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Preben Ørbeck: Good morning, and welcome to Aker Solutions presentation of our third quarter results. My name is Preben Ørbeck, and I'm the Head of Investor Relations. As usual, I'm joined by our CEO, Kjetel Digre; and our CFO, Idar Eikrem, who will take you through the main developments of the quarter. After the presentation, we have time for questions. Those of you who are following the webcast can submit your questions via the online platform. And with that, I leave the floor to Kjetel Digre. Kjetel Digre: Thank you, Preben, and welcome to everyone tuning in. As always, let me start the presentation with the main messages for today. First and foremost, I'm pleased to report that we continue to deliver solid financial results in a period of high activity. Our third quarter revenues were NOK 17 billion, which is an increase of almost 30% from the same period last year. And we delivered an EBITDA margin of 8.8% in the quarter or 7.2% if we exclude net income from SLB OneSubsea. In Aker Solutions, our core focus is to deliver predictable project execution. And during the quarter, I'm pleased to report that we met all key milestones on the Aker BP portfolio and celebrated the official opening of the record-breaking Ormen Lange Phase 3 project at Nyhamna. And speaking of high activity. Based on our secured backlog, we now expect revenues for the full year of 2025 to exceed NOK 60 billion. To put this into perspective, this represents more than 3x our revenues in 2020 and 2021 when excluding the Subsea division. However, as we mentioned in our second quarter presentation, we expect activity levels to come down in 2026. Market conditions are changing, and we need to adapt. But fortunately, that is how we have always operated. First of all, we have a scalable business model that is designed to respond to cycles. We are also improving efficiency throughout our organization and in our projects, implementing new digital solutions and robotics to reduce cost and time to first energy. I'll talk more about this later. But first, I will take you through some of the operational highlights of the quarter. Let me start again with the Aker BP portfolio. I'm encouraged to report that the projects are progressing according to plan. As you saw from the introduction video, several important milestones were met during the third quarter. Let's start with 3 highlights from the Hugin A project. In July, we celebrated the sail away of the massive 22,000-tonne jacket substructure from our yard in Verdal. The jacket was later successfully installed at the Yggdrasil area in the North Sea. And at Egersund, the utility model was successfully loaded out and transported to Stord for final assembly. And in late September, another critical milestone was met when this wellbay module arrived at Stord from our partner yard in Dubai. Progress was also good on the Valhall PWP and the smaller Hugin B and Fenris projects in the period. In addition, our Life Cycle segment is actively engaged in modifying existing infrastructure on the Valhall central complex and on the Skarv FPSO. Across the Aker BP portfolio, I continue to be impressed by how teams across Aker Solutions and the alliance partners are working together to deliver these complex projects. Some projects are also leaving our yards to start the offshore installation and commissioning phases. One example is the Jackdaw project, where the topside was successfully loaded out from Verdal and installed offshore in the U.K. This is a so-called not permanently attended installation, enabling lower manning and cost-efficient production from the gas reservoir. Moving over to Ormen Lange. In August, we celebrated the official opening of the Ormen Lange Phase 3 project together with SLB OneSubsea, Subsea 7 and Shell. Aker Solutions has been responsible for the integration of the subsea compression system with the Nyhamna onshore gas plant. This includes the delivery of a 500-tonne module providing power, cooling, heating and ventilation for the offshore project. SLB OneSubsea has been responsible for the subsea compression system, which enables increased recovery from the Shell-operated Ormen Lange field. I think it's worth mentioning that the project has set a few records when it comes to subsea work. One is for the deepest installation of a subsea compression system in water depths of more than 900 meters. It also set a new record for the longest subsea step-out, delivering gas to the Nyhamna plant more than 120 kilometers away. We are also working together with SLB OneSubsea and Subsea 7 on the Jansz subsea compression project for Chevron in the Western Australia. Aker Solutions is responsible for the delivery of about 30 modules to what will become part of the world's largest subsea compression system, weighing approximately 6,500 tonnes. Deliveries of modules from our Egersund started in early October this year with the final transport to the field planned in the fall of 2026. Next, I wanted to highlight our progress on what we have called the second-generation renewables projects. These are projects we have taken on with balanced risk reward profiles and joint focus on standardization to drive down project costs. On Norfolk , we are progressing as planned on the 2 HVDC platforms executed in our joint venture with our partner, Drydocks World, seeing significant benefits in copying effects from the first to the second topside. We have also started work on the jackets for these platforms, taking advantage of our state-of-the-art robotic production line at Verdal. Lastly, I wanted to touch upon our hydropower business. Personally, I'm very happy to see that hydropower, which is a growing market, is back as a key offering to our energy clients. I don't know of many companies that can brag about having 150 years experience in this market, but we do. From our state-of-the-art facilities at Tranby, featuring Europe's largest mill-turn machine, we are supporting hydropower's new role in the energy mix, providing flexible and reliable power when society needs it. One example is the Svean project for Statkraft, where Aker Solutions is delivering all electromechanical equipment. This delivery is key to modernizing the Svean plant with a target of providing 10% more electricity through higher efficiency using the same resources. All in all, I'm pleased to see that we continue to deliver predictable project execution across our portfolio, and I would like to recognize the contribution of our 12,000 employees as well as the thousands of subcontractors and hirings who make this possible through their expertise, dedication and teamwork. Next, I will talk about our tender pipeline and market outlook. At the end of the third quarter, our active tender pipeline stood at about NOK 75 billion. This was a slight reduction from the second quarter, mainly driven by the announced cancellation of Equinor's electrification projects in Norway. In the current environment, the market conditions are getting tougher, especially for new investments within renewables and transitional energy solutions. A key part of our response is to work closely with both developers and our delivery partners to mature commercially viable projects. This relates both to the adoption of new tools and technologies such as AI and robotics, but also how we work together to come up with innovative concepts and designs that enhance efficiency, reduce costs and reduce delivery times. This joint improvement agenda is also highly relevant within oil and gas, where we are currently in the process of renegotiating several important long-term frame agreements for maintenance and modification services. And we're also working with clients to mature several greenfield oil and gas opportunities with the aim of turning them into future projects. So to summarize, the last 5 years have been a remarkable growth and transition journey for Aker Solutions. And I'm very proud of the fact that we continue to deliver solid financial results with such a high workload across our locations. This is a true testament to the capabilities of our 12,000 employees and the culture that we have developed together. At the same time, we recognize that the market is changing around us and that our activity levels will go down in 2026. That said, adapting to change is not something new in Aker Solutions' 180-year history. As mentioned, we have a scalable business model, enabling us to ramp up and down activity. Furthermore, we are working closely with our clients to mature new opportunities, both in traditional oil and gas and within renewables and transitional energy solutions. And finally, our financial position remains robust. This gives us a strong foundation to continue developing the company and generate solid returns for our shareholders over time. And now I will pass the word to Idar, who will go over the numbers in more detail. Idar Eikrem;Executive VP & CFO of Kværner ASA: Thank you, Kjetel. I will now take you through key financial highlights for the third quarter, our segment performance and run through our financial guidance. As always, all numbers mentioned are in Norwegian kroner, unless otherwise stated. So let me start with the income statement. The third quarter revenue was NOK 17 billion, up 29% from the same period last year. The underlying EBITDA was NOK 1.5 billion with a margin of 8.8%. If we exclude the net income from OneSubsea, our underlying margin was 7.2%, in line with our guidance for the full year. The underlying EBIT was NOK 1.1 billion with a margin of 6.6%. And the underlying net income was NOK 863 million, representing an earnings per share of NOK 1.79 in the quarter. Now let's take a look at the cash flow. Our financial position remains robust with a net