billion, up 10% year-over-year, accelerating its growth trend in the annual comparison along with total revenues. EBITDA margin was 44.2%, slightly below sequentially as a result of seasonal effects, but above the 43.6% recorded in the third quarter of 2024. Again, an expansion of 50-plus basis points, regardless of the contraction in corporate revenue. Notably, margin expansion at newer territories continue driven by an incremental subscriber base and improve infrastructure utilization. At the same time, margins in mature regions remain solid and aligned to historical trends. Net income for the quarter was MXN 628 million, accumulating MXN 2.1 billion year-to-date, a 13% increase versus MXN 1.9 billion recorded in the same 9 months of last year. In this context, we remain confident that profitability will strengthen as depreciation stabilizes and newly integrated regions mature. Turning to the balance sheet. Net debt declined sequentially, but remained largely in line with the same period of last year closing at MXN 22.3 billion at quarter end, supported by a solid cash generation and the absence of any additional debt. The net debt-to-EBITDA ratio stood at 1.45x down from 1.56x in last quarter and below the 1.54x of the prior year. In this sense, we continue to maintain one of the strongest leverage profiles of the industry. Additionally, our interest coverage ratio remained solid at 5.59x and the weighted average cost of debt stood at 8.77%, continuing its downward trend. This indicator reinforce the strength of our capital structure and provide flexibility to support our long-term goals. Turning to investments. CapEx for the quarter totaled approximately MXN 2.4 billion, above the MXN 1.9 billion reported last quarter, mainly due to typical second half seasonality. However, we remain comfortably within our full year investment guidance. In relation to revenue, CapEx represented 26.6% in the quarter and 25.1% year-to-date. And we continue to expect the full year ratio to lie as we have been mentioning between 26% and 28% of revenues, consistent with our soft lending investment trend. Looking ahead, we focus on balancing growth with cautious capital allocation, and our priorities continue to include the generation -- increase the generation of positive cash flow in 2026, preserving our investment-grade credit profile and advanced maturation of recent investment across both new and legacy markets. Lastly, I would like to highlight 2 items that reflect our continued commitment to transparency and value creation. First, as noted by Enrique HR Ratings reaffirmed our AAA credit breaking, following the reaffirmation rate by Fitch Ratings in the second quarter. Both rating actions validate the strength of our balance sheet and consistency of our financial strategy. Second, we continue to advance at our sustainability and disclosure activities with the release of our 2024 integrated annual report under GRI and SASB standards. Verified by 35 professionals in accordance with these standards as we continuously strive to further strengthen our ESG reporting in anticipation of evolving market standards and practices. In line with this, the impact allocation report of our 2024 local notes is also now available. In summary, our third quarter results reflect the strength of our business model, discipling financial execution and a healthy position for long-term growth. Thank you. We are now ready to take your questions. Operator: [Operator Instructions] Our first question comes from the line of Marcelo Santos from JPMorgan. Marcelo Santos: I have two questions. The first is regarding CapEx. So you made it very clear what's the outlook for this year. How do you see CapEx going in 2026 and 2027. And the second outlook is a bit about the competitive environment and growth. I mean, you had very good adds, but churn was a bit higher and SG&A was a bit higher sequentially. So is growth coming at a more expensive cost than what was foreseen? Is this because of a bit of the environment? So just wanted to tie these things. Raymundo Pendones: Luis, you want to go ahead? Luis Zetter Zermeno: Yes, on CapEx, for sure, Marcelo, thanks for your question. And as we mentioned, our CapEx is in the downhill trend and even when we are going to end this year around 26% as we expected, our forecast for the future '26 and '27 will be, '26 will be around 24% to 26% of revenues and declining on '27 to grow between 21% and 23%. Enrique Robles: Yes. The CapEx trend continues to decline, even though we have [ up ] worth in this quarter because of the build of the network and the [ comps ] that we activate, we expect that we announced that in the second quarter when we said the second quarter wasn't difficult. But the good news is like Luis is saying that we continue to have a lower CapEx over revenue this year around 26% to 28%, that's what we expect. And the message here from the management is that we will have that decline for next year between 24% to 26%. Raymundo Pendones: And Marcelo regarding the competitive environment. The highest growth that we have in subscribers, the highest growth rate comes from expansion territories as there is a greater opportunity for penetration and company's expansion on that part, of course. In legacy territories, the good news is that penetration remains stable at around 40% and growing. That means despite of competition, the offer that we have and the strategy of a good product, good network at the best affordable price is proving to provide a 10% growth in revenue, EBITDA and subscribers all around and we continue -- we will continue to forecast that for the early 2026 if you might say. Now the churn, remember that we have an increase in rates at the beginning of the quarter. That increase in rates put pressure on the churn. Our level of gross adds is the