cash position that increased to NOK 2.5 billion in the quarter. Operational cash flow in the period was around NOK 400 million. This was mainly driven by EBITDA contribution from our operating segments as well as reversal of working capital of about NOK 550 million. CapEx in the period was NOK 94 million, representing about 0.6% of revenues in the quarter. And lastly, the quarterly dividends received from our 20% stake in SLB OneSubsea was NOK 142 million. Now let's take a closer look at our segments. For Renewables and Field Development, the third quarter revenue increased to NOK 12.5 billion, representing a year-on-year growth of 36%. The underlying EBITDA in the quarter was around NOK 1 billion with a margin of 8%. The legacy lump sum project continued to be a drag on the margins in the period. However, I would also like to mention that margins on the second-generation renewable projects are healthy. The order intake in the period was NOK 7.1 billion, leading to a secured backlog of NOK 41 billion at the end of the quarter. Based on the secured revenues and backlog, we now expect the revenues in this segment to be around NOK 45 billion for the full year of 2025, representing a growth of about 20% from 2024. For the Life Cycle segment, the third quarter revenue came in at NOK 3.8 billion. This is a 10% increase from the same period last year. The underlying EBITDA was NOK 275 million with a margin of 7.2%. Order intake was NOK 2.6 billion or 0.7x book-to-bill. The backlog was NOK 19.1 billion, dominated by long-term frame agreements and reimbursable modification project with long-term customers. Based on the secured backlog and market activity, we expect revenue in Life Cycle to be around NOK 15 billion for the full year of 2025, representing a growth of about 15% from 2024. Moving to our financial performance of the SLB OneSubsea here shown as 100% basis translated into Norwegian kroners. You will also see that we have added some more detailed financial information about SLB OneSubsea in the appendix to this presentation. In the third quarter, OneSubsea reported revenue revenues of NOK 9.9 billion. For the first 3 quarters of 2025, revenues for the company were about NOK 30 billion. The EBITDA in the quarter was about NOK 1.8 billion with a margin of 18.4%. The margin in this quarter was negatively affected by change in revenue mix and one-off cost on our legacy project. Underlying execution, however, remains strong. So far in 2025, the company has delivered an EBITDA margin of 20%. Net income for the entity was around NOK 1.1 billion before PPA adjustments. After this adjustment, Aker Solutions recognized NOK 295 million for our 20% share. I should mention that these figures include a NOK 95 million catch-up effect from our second quarter reporting as actual performance was better than forecasted. In the first 3 quarters of 2025, Aker Solutions has recognized about NOK 670 million in net income from OneSubsea into our financial figures. The backlog for the company was NOK 47.3 billion at the end of the quarter. Order intake in the period was about NOK 11.5 billion or 1.2x book-to-bill. This includes the award of a 12-well all-electric subsea production system for the Fram Sør field for Equinor. The company expects order intake to increase towards the latter part of the year, positioning the company for growth in 2027 and onwards. As you can see, SLB OneSubsea is an important contributor to Aker Solutions' financial performance and value creation. Since the closing of the merger, SLB OneSubsea has built up a solid net cash position of about $440 million. The company has an attractive dividend policy with a target to distribute about $280 million to its shareholders in 2025. For Aker Solutions, this represents a dividend of -- at current exchange rate of between NOK 550 million and NOK 600 million this year. Now to sum up. In the third quarter, we continue to deliver solid financial and operational performance. As we have said before, the legacy lump sum projects have been both operational and commercially challenging. Commercial discussions are still ongoing with both clients and subcontractors to solve these commercial challenges. Based on our secured backlog and market activity, 2025 revenues is now expected to exceed NOK 60 billion with an EBITDA margin in the range of 7% to 7.5%. As mentioned, at this early stage, we expect activity levels to come down in 2026 with revenue forecasted to be around NOK 45 billion. SLB OneSubsea is an important contributor to the financial performance of Aker Solutions. The company has built up a solid net cash position and is on track to distribute about $280 million to its shareholders in 2025. At current exchange rate, this implies a dividend to Aker Solutions of about NOK 550 million to NOK 600 million this year. CapEx for 2025 is estimated to be around 1% of revenue. And lastly, working capital is expected to normalize to between negative NOK 4 billion and negative NOK 6 billion over time. That was the end of our presentation. So thank you for listening. In a few moments, we will open up for questions. Preben Ørbeck: Okay. The first question comes from Erik Fosså in SpareBank 1 Markets. Can you talk about the disappointing AR7 budget and how it affects your business, particularly looking at the Vanguard East and the Vanguard West projects? Kjetel Digre: Yes. First of all, a comment on U.K. If you look at the regions where we are involved and energy transition efforts and renewables, one of the places that are really both predictable and forward-leaning with ambitions is U.K. So that's one comment. I think this will develop and offshore wind is going to be a key to U.K. going forward. And then to this specific question. In Norway, we have our relation with our client RWE. And in those projects that I mentioned, the Norfolk, Vanguard East and West, we have milestones to reach and the projects are progressing very well as seen in the video here. The things are puzzling together in a predictable way. And we will just continue to deliver that in good sort of coordinated fashion together with our clients. So no big issues there, and we are pushing on. On the OneSubsea... Preben Ørbeck: And there is a follow-up from Erik Fosså on if you can give some indication on what to expect in SLB OneSubsea in 2026? Kjetel Digre: Just to start off just with the OneSubsea part of it, we are closely coordinated, obviously, through our ownership there. And what we see in different regions, for instance, in the NCS is that the subsea is a solid and healthy brick in the puzzle for energy projects. And for instance, the Norwegian continental shelf is going into an area where lifetime extensions, subsea tiebacks and also bigger greenfield subsea projects and also more complex technology elements like the compression project that is going to be stable/increase. And so that's what we see in our OneSubsea sphere. Idar Eikrem;Executive VP & CFO of Kværner ASA: Yes. Just to add to this, you will also see in this quarter that we have provided some additional information of the historical performance of OneSubsea since the establishment. So that should help you. And with the combination of market information, you should be able to sort of make some assessment of what the 2026 could bring. Preben Ørbeck: Moving on to a question from Lukas Daul in Arctic. What are the main factors that can impact your preliminary 2026 guidance? Idar Eikrem;Executive VP & CFO of Kværner ASA: Yes, our preliminary guidance for '26, as you can see, we have came out with the top line guidance and that we have put NOK 45 billion in top line, which is a reduction from current level of NOK 60 billion plus and that was expected due to the high activity level that we are currently doing. Preben Ørbeck: Moving on then to a few questions from [indiscernible]. I can start with the first, Aker BP has increased the CapEx guidance on the key development projects. How does this affect Aker Solutions as an alliance partner? Kjetel Digre: Well, first of all, I guess, information about projects and the status is something that we really get from Aker BP. Our part of it is that we are engaged as an alliance partner in big projects, many of them in different parts of the asset setup of Aker BP and the projects are on track, both when it comes to progress, when it comes to quality, safety and also the sort of the main prognosis of reaching the start-ups as planned. CapEx is then always a combination of potential new scope, which we know is part of some of these projects and then also how we, along the way, are taking actions to make sure that we are delivering within Aker BP's sort of frames and budgets. So -- and as an alliance partner, we are in a peak activity and many of us, including myself, are spending a large and a major portion of our time actually to safeguard these projects in a good sort of collaborative way in these alliances. Preben Ørbeck: Next question from [ Neil ] when do you expect the conclusion of the multiyear life cycle frame agreements that are currently on tender? Kjetel Digre: Yes. I would say it's quite a sort of a special timing now because many of them, almost all of them has been up for renewal. And I think without sort of commenting this firstly, what is really a great opportunity is that all our clients on these contracts are inviting for a common improvement push, and that's what we are right in the middle of now. And then these things will then -- it's back to the clients sort of decisions to when they are ready, but it will be in the months to come that these things will be clarified both in Norway, but also in, for instance, Canada. Anything to add, Idar? Idar Eikrem;Executive VP & CFO of Kværner ASA: No. Preben Ørbeck: The third question from [ Neil ] did you make any loss provisions related to the legacy projects in the third quarter? Idar Eikrem;Executive VP & CFO of Kværner ASA: Yes, that also cover another question that we have got on this provision line that you can see in the balance sheet, there is a reduction of NOK 100 million roughly from second quarter to third quarter. In that provision line, you will have 3 elements. One is onerous contracts, loss-making contracts, which is going down in the provision. And then you have a warranty provision on ongoing project, and those have increased during the quarter of natural reason of progress. And the last element that goes into that line is all other provisions that we have in addition to the 2 first ones. Preben Ørbeck: Thank you. Next question from [ Neil Agnus ] whether it's sustainable with a CapEx of only 1% in Aker Solutions? Kjetel Digre: Perhaps I can start just on referring back to the activity package. That's what we are right in the middle of now to deliver on. And when launched, pointing at all these oil and gas opportunities that we are now realizing, it came with an expectation and pointing at opportunities to both sort of modernizing the industry engaged in oil and gas and then also gradually make sure that we are ready to take on tasks and responsibilities in the new energy verticals. So that's what's been happening now for 3 to 4 years. We have been investing billions in our yards to upgrade to be more efficient, to be safer, and we also invested in the competence of our people. And all in all, this was necessary to be able to push through the activity level that we're actually engaged in just now. Historically, Idar, perhaps you can comment. Idar Eikrem;Executive VP & CFO of Kværner ASA: Yes. No, it's correct what you are saying. And now we are in a phase where we actually are capitalizing on the investment that we have done over the last few years. We have enlarged our capacity quite significantly. And revenues for next year is forecasted to be NOK 45 billion and 1% is sort of the CapEx guidance for that year due to the -- we can capitalize on the investment that we have done. Any sort of CapEx over and above that needs to be sort of separate business cases that would be good for us and shareholders to do, and then we will announce that separately as a special case. Preben Ørbeck: Excellent. That seems to be -- there seem to be no further questions from the audience. So with that, thank you all for listening in and from everyone here. Goodbye.
Christopher David O'Reilly: [Interpreted] Thank you very much for taking time out of your very busy schedule to join Takeda's FY '25 Q2 earnings announcement. I'm the MC today, Head of IR. My name is O'Reilly. Thank you for this opportunity. [Operator Instructions] Before starting, I'd like to remind everyone that we'll be discussing forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those discussed today. The factors that could cause our actual results to differ materially are discussed in our most recent Form 20-F and in our other SEC filings. Please also refer to the important notice on Page 2 of the presentation regarding forward-looking statements on our non-IFRS financial measures, which will also be discussed during this call. Definitions of our non-IFRS measures and reconciliations with the comparable IFRS financial measures are included in the appendix to the presentation. Now we would like to start with the presentation of the day. We have Christophe Weber, President and CEO; Milano Furuta, Chief Financial Officer; Andy Plump, President, R&D; Teresa Bitetti, President, Global Oncology Business Unit; P.K. Morrow, Head of Oncology Therapeutic Area Unit, will provide you with presentation, which will be followed by a Q&A session. We will get started now. Christophe Weber: Thank you, Chris, and thank you, everyone, for joining us today. Our fiscal year 2025 first half results confirm our expected business dynamic for fiscal year 2025 with business fundamentals tracking as planned. This is the last year of very significant VYVANSE generic impact, which peaked in H1 and which will be much less of a headwind to our growth from now on. Growth on launch product grew 5.3% at constant exchange rate, and we expect this growth to accelerate in H2. ENTYVIO is growing, albeit at a slower pace as the pen is growing 20% quarter-to-quarter in the U.S., but still represent only 9% of ENTYVIO volume in the U.S. Our PDT business is expected to grow at mid-single digit this year with immunoglobulin and albumin growing high single digit. We will continue to maintain very tight OpEx control through efficiency improvement supporting profit. Our decision to update full year management guidance for core operating profit and core EPS was driven by a headwind from transactional foreign exchange, mostly generated by the euro appreciation, which has most notably affected QDENGA. Our updated reported forecast, including our EPS forecast reflect a nontax deductible impairment loss booked in the first half. From fiscal year 2026 onwards, Takeda will be in a new business cycle with VYVANSE generic impact mainly behind us, potentially three new product launch for rusfertide, oveporexton and zasocitinib and an evolving late-stage pipeline now enriched by our strategic partnership with Innovent Biologics. Our leadership in leveraging technology and AI will further transform the company, which will be led by Julie. Milano will discuss our financial results and expected results in more detail in a moment, and then Andy will present our pipeline advancement with exciting data on zasocitinib. Later on this call, Teresa Bitetti and P.K. Morrow will discuss our partnership with Innovent Biologics and we'll focus on two new late-stage molecules. With that, I'll hand it over to Milano to walk us through the financials. Milano? Milano Furuta: Thank you, Christophe, and hello, everyone. This is Milano Furuta speaking. Slide 7 summarizes our first half financial results. Overall, our business performance is tracking as we planned. As anticipated, this period was significantly impacted by LOE, as we lost approximately JPY 100 billion of VYVANSE revenue. Meanwhile, we have been focused on driving OpEx savings, which has partially offset the impact to corporate profit. We expect H1 to be the peak of VYVANSE generic impact, and we expect a better growth outlook for the full year. Revenue in H1 was just over JPY 2.2 trillion, a decrease of 6.9% or minus 3.9% at constant exchange rates or CER. Core operating profit, core OP, was JPY 639.2 billion, a year-on-year decrease of 11.2% at actual FX or 8.8% at CER. Reported operating profit was JPY 253.6 billion, a decline of 27.7% due to larger impairment losses this fiscal year. Core EPS was JPY 279 and reported EPS was JPY 72. The 40% decline in the reported net profit and EPS reflects the impairment of cell therapy, which is nondeductible from taxable income. Cash flow was very strong this period with adjusted free cash flow of JPY 525.4 billion, including improvements in working capital. Slide 8 shows our growth and launch products, which represent over 50% of revenue. In H1, this portfolio grew 5.3% at CER. This modest growth includes the impact of phasing of certain products, and we anticipate a higher growth rate in the second half. In GI, ENTYVIO growth was 5.1% at CER. We are encouraged to see increasing numbers of active ENTYVIO Pen patients in the U.S., and we are also making progress with expanding formulary access. That said, revenue growth has been slightly below our expectation, and we are revising our full year forecast for ENTYVIO to 6% at CER. In rare disease, TAKHZYRO continues to grow steadily as a market leader in HAE prophylaxis with 5.9% growth at CER. Our PDT portfolio growth reflects several factors, which were built into our guidance and fully in line with expectation. IG growth was 3.1%. While Medicare Part D redesign is impacting several products in the U.S. this year, one of the most impacted product is GAMMAGARD LIQUID, and we expect this to normalize in Q4. Our SCIG portfolio is growing at double digits, and we expect this to continue. Albumin declined slightly in H1 due to timing of shipments to China and the foreseen cost containment measures. Meanwhile, we have also secured additional sustainable tender markets outside of China, and we expect albumin performance to accelerate in H2. Therefore, we confirm the growth outlook of high single digit for both IG and albumin. In oncology, FRUZAQLA continues to expand as we roll out global launches. Finally, in vaccines, we have reallocated supply of QDENGA based on market needs, which has pushed some shipments timing into later this fiscal year. However, we expect annual demand to remain in line with our original estimate. Another factor impacting the growth rate of QDENGA is transactional FX, mainly due to the strength of the euro versus the Brazilian real. On Slide 9, you can see how the growth on launch products and the VYVANSE loss of exclusivity contributed to total revenue performance. FX was also a headwind this quarter due to appreciation of the Japanese yen against major currencies. As we expect growth and launch products to deliver higher growth in H2 and VYVANSE year-on-year decline to moderate, we project more favorable year-on-year growth dynamics in H2. Next, an update on efficiency program that we initiated in April 2024. We continue to make progress with initiatives in H1 this year, including additional organizational changes impacting 600 positions, further optimization of real estate and the growth initiatives to capture efficiencies across the R&D value chain. Restructuring costs in H1 were JPY 27.4 billion, and we are focused on further driving additional OpEx savings. As we show on Slide 11, these operational