same. It's a little bit higher than what we had in the second quarter. So that means we're improving and having more capacity of bringing gross adds. We're not against any increase in rates that we that we have at the beginning. And in some of our high penetrated market, we have that increase in short. We expect that's shown to stabilize and decline slightly in the quarters to come. That's our view of what we have. Of course, it is a competitive environment. We've been having that competitive environment for a long time. We have Izzi, we have Total, we have Telmex in our markets. But as we said before, we believe that we'll have the best offer and to continue to provide growth in the markets where we are. Operator: The next question comes from Milenna Okamura from Goldman Sachs. Milenna Okamura: The first one is you mentioned in your early remarks, some commercial adjustments that drove your ARPU increase. So can you give us a little bit more detail about these initiatives, aside from the price you have implemented? And how do you expect margins to evolve going forward as you continue to increase your fiber penetration in new areas? Raymundo Pendones: Yes. Thank you for the question, Milenna. Regarding the ARPU, we continue to provide a slight increase in the ARPU that we have there. And that's a combination of several factors. One is the increase in rates that we have on that part. The other one is the increase in apps and services per unique subscribers that we also are successful in that part. And that's coupled with the increase of subscribers bring a lower ARPU because of the promotions that we have. So all that combination doesn't allow us to increase more the ARPU, but we believe that we can continue to have a slight trend increasing going forward. Now in terms of the markets, we still have room to grow, we are at around 81% Broadband penetration in our markets, and we really believe that we can raise to around 90% -- to below 90% in the years to come. So all the companies will continue to grow in that part. The thing is that who has the better offer price and margins to take part of that growth in the market. So far, we have growth in expansion. That means we're capturing market from competition. And of course, some of them also will be new market subscribers. And we're capturing subscribers, also 1/3 of our subscribers come from organic systems. That means we're growing above market growth because of that offer that we have because we convert and we have all our subscribers, 83% of our base, the majority of those organic subscribers already has access to fiber, brand-new CPEs, better quality of the video that we have there and better offer. So that's what we see that we will continue to grow in the markets to come. You can expect 2026 and 2027 to continue to provide for Megacable growth between 100,000 to 150,000 subscribers per quarter. Operator: The next question comes from Phani Kumar from HSBC. Phani Kumar Kanumuri: So the first one is regarding the comment that you made earlier, saying that if you exclude the special projects, your CapEx margin is in mid-teens. So I wanted to understand like what are you excluding from this? Is it just the expansion project and the migration products that you have? The second question is how was this CapEx, the maintenance CapEx, let's say, 3 years ago, has it come down from like 20% to mid-teens? Or is it -- how is the trend evolving? And what is driving that trend? Raymundo Pendones: I'm sorry, this was [indiscernible], it was productized in my opinion. Luis Zetter Zermeno: Phani -- a little bit. Can you rephrase the first question, please? Phani Kumar Kanumuri: The first question is, you said that you are excluding some special projects. So what are the special projects that you have? Is it just a recognition or does it also include the customer premise equipment? Luis Zetter Zermeno: So what we consider special projects are both the expansion and the GPON evolution CapEx projects per se. There are other small investments that come along with that -- those strategies. But basically, those are the 2 special projects that we mentioned. Raymundo Pendones: The expansion project like Luis was saying, we announced that at the end of 2021, we start getting subscriber at the mid of 2022. We're very happy that we already doubled the infrastructure of the company, getting more than 9 million home pass in addition, put us in a very similar position to that of the competition as a strength company and growing subscribers on that. We are very well in terms of how we're increasing those subscribers, and that's reflect on the growth of revenue. And that means that in the future, we will slow down kilometers and homes to be activated in the expansion territories and that's for sure. The other project that we have, which is the GPON Evolution we call it, that's evolving from HFC to GPON to fiber, all our existing territories. We're very successful also. As I said, totally, we already have 83% of the company is already on fiber. So for the years to come, the evolution from HFC to fiber, it will be smaller. So what Luis is saying, our 2 main projects -- special projects are decreasing in CapEx intensity expenditures, okay? This company will never stop investing in CapEx, that's for sure because we're a technology company. But the levels that we expect after we finish those special projects and that's around 2028 will be levels between the 15% to 28% CapEx over revenue. Enrique Robles: But in the meantime, it will be declining from the current 25%, 26% to the lower very low 20s, and we will get to below 20s when we finish -- when we finish those 2 special products. Luis Zetter Zermeno: And to your second question, the maintenance CapEx has reduced, yes, because it's easier or cheaper to maintain network on the GPON side of