efficiencies are contributing to a reduction in R&D and SG&A expenses. In this bridge for core operating profit, you can see that LOE of high-margin VYVANSE was the main reason for the year-on-year decline of 8.8% at CER. Within this decline at CER, we had a negative impact from transactional FX, which accounts for about 1/3 of the decline. Let me take a moment to explain how this is impacting our P&L. Revenue can be impacted when there is an FX fluctuation between the currency paid for product and the currency of the entity where revenue is booked. This is exactly what is impacting QDENGA sales today, for example, because our European entity books revenue in Europe for its sales to Brazil in Brazilian real. Cost of goods can be impacted, too, when products are imported from other countries. For example, when the euro appreciates, commercial entities outside Europe have to recognize higher COGS when importing products to sell locally. As you know, Takeda has a large manufacturing footprint in Europe, so we are particularly sensitive to euro currency volatility. Next, reported operating profit on Slide 12. This decreased by 27.7% versus prior year, mainly due to the decline in core operating profit and higher impairment of intangible assets. The main item was a JPY 58.2 billion expense related to our recent decision to discontinue cell therapy efforts. Next, our updated full year outlook on Slide 13. Starting with management guidance, although we have reduced our forecast for ENTYVIO and VYVANSE, we expect total revenue to stay in the range of the broadly flat versus prior year. For profit guidance, we expect higher OpEx savings to fully mitigate the impact from unfavorable change in product mix. However, the transactional FX dynamic that I just described is having a larger impact on profits. Therefore, we are slightly lowering our guidance for core operating profit and core EPS from broadly flat to low single-digit percentage decline. The bottom part of the slide shows our reported and core forecast. This reflects our latest FX assumptions, including transactional FX and items booked in H1 that will impact the full year results. We have also revised our adjusted free cash flow forecast to include a USD 1.2 billion payment to Innovent Biologics for our recently announced in-licensing deal. This payment will be funded by cash on hand. Our dividend outlook remains JPY 200 per share for the full year. On Slide 14, we show more details about the updated operating profit forecast. You can see the relative magnitude of transactional FX impact, while OpEx savings compensate for unfavorable product mix. The net impact of all these moving parts, including transactional FX, is a JPY 10 billion reduction in our operating profit forecast to JPY 1.13 trillion. In summary, our business fundamentals are tracking as planned. While H1 growth was largely impacted by LOE, we expect better growth rates for the full year fiscal year. Meanwhile, we remain focused on cost discipline to deliver our guidance, while investing for future growth. Thank you for your attention. I will now hand over to Andy for more details on the pipeline updates. Andrew Plump: Thank you very much, Milano, and hello to everyone on today's call. Next slide, please. Fiscal year 2025, as you just heard from Christophe, is a pivotal year as we advance and accelerate our exciting high-value late-stage pipeline to launch. Today, I am pleased to provide pipeline updates reflecting our growing late-stage portfolio of promising programs powered by our increasingly productive and efficient development engine. We are 2 for 2 with positive Phase III studies for both rusfertide and oveporexton with zasocitinib Phase III data in psoriasis expected by the end of this calendar year. In a few minutes, Teresa Bitetti and P.K. Morrow will walk you through the details of our recently announced partnership with Innovent Biologics, which upon closing, will expand our oncology pipeline. With 2 highly differentiated late-stage oncology assets in development for multiple solid tumors, this deal has the potential to transform our oncology pipeline. But first, I'm going to highlight some recently presented Phase III data for oveporexton and long-term IgA nephropathy data for mezagitamab that we are particularly excited about. The results of these studies truly represent Takeda's high bar for innovation and the breakthrough benefits we seek to provide patients. Let's start with oveporexton on the next slide. Oveporexton is on track to be the first-in-class and potentially best-in-class orexin 2 receptor agonist that treats the underlying orexin deficiency in patients with narcolepsy type 1. We believe that the data presented at the World Sleep Congress last month establishes a new standard of care for NT1. In one of the largest, most comprehensive Phase III development programs for NT1 to date, we demonstrated statistically significant and clinically meaningful improvement across all 14 primary and secondary endpoints with most participants within normative ranges. It is clear that oveporexton has a profound effect on daytime symptoms like excessive daytime sleepiness and cataplexy, nighttime symptoms and cognitive symptoms. In addition, it significantly impacts how patients with NT1 feel and function. We believe we have created a new standard of care to treat NT1 by treating the entire range of symptoms with a safe, well-tolerated pill. Oveporexton sets a high bar with the new standard of care, which will be hard to beat. Feel and function were assessed using multiple objective and subjective measures. Based on these strong Phase III data, we plan to file for U.S. approval in NT1 as quickly as possible later this year with regional filings to occur simultaneously or shortly thereafter. Our orexin franchise is making rapid progress beyond oveporexton. The next-generation orexin 2 receptor agonist, TAK-360, is rapidly enrolling Phase II studies for narcolepsy type 2 and idiopathic hypersomnia. Results for these trials are expected to be read out by early fiscal year 2026. Next slide, please. We previously presented compelling 48-week proof-of-concept data for our anti-CD38 antibody, mezagitamab, in IgA nephropathy. This includes consistent and supportive trends in decreased IgA, IgG and galactose-deficient IgA1 levels, reflecting the selective targeting of CD38 on plasma cells, which produce pathological antibodies. I'll now preview the exceptional 96-week results from the proof-of-concept trial that continue to support this promising approach to modifying this disease. Mezagitamab-treated patients show persistent reductions in proteinuria or UPCR, nearly 18 months after the last dose, suggesting sustained efficacy beyond the treatment period. Importantly, the estimated glomerular filtration rate, or eGFR, that is the regulatory gold standard for measuring renal function remains stable at 96 weeks. Mezagitamab is the first IgA nephropathy therapy to demonstrate stable renal function 18 months after dosing. We look forward to presenting the full data at ASN Kidney Week next month. Our Phase III IgA nephropathy study is open and has been enrolling well. Next slide, please. The Phase III VERIFY study of rusfertide, a potential first-in-class synthetic hepcidin mimetic in development to treat polycythemia vera was presented at the American Society of Clinical Oncology in a plenary session in June. Updated 52-week data will be available at an upcoming medical congress. This quarter, we received breakthrough therapy designation, which speaks to the exceptional practice-changing data presented at ASCO 2025 and increases the probability of priority review for rusfertide, which we intend to file this fiscal year. Looking ahead to our next major pipeline milestone, we expect zasocitinib Phase III psoriasis data later this calendar year. Based on the data seen in Phase II, we believe zasocitinib will provide an important and very attractive oral option for patients. I'm also excited to report that the head-to-head study of zasocitinib versus deucravacitinib in psoriasis is expected to complete enrollment in the next few weeks. As you can see here, psoriasis is the first of many diseases where zasocitinib can benefit patients. With that, I will now turn it over to Teresa and P.K. to provide more details on the Innovent partnership, which has the potential to catapult Takeda into an industry-leading oncology company. Thank you. Teresa Bitetti: Thank you, Andy. Good morning, good afternoon, and good evening. We are pleased to be here today to share more detail about our recently announced partnership with Innovent Biologics and why it's critically important for patients and for Takeda. Next slide. Our collaboration with Innovent involves 3 differentiated assets, each with unique mechanisms. 363 is a potentially first-in-class PD-1/IL-2 alpha bias bispecific. 343 is a next-generation Claudin 18.2 ADC, and we're also receiving the exclusive option to license 3001, which is another ADC targeting EGFR and B7H3. This deal is strategically important because it adds cutting-edge anchor assets to our pipeline. First, a bispecific with the potential to be an IO backbone therapy across a broad range of indications, lung included. Second, a next-generation ADC with potential to address difficult-to-treat cancers, including gastric and pancreatic. And finally, an option to license a potential best-in-class bispecific ADC. These unique programs, each with differentiated mechanisms further demonstrate our commitment to science, our commitment to patients and have the potential to be significant growth drivers for the Takeda enterprise post 2030. So next slide. Let me spend a little time sharing how we've structured this deal and what it brings to the Takeda portfolio. So for 363, which is the PD-1/IL-2 alpha bias bispecific, Takeda will lead the co-development of this asset globally using a 60-40 Takeda-Innovent cost split. Takeda will also lead U.S. co-commercialization of 363 with a 60-40 Takeda-Innovent profit or loss split. And Takeda will have the exclusive right to commercialize and manufacture outside of Greater China. For 343, the Claudin 18.2 ADC, Takeda will have the right to develop, manufacture and commercialize worldwide outside of Greater China. And finally, we will have the option for 3001, which is the EGFR/B7H3 ADC currently in Phase I. If we choose to exercise the option, we will have global rights to develop, manufacture and commercialize outside of Greater China. Next slide. This collaboration further enhances and augments our oncology portfolio and is consistent with our clearly articulated oncology strategy. As a reminder, you can see here on this slide, our strategy is focused on 3 disease areas and 3 modalities. And as we have highlighted here in the red box, the programs included in this partnership fits squarely within our strategy. So now I'm going to turn it over to P.K. to explain more about the science behind these programs. Phuong Morrow: Thank you, Teresa. I'm now going to share more about the 3 programs in this collaboration and why we are so excited to bring them into our pipeline at Takeda. I will start with IBI363. IBI363, as you can see here, is a bispecific with a unique mechanism that has the potential to become an immuno-oncology or IO backbone. Specifically, IBI363 is what I would call an IO-IO molecule, meaning that it is designed to block the PD-1/PD-L1 pathway and selectively activate IL-2 alpha signaling while attenuating IL-2 beta gamma signaling. As you can see on the left-hand side of this slide, this differentiated IL-2 alpha biased approach has been shown to activate tumor-specific T cells that express both PD-1 and IL-2 alpha receptor within the tumor microenvironment, thereby unleashing a more effective antitumor immune response. IBI363, thereby supercharges tumor-specific T cells, resulting in apoptosis of the cancer cell. And by blocking the PD-1 pathway, IBI363 ensures that these T cells continue to stay activated and it reduces the risk of T cell exhaustion. IBI363 has now dosed more than 1,200 patients and has demonstrated very encouraging results. Next slide. We have seen clinically impactful results in trials involving patients with IO refractory squamous and non-squamous non-small cell lung cancer as well as in third-line microsatellite-stable colorectal cancer. And while median overall survival is immature at the higher doses, it already shows a positive trend even at these lower doses. The results you see on the screen were just shared as oral presentations at this year's ASCO. They are encouraging data, especially when indirectly compared to results from standard of care chemotherapy on the right. The safety profile of IBI363 is considered tolerable with the most common adverse events related to IBI363 being rash and arthralgia. Discontinuations due to these events have occurred in a small percentage of patients and a priming dose has been added to the dosing schedule to reduce the risk of immune-related events that may occur with bispecific dosing. The high caliber of these data is reinforced by the FDA's granting of a Fast Track designation in non-small cell lung cancer. Thus, while this is a competitive environment, we are very encouraged by the data we have seen to date and the potential of this differentiated mechanism. Next slide. To maximize the potential of IBI363, we have 3 very clear objectives, which are built on the efficacy that we've seen thus far. First is to establish foundational efficacy in tumors that have progressed as IO therapies. Second is to penetrate into earlier lines as either monotherapy or in combination. And third is to build on our known data to establish efficacy in immune desert tumors such as microsatellite-stable colorectal cancer in which other IO therapies have not worked. So that's why, as shown on this slide, we're initially establishing the 5 Phase III trials, including 2 trials in IO refractory squamous and non-squamous non-small cell lung cancer, 2 in frontline non-small cell lung cancer and 1 in microsatellite-stable colorectal cancer. We also have a series of life cycle management trials that we're discussing with Innovent, which will help to build upon proof-of-concept data as it evolves. Next slide. Now I'll walk you through IBI343. This Claudin 18.2 targeted ADC is seamlessly harmonized with our oncology strategy due to, first, its novel ADC platform; and second, its demonstrated efficacy in GI cancers. When examining the image on the left, I will walk you through the platform from left to right. First, on the very left, IBI343 has a humanized IgG1 with Fc silencing. This Fc silencing is important because it reduces the risk of off-target toxicity and increases the tolerability of this Claudin targeting molecule. This differentiates 343 from other Claudin-targeting agents, which are known to have increased gastrointestinal adverse events. In addition to that, in the middle, the glycan-specific conjugation and sulfamide spacer increases the stability, solubility and potential bystander effect, allowing the ADC to result in a more efficient apoptosis of the cancer cell. And it also supports a homogeneous drug-to-antibody ratio of approximately 4, which many of us believe is a favorable ratio for ADCs. And finally, this potent exatecan payload inhibits topoisomerase 1, so it fits seamlessly into many standard of care regimens. Next slide. 343 has been dosed in more than 340 patients. And as shown during oral presentations at this year's ASCO, IBI343 has demonstrated encouraging activity in pancreatic and gastric cancers. Compared to the standard of care, 343 has more than doubled the response rate and more than doubled the overall survival as compared to standard of care chemotherapy thus far. This, coupled with a favorable and consistent safety profile with manageable GI and hematologic adverse events supports its ability to fit seamlessly into the standard of care. All of this makes us very excited to continue advancing this asset in GI cancers with critical unmet need. And as with 363, these results were also reinforced by a Fast Track designation by the FDA for pancreatic ductal adenocarcinoma. Next slide. We also have an ambitious development plan for 343 in Claudin 18.2 expressing GI cancers as its topoisomerase inhibition enables us to fit seamlessly into the frontline treatment of pancreatic cancer. In the second line of the chart, you can see that Innovent has an ongoing study, which is well underway in China and Japan in the third-line setting in gastric cancer. We will leverage this data from this study and add a single-arm study in the U.S. and the EU to move forward towards global registration in the third-line setting. And in the bottom row, you can see that the plans are underway for a frontline study in gastric cancer to address the needs of more gastric cancer patients across lines of therapy. Next slide. And finally, I will review with you IBI3001, for which we have the exclusive option to license at a potential future date. IBI3001 is truly a novel molecule, which is both a bispecific and an ADC. It targets EGFR and B7H3, 2 targets that are highly expressed in many solid tumors, including lung cancer, colorectal cancer and head and neck cancer, and it is linked to the same potent exatecan payload as 343. Innovent has rapidly progressed this asset into the clinic, already producing data, as you can see on the right-hand side, that shows encouraging efficacy even in highly refractory solid tumors. We look forward to following the progress of this trial, which is moving at speed. And with that, I'm delighted to turn it back to Teresa to talk about the immense promise of this collaboration for patients. Teresa Bitetti: Thank you, P.K. So looking at this from a patient perspective against the backdrop of the top tumor types by overall prevalence worldwide, we have the opportunity to make a difference in areas of extremely high unmet need. So as you can see highlighted in red, the tumors in our initial development plan are not only prevalent but difficult to treat. In our initial plans, we can address 4 of these cancers and make a meaningful difference for patients. Next slide. As I mentioned at the start, this partnership will serve as a significant potential growth driver for Takeda. When we look at the market opportunity for our initial development plans for 363, we're looking at lung and CRC. In lung, we will be focusing on the IO refractory second-line setting, where the majority of patients will have already been treated with a PD-1 or PD-L1 and then move rapidly into the frontline setting as a monotherapy or part of a combination regimen. And in colorectal cancer, we'll focus on the frontline patients with MSS CRC. So in aggregate, the initial plan focuses on a potential combined addressable market of over $40 billion. Next slide. Now let's look at the market potential for 343. Globally, gastric cancer affects around 1 million people with 35% to 55% expressing the Claudin 18 biomarker. In pancreatic, the global incidence is approximately 500,000 with 30% to 60% of patients expressing Claudin 18. The current standard of care in these tumor types centers on chemotherapy and the 5-year survival rates are very low, highlighting the urgent need for innovative treatments. Altogether, 343 offers a potential combined addressable market of approximately $8 billion, although we expect this market to grow as we and other novel agents enter. So as you can see, across both assets, there's an enormous potential