the house compared to the HFC previous network. Phani Kumar Kanumuri: Is there any quantity measure? Is there any quantification of what's the decrease that happened, let's say, over the last 3 years? Luis Zetter Zermeno: Well, it was a little bit above 20%, and now it's on the high teens or mid-teens. So that's basically on the maintenance CapEx. Operator: Next question comes from Andres Coello from Scotiabank. Andres Coello: Two quick questions, please. The first one is on the competitive environment. I think Televisa just confirmed that they will invest $600 million this year. I think that's 20% more than what you are planning to invest, around $500 million. So I'm wondering if you are noticing any change in behavior from Televisa, if you think that Televisa can become a little bit more defensive in the territories that you just entered. That's my first question. And whether this can, in any way, affect your CapEx guidance to have Televisa investing more than you. And my second question is on the recent natural events in Veracruz and other states. I'm just wondering if there was -- if you're expecting any nonrecurring impact in the fourth quarter, perhaps in terms of revenues and also in terms of infrastructure. Raymundo Pendones: Yes, Andres, thank you for the questions. Regarding the competitive environment, Televisa is investing more than us because we already invest what we have to invest. We have been investing in fiber before they did hit on that part. We have a good offer, a good product and good price and we don't see why we are going to slow down our CapEx and our growth in subscriber. Regarding Veracruz, we were affected and hit in some of our markets. One of those markets being Costa Rica. We already have all the system back and working and on and working with our subscribers. And what we can say is that we're working in a normal condition. Operator: The next question comes from the line of Emilio Fuentes from [ GBM ]. Emilio Fuentes: I was wondering if you could give us some outlook on how your dividend will evolve going forward, especially given how you've been able to pay around 20% of your EBITDA. Now that you -- the company will go into a less intensive investment phase and the more cash generating phase, should we expect this to go up? Enrique Robles: Well, we haven't made any decisions yet. Obviously, it will depend on the future, how we see the industry and opportunities going forward, but if we do not have anything better to put our money in. Obviously, we could always raise our dividends. We don't see why not, but it's too early to call that. Operator: The next questions come from Ernesto Gonzalez from Morgan Stanley. Ernesto Gonzalez: Look, I know it's early to discuss 2026. But given the high levels of penetration in the Broadband market in Mexico, is it reasonable to assume that you can maintain the current level of growth for next year? And the second question is, can you also discuss the main drivers of why your subscribers churn? Is it because they get better prices elsewhere because they're looking for a better network or any general commentary in churn is appreciated. Raymundo Pendones: Thank you, Ernesto. Yes, as we mentioned, we don't see why we should slow our growth. We forecast the same growth that we have between 100 to 150 per quarter. That's what we're looking for 2026. And that's based in the offer and also because the market at 81% penetration still have room to grow on that part. Regarding the churn, what we see is that a slight amount of our churn goes to competition. But as I said, this slide, what we see is that every churn that we have is economically, that's the main reason that they can afford to pay. And as I said at the beginning of the third quarter, we had an increase in rates that put pressure on the churn. That's the reason of the increase in churn. Operator: The next question comes from Lucca Brendim from Bank of America. Lucca Brendim: I have only one here from my side. Can you give us an outlook on the corporate segment. It has slowed down this year, but how can you -- we think about it going forward, especially for 2026, 2027, how much do you think that this segment can grow. Raymundo Pendones: Yes, it's a good question. Look, as I said, the corporate segment has a slowdown, it's a soft result that -- what we have. And that's due to -- 2 main factors. One is the market. The market has decreased the price of fiber and the price of connectivity. And the other one is that we changed the way that we sell our infrastructure product before we used to sell a lot of that infrastructure on a cash basis. And now we changed that into more products that has serviced over a long period of time, bringing a more recurring into the future, more profitable instead of just selling hardware in that part that we don't like that part. So we make a shift in the strategy of the corporate segment that affect us slightly in the short term, but that sure will bring better results in the future. Something that I want to say is that the corporate -- even for the corporate segment has a 5% decline year-over-year. We did not see a decline in the EBITDA of that segment. That means we have a much more better margin with our strategy, recoveries of the decrease in the revenue that we have. So that's part of our strategy. We are very happy of that part. We integrate our 3 companies into MCM business, Tech-Co and that shift is sure it's going to pay off in 2026. Operator: The next question comes from Alex Azar from GBM. Alejandro Azar Wabi: I just wanted to pick your brains on what's next. Several questions from my colleagues being on capital allocation, fully penetrated market. So what's on your mind when you see Mexico fully penetrated in terms of cable perhaps '27, '28. How should we think about Megacable in the next 5, 10 years? Are