to make a significant impact for patients. So next slide. So in closing, we are incredibly energized by this extraordinary strategic partnership that brings great value for both patients and for Takeda. This agreement with Innovent will enable us to address critical treatment gaps in some of the most prevalent and difficult-to-treat cancers. It brings forward unique and truly differentiated programs that will overcome many of the challenges of currently available therapies, and it adds anchor assets to our solid tumor pipeline with the potential to be future growth drivers for Takeda. So in short, this collaboration is incredibly meaningful, both for us and for patients. So thank you for your attention. I'm going to hand back to Chris to open the Q&A. Christopher David O'Reilly: [Interpreted] Now I would like to take questions from participants. We have Christophe, Milano, Andy, Teresa, P.K. and Julie Kim, CEO Elect Interim Head, Global Portfolio Division and Giles Platford President, Plasma-Derived Therapies Business Unit are joining in the Q&A. [Operator Instructions] The first question is from Yamaguchi-san. Hidemaru Yamaguchi: This is Yamaguchi from Citi. The first question regarding to Innovent deal. I understand the potential of this product is pretty big. But at the same time, Takeda sales has not really involved in the solid tumor for a while after [indiscernible]. And investors have a lot of question on this one, how much you need to spend on R&D for the next few years where you have to balance the operating margin. So R&D investment, even though you're going to split, but solid tumor first line seems to be very costly. So can you give me some elaboration on how you're going to run this clinical trial to compete with the global guys on the R&D and trying to, I would say, finance your R&D and the impact -- potential impact to the margins? That's the first question. The second question regarding to the earnings change. Even though there's only a slight change on a CL basis on the ENTYVIO and VYVANSE, seem to have a big change on the currency things. And this year might be a unique year, but is there any way in the future trying to avoid those changes or through some other transactions trying to prevent or this year, it's hard to escape from this currency related to earnings divisions. That's the second question. Christopher David O'Reilly: Thank you, Yamaguchi-san. So the first question was around how we're going to run the trials for the Innovent assets and what that means for R&D expenses. So perhaps P.K. can just comment briefly on -- again, on the development plans we have in place for these programs. And then Milano can add a comment on how that will fit within our R&D budget. And then for the second question on this transactional FX impact, I'd also like to ask Milano to comment on that, please. Phuong Morrow: Yes. Thank you. So we are very committed to investment both within our oncology portfolio as well as overall in order to support our long-term growth, while continuing to support profitability. In terms of the financial implications of this deal, these have actually been reflected in our revised forecast and guidance. It's a little premature for us right now to comment on outlook for R&D spend and margins for fiscal year 2026. But I can assure you, we are very committed to achieving the margins in the mid- to long-term, which are driven by top line growth and optimizing our cost structure. Milano Furuta: Thank you, P.K. Yamaguchi-san, not much things to add to what P.K. said already. But I think you can see that we have been managing quite effectively or in some areas, we are even reducing R&D expenses beyond our initial expectations by the efficiency program, also the continuous -- with continuous cost discipline. That's one. And then the second one is we are very mindful about this -- the incremental R&D investment as well. So that's why you see this cost split of the 60-40 for this 363 compound. At the same time, as you might be aware that we have been arranging some cost sharing program, the partnership with Blackstone for mezagitamab. So that's kind of through those kind of arrangements. We are very consciously managing incremental investment. But in the end, we want to invest for growth, while optimizing OpEx. Eventually, that's going to be top line growth, should be the main driver to the long-term corporate margin improvement. Second question about transactional FX. This is very hard to answer, as it is very difficult to predict the currency fluctuation. But this transactional FX in Takeda's case, as I commented during the presentation, the euro volatility is quite -- have a big impact in this year. This is because of -- relatively, we have a large footprint in the manufacturing operation in Europe. So we have to see how currencies goes. But in the long -- if we want to mitigate, then we have to -- maybe in the long run, somehow we have to rebalance the manufacturing footprint, but that's kind of, of course, a long-term strategic plan. It's not -- we've taken actions depending on a 1-year currency volatility. We have to take a bit to long-term stance on that. Christopher David O'Reilly: [Interpreted] Next question from Mr. Matsubara from Nomura. Matsubara: [Interpreted] Matsubara from Nomura. I have 2 questions. First is about ENTYVIO. As you explained, ENTYVIO Pen penetration is advancing, but the insurance coverage as of now and to enhance penetration of pen furthermore, what actions are you taking now? The second question is Nabla Bio that you have partnership with now, and this is nonclinical as of now, and it's not fully disclosed, but by utilizing this R&D acceleration, how does it go? And for mid- to long-term pipeline enhancement and acceleration, how do you see that? Christopher David O'Reilly: Okay. So thank you for your questions, Matsubara-san. So the first on ENTYVIO, what is the state of insurance coverage? What are we doing to expand access to pen? I'd like to ask Julie to comment on that. And then the second question was on our recently announced collaboration with Nabla Bio. Perhaps Andy can add some comments on what we're doing in terms of utilizing AI in drug discovery. Julie? Julie Kim: Yes. Thank you for the question. And in regards to ENTYVIO Pen access, as you heard from Christophe in his opening comments, we are continuing to improve our overall position along the access continuum, and we're encouraged by the 20% growth that we're seeing quarter-over-quarter in terms of ENTYVIO Pen. Now that being said, we continue to work on access at various different levels. One, in terms of the -- I would say, the highest level of coverage. I think you are all aware that we have 2 out of the 3 big contracts signed for quite some time now, and we continue to work on the CVS piece. For the other levels of access, when you look at the way that the U.S. market is structured, it's actually -- there's a lot of localization even with the way that we have the big 3 PBMs. So while we continue to improve at the local level as well, we are putting in place very specific tactical actions to address the localized challenges in addition to what we're doing at the overall coverage level. So hopefully, that gives you a sense that we're working across multiple different levels on the access continuum in the U.S. Andrew Plump: And thank you, Julie, Matsubara-san, and thanks for the question. We're quite excited by the partnership with Nabla Biosciences. But maybe I can just dial up for a second and give you some sense of the work that we've been managing in our research laboratories for the last couple of years. We see discovery in the biopharmaceutical industry changing quite rapidly, and we're positioning Takeda to be at the leading edge of application of advanced technologies in research. And in fact, we're in the process of completing a new laboratory in Cambridge, Massachusetts in Kendall Square that we call the lab of the future. And the intent of this lab is to enable a workflow in discovery that can both improve our probabilities of success and also greatly accelerate the time that it takes to move molecules through discovery. Today, 1 in 5 -- 1 in 4 of our research programs are enabled by in silico technology. By next year, we expect that over 90% of our programs will be enabled by in silico technology. The partnership with Nabla Biosciences is one example of how we're embracing AI in drug discovery. This is a company that was started by George Church that uses algorithms to optimize sequences of large molecules. We've worked with them for over 2 years now, and we have 3 pilot experiments that each were successful, 2 accelerated programs and a third one actually took us to a novel space that we wouldn't have gotten to with traditional approaches. So we were quite excited about that, and that's what led to then the collaboration that you see at hand. Christopher David O'Reilly: [Interpreted] JPMorgan, Wakao-san. Seiji Wakao: This is Wakao from JPMorgan. I have 2 questions. Firstly, regarding gross margin trend and revised guidance. When comparing the initial guidance with the revised full year guidance, the gross margin has deteriorated 66% to 64.7%. Should we understand this is -- this primarily as an FX impact from the euro? If there are other contributing factors, could you elaborate on this point? And also, if FX is indeed affecting the gross margin, the second quarter gross margin looks relatively solid compared to the FX levels. I'd like to know this point? And why do you expect it to deteriorate in the second half? And second question about IV -- Innovent partnerships. When is the next data update for IBI363 expected, so Page 27. Regarding ongoing first-line and second-line NSCLC studies, we will be able to see data in 2026. In addition, when is the global Phase III trial expected to start? That's it. Christopher David O'Reilly: Thank you, Wakao-san. So the first question on gross margin trend and the revised gross margin outlook for the full fiscal year. I'd like to ask Milano to comment on that. And the second question on the next data point to come for IBI363 and whether we can give an indication of starting Phase III studies. I'd like to ask P.K. to comment on that, please. Milano Furuta: Wakao-san, thank you for the question. You asked about the bridge from initial forecast updated forecast. At the same time, how the H2 second half gross margin will be lower. Actually, the answer would be basically same. If you compare -- if we compare the May forecast and revised the forecast, as you said, gross margin is expected to be lower by about 1.4 percentage points. About half is coming from the transactional FX. And the other half is also coming from kind of product mix change. So we are reducing the VYVANSE, the revenue and the ENTYVIO revenue. And then these 2 revision has a negative impact on the gross margin. So that's the contributing this gross margin update in the forecast. And actually, this explains -- these dynamics explains in the second half because this is more about the second half sales. Also, we are updating the currency forecast for H2. So those 2 impacts were contributing lower gross margin in H2. Phuong Morrow: Thank you, Milano. And perhaps to address the other 2 questions that were asked related to the Innovent collaboration. The first is to say that we, like you, are very enthusiastically monitoring the data with both 363 and 343. We are not yet releasing when we will disclose further data in the coming year, but we will be following this closely, as we determine when the appropriate data inflection will be in order to release more data in a public forum. The second question you had was related to the start of the Phase III studies. And we have noted that the Phase III study in second-line squamous non-small cell lung cancer, we expect to begin in the coming months. And as you saw from the slides, we will also be looking towards moving and initiating additional studies at speed. Christopher David O'Reilly: [Interpreted] Next question is Stephen Barker, Jefferies. Stephen Barker: Steve Barker from Jefferies. The first question is about ENTYVIO and the second question is about your collaboration with Innovent. Starting with ENTYVIO. So you've cut your estimated current growth rate at constant exchange rates from 9% to 6% due to competitive pressures. I was wondering if you could give us more details of those competitive pressures and the implications for growth going forward as in next year and beyond? And secondly, regarding your deal with Innovent, certainly, the China data published to date on 363 is impressive. But there have been several cases where impressive data in China has not been replicated in international studies. So I was wondering if you could share your view on if that apparent trend or phenomenon is real or not? And more specifically, how confident are you that you can replicate the impressive China data in international trials? Christopher David O'Reilly: Thank you, Steve. So I think the first question on ENTYVIO and the reasons for the reduction in the full year forecast. I'd like to call on Julie to answer that. And the second question on data replicability of the China studies in a more global population. I'd like to ask P.K. to comment on that, please. Julie Kim: Thanks for the question, Stephen, on ENTYVIO. So let me start by saying that ENTYVIO has been on the market for 12 years now, and it is still the overall market share leader in IBD when you look at it from a patient demand perspective, and we are holding market share. But as you've noted, there are a few things that are impacting our top line. One is in terms of the intensified competitive activity, and we're seeing that particularly on the CD side, but it is also starting to impact UC. But as I said, overall, because ENTYVIO is still the only gut-selective medicine out there for IBD, we've been able to hold share. The other things that are impacting the top line, there are a few things. One, as Milano mentioned in his talks, it is about the channel mix. We've particularly had an increase in 340B population as well as an increase in Medicare Part D redesign impact. Beyond that, the pen conversion, as we've mentioned, is moving a bit slower than we anticipated. And while we are resolving those access hurdles, it has impacted the top line thus far. But we do expect as those hurdles are resolved, we will see an acceleration of growth, which is why we do expect to end the year higher than where we are year-to-date. Phuong Morrow: Thank you, Julie. And to answer the second question, I'll say 2 points. One is, as you alluded to, initially, Innovent has accrued more patients in China, but over the past few months has now begun to increase the enrollment ex-China, including in U.S. and Australia, and we are continuing to monitor that data as well as its applicability. The second element is the fact that we actually endeavored on very significant due diligence during the evaluation for this collaboration. And that included bringing our own Takeda radiologists in order to evaluate the -- many of the images that we were seeing of the patients as well as determining the correlation with our response criteria, i.e., RECIST. And we saw a very strong correlation there. Christopher David O'Reilly: [Interpreted] Next question, SMBC Nikko Securities, Wada-san. Hiroshi Wada: Wada from SMBC Nikko Securities. About Innovent pipeline, I have a question. 363, regarding mechanism of action, I want to know IL-2 alpha bias, what's the significance of this? Roche has -- well, IL-2 itself is approved for the melanoma and other cancers, but not expanded very much to other cancers. If you activate alpha, Treg may be activated as well. And because of that immune response is suppressed, I think that's what was the rationale. So alpha activated mechanism for 363, what's the meaning of that, including the clinical data you have obtained so far. Can you explain that, please? Christopher David O'Reilly: Yes, P.K., would you like to take that question? Phuong Morrow: Yes, absolutely. So it's a great question. And we also asked the same question and interrogated that data with Innovent and discussed this in depth. And I can tell you that what is actually unique about this particular pathway is the fact that, first, we did learn from the experiences of others within the industry as it relates to IL-2. And that's why our focus has been on this IL-2 alpha bias with attenuation of the beta-gamma pathway. And with that in mind, we have seen that the IL-2 alpha biased approach has been able to target specifically tumor-specific T cells that are addressing both -- or express both PD-1 and IL-2 alpha. So it's been a very precise and effective activation within the tumor microenvironment. The other question that you had was related to whether this would actually cause and trigger activation of Tregs, which we also had that question related to. And we have not actually seen activation of Treg cells, which would have resulted, of course, in a decrease in the immune response. Thirdly, I would say that because of this, we think that the clinical data are very consistent with the mechanism of action with findings of very encouraging data in both IO refractory as well as in earlier lines. Thank you. Hiroshi Wada: [Interpreted] May I continue? Christopher David O'Reilly: [Interpreted] Yes, go ahead. Hiroshi Wada: [Interpreted] And for development policy, so refractory cold tumor is the strategy that you want to take. I understand that additional IL-2 NSCLC first line and head-to-head with PD-1 for Phase III. Is that the plan going forward? Phuong Morrow: Yes. Chris, would you like to be to take this? Christopher David O'Reilly: Yes, please P.K. Phuong Morrow: Yes, of course. So I think your question was around the development plan related to IBI363 and where we see the experience with this and the promise of this and agree with you that we actually want to leverage the strong clinical data. So beyond the 2 second-line studies in IO refractory squamous and non-squamous non-small cell lung cancer, we will plan to go head-to-head against IO therapy, both likely in an all-comers population as well as in a TPS-high population. Christopher David O'Reilly: Next question, I'd like to call upon Tony Ren from Macquarie. Tony Ren: Tony Ren from Macquarie. A couple of questions again on the Innovent transaction. For the IL-2 PD-1 bispecific IBI363, I understand -- I actually cover Innovent myself. I understand they have a global Phase II study. The primary completion -- estimated primary completion of this study is March 2026. So really only 4 months away. Did you guys get a chance to look at the data from that Phase II study, which I believe primarily is conducted in the U.S. and looking to recruit about 178 patients? And if so, were the data better or worse than what you've seen in China? So that's my first question. Christopher David O'Reilly: P.K., would you like to answer that one as well, please? Phuong Morrow: Yes, absolutely. So yes, first, I would like to say that, yes, we have been in constant communication with Innovent related to the evolving data. And as you allude to, that data in the global Phase II is progressing or the trial itself is progressing very nicely and at speed. I can't disclose what obviously, the data shows thus far, but we can see that I would like to just say that the data thus far is fairly encouraging, but I think too early to comment further. Tony Ren: Okay. Thank you for addressing that. Also, Innovent is starting the