you guys going to grow more aggressively in -- as an MVNO or perhaps the corporate networks. Just wanted to understand how you're viewing the company very long term. Enrique Robles: Thank you, Alex. Obviously, in the telecom industry, there is very many opportunities in the future, like as you mentioned, mobile with MVNO. In the corporate market, we have a great, great opportunity. In the digitalization of the country, obviously, also in education and telemedicine and all that and with the AI accelerating, growing -- the growth of the AI and all the applications that will come with that. Obviously, there is a big -- very big opportunities in the future for the telecom industry to sell -- to upsell services and applications for the Mexican homes and for the business community. Also in the education and medicine industries and services are really big -- it's going to open very big opportunities. We still have a lot to do in digitalization, and this government is putting a big emphasis in that. We have to digitalize the country banking and everything. I think that the market is there. Obviously, it will decelerate in some segments like the connectivity of homes, but we will get to saturation point at times -- some certain time, but there are a lot more things to do. And also, we -- I mean we don't know what new things are coming with AI and the new technologies. For sure, we will find something to do. Raymundo Pendones: That's the remark. At the end, this is a MXN 64 million question, what are you going to do? We're really, really, really focused, Alex, in what we announced at the end of 2021 in that part, those main 2 projects as we like to say, the GPON evolution that brings us that strength in the network and in the product for the future to come and expanding and being effective in both. That's where we're focused on the management right now on that part. But for sure, we're not going to stay on that part. CapEx will decrease. Free cash flow will increase. Revenues will continue to come. EBITDA will continue to come. And the same question that you have, it will be good to know in a year or 2, what we are going to do. But for sure, we're going to continue to be part as Enrique said, on a market that will continue to move from connectivity to IT solutions and value-added services, both in the corporate segment and the residential and maybe other technologies, too. Luis Zetter Zermeno: And we will have the balance sheet to support any endeavor that we will be searching. Raymundo Pendones: We won't be steady, that's for sure. Alejandro Azar Wabi: If I may add, if I may have a follow-up, and thank you for the color. But the market has been really hot in terms of AI, data centers. If I'm not mistaken, you have some data centers. So how are you thinking on these assets? Are you seeing them as core assets? Or would you be thinking of divesting like Axtel bid that under different circumstances. But how are you seeing your data centers? Are you -- are those core assets or you can divest them? Or how you think on those? Enrique Robles: Well, the data center is an asset that would be able to test the waters there. I think that's going to be really big players in that specialized in data centers. Ours is a very good asset that we have. But I don't think we will be growing in those kind of data centers. We will be more focused in edge data set. We already have built over 300 of those all across the country. Raymundo Pendones: And also, like Enrique telling you and your straight question, it is not core. What we have on those both in our main data centers, centralized data center and the edge, we have Megacable infrastructure. Those facilities are built mainly as an anchor for Megacable and an office space and kilowatts for other people to be here. We don't have the mind in investment in fixed data center assets. We want to have a solid core network, both in the long haul and the last mile, the best fiber company in terms of products and services and put applications on top of that. The other ones, the main anchor for the data center is Megacable. It has a great asset for somebody else in the future because it's located in the western part of Mexico. There is no other asset like that in this area. The hyperscalers and the content and the streamers will have to come after going to Greater Mexico, will have to come to different parts of Mexico, one of those being Guadalajara, and that's where we have it. And that's the mind that we have for that part. Our infrastructure is for Megacable use. We don't know whether to maximize that in the future. We will explore that when we finish having our mind in bringing the growth of subscribers increase in margin, the decrease in EBIT -- in CapEx and all the KPIs that we're telling you we're focused on that point. Operator: We have one question through the chat is coming from [ Patrick Brook ] from DS Advisers. There have been reports that AT&T is looking to sell its mobile business in Mexico. Is that something Megacable will be interested and consider buying? Enrique Robles: Not currently, we are pretty much focused in our main projects, which is finishing our expansion plan. And we don't want to go into -- I mean, we're going into a cash positive cycle, and we don't want to reverse that, not currently. We are focused in our main projects. Thank you very much. Operator: Okay. That was the last question. With no questions in the queue. This session is concluded. I pass the call over to Mr. Enrique Yamuni for final remarks. Enrique Robles: Okay. Thank you very much, Saul. As always, it is a pleasure to discuss our results with you. Please contact our Investor Relations department if you have any questions or concerns regarding the company. Have a very wonderful day and a great weekend. Luis Zetter Zermeno: Thank you, everybody.