Phase III global study. I think it's called MarsLight-11 trial in immunotherapy-resistant non-squamous non-small cell lung cancer, right? So that trial according to clinicaltrial.gov is literally starting today. But also -- Dr. Morrow, you said that you're looking to start in the next few months. So are you -- as Takeda is leading the clinical development, right, are you looking to change the trial design and the conduct of this MarsLight-11 study? Phuong Morrow: What I will say is that we -- as I noted, we have had great conversations and discussions with Innovent weekly, if not every few days. And related to the MarsLight study as well as these beginning studies, we've also had discussions about whether we would need -- we would desire to change or tweak any of the elements of the protocol itself. I would say right now, we have not required any or asked for any significant changes as of today, but we are continuing to have those discussions. Tony Ren: If you do decide to change the trial design or protocol or conduct, would that require a new FDA clearance? Phuong Morrow: I don't think so. Christopher David O'Reilly: [Interpreted] Next question is Ms. Ueda, Goldman Sachs. Akinori Ueda: I am Ueda, Goldman Sachs. My first question is regarding [indiscernible] therapy business. I think in the United States, now CSL has been closing some of its plasma centers recently. So it also appears that Takeda is currently focusing on moving -- improving efficiency such as optimizing utilization rates and implementing the digital transformation initiatives rather than expanding the number of centers. So are there any changes in the business environment in the U.S. such as like the demand outlook or the cost structure that are driving the shift? And furthermore, I think some other companies seems to be actively investing in the collection centers outside in the U.S. So could you also let us know whether you are also considering similar types of investments? [Interpreted] I'd like to ask a second question to Milano regarding your dividend increase. Given this -- the downward revision of the guidance, I believe that EPS is going to be also lowered. And you also are able to transfer from the accumulated fund to your hand. However, what is about the potential risk of the impairment loss and how you are confident to continue increasing the dividend payment? I'd like to ask the second question to Milano-san. Christopher David O'Reilly: So the first on the PDT business and specifically on our collection initiatives in the U.S., I think I'd like to ask Giles to comment on that. And then the second question on the sustainability of the dividend. Milano, if you could kindly answer on that one, please. Giles Platford: Yes. Thank you, Chris, and thank you, Ueda-san, for the question. We have been investing extensively to improve efficiency and productivity across our BioLife collections network, and that has positioned us very strongly to be able to meet the growing demand for plasma-derived therapies and to continue to grow our collection volumes without opening to the same extent, new centers. In particular, we have benefited this year from the accelerated rollout of the personalized nomogram for both our FK and Haemonetics devices, and that has enabled us to improve volume collection by approximately 10% to 11% on a per donation basis. And as a result, we won't be opening as many new centers, and we are also benefiting from the ramp-up of the centers that we have opened in the past years. To the second part of your question, we do continuously evaluate opportunities to open up new countries to contribute to global supply of plasma. We don't have anything to communicate at this point in time, but it is a big part of our advocacy work worldwide to ensure that we are having more countries contributing to sustainable supply of plasma. Thank you. Milano Furuta: [Interpreted] Thank you very much for your question. Basically, regarding our dividend policy, as we explained in the past, it is a progressive policy, meaning we will sustain or increase the dividend. And in order for us to make a decision, we will look at core EPS and reported EPS and mid- and long-term reduction of interest-bearing liabilities or borrowings. And looking at these 3 parameters, we make a proposal what to do with the dividend in the next year and going forward. Therefore, at this point in time, I cannot say anything definitely, but these are the 3 points, we will base our decisions. And for the next fiscal year, around May time frame, we would like to announce what is the policy of dividend. Christopher David O'Reilly: [Interpreted] Next question from UBS Sakai-san. Fumiyoshi Sakai: Fumiyoshi Sakai from UBS, two questions. One is the same plasma business. CSL issued profit warning. There are reasons very vague, but one of the factors that you mentioned is weakening demand of China albumin sales or revenues. And your page -- Slide 40, you have slight decline in China. However, you haven't really changed the guidance for FY '25. Do you think -- do you still think that this guidance is achievable? If it's so, can you just give us the -- what's really going on in China market right now? So that's the first question. The second question is U.S. Biosecure Act when you make a deal with Innovent, anything going on in the U.S. these days is a mystery, but this act is still pending? And have you considered what are the political consequences having China Biotech as a partner? Probably not? But if you could update with this Biosecure Act and your business tie-up, I would really appreciate that. That's the second question. Christopher David O'Reilly: Thank you, Sakai-san. So the first question on albumin demand in China and our confidence in the full year outlook, I'd like to ask Giles to comment on that. And then the second question on U.S. US Biosecure vis-a-vis the Innovent deal. I'd like to ask Christophe to answer that question, please. Giles Platford: Sure, Chris, and thank you, Sakai-san, for your question. It's true, our albumin portfolio did decline marginally by 2% for the first half. This was a result of the impact of shipment phasing to China, but also related to the continued government-imposed cost controls in the country, both of which were anticipated as well as some effect of tender timing globally. And I'd like to point out that with a somewhat slower near-term growth outlook for China linked to those government-imposed cost controls, we have been actively working to build sustainable market opportunities for albumin outside of China, and we do see continued growing demand for albumin worldwide. And we have successfully secured a number of tenders in markets ex-China, which will be delivered in the second half, hence, accelerating our growth for the balance of the year. So yes, we remain confident to deliver on our guidance of high single-digit growth for the year for albumin and for our IG portfolio. Thank you. Christophe Weber: Thank you, Sakai-san. This is Christophe here. Obviously, we take into consideration the geopolitical environment when we discuss a deal like our partnership with Innovent Biologics. So I will mention 2 points. One is that we will do -- we'll drive the global development of this asset, guaranteeing that it is meeting all the criteria required by regulatory agencies across the world. So that's very important. And the second point I will mention is that we will manufacture these molecules in the U.S. So we will do a full tech transfer and we manufacture -- we'll organize the manufacturing of this molecule in the U.S. And therefore, we think that this is also a way to mitigate the potential geopolitical risk. Thank you. Fumiyoshi Sakai: [Interpreted] Can you just -- Giles-san, can you give a margin update in PDT business? Giles Platford: Yes, absolutely. I can do that. So we continue to see our margin recovery year after year, and we expect to deliver continued margin improvement in fiscal '25. And that's part of the reason why we gave a slightly more modest guidance in terms of growth for this year. We are seeing more supply on the market. If you remember, Takeda was the first to recover post pandemic. So we benefited from strong growth the past couple of years in meeting unmet demand globally. We see that situation now normalizing. So we're being a little more selective in terms of tender participation ex-U.S., very much expected, anticipated and consistent with the guidance that we gave, and that's partly because we're trying to calibrate both the need to grow, but also the need to grow profitably and to ensure we're getting value recognition in the process. We see continued improvement in product mix. So our innovative subcutaneous IG portfolio has delivered 15% growth for the first half. So that product mix helps in improving margins. The BioLife productivity and efficiency efforts driven by data digital and technology transformation that I referenced earlier are also helping us to improve margin. And we have seen gradual improvement in yield in fractionation and process improvement across our manufacturing network. So all of that is contributing to an improvement in margin over time. Thank you, Sakai-san. Christopher David O'Reilly: For the next question, I'd like to call on Mike Nedelcovych from TD Cowen. Michael Nedelcovych: I have 2. My first is just a broad question on your celiac disease programs. I'm just curious what the breadth of your ambitions are here? How important could those programs become ultimately should they make it to the marketplace? And then my second question is on mezagitamab for IgAN. When we think about the target product profile for that agent, is it sufficient to have efficacy similar to competitor agents across mechanisms, but with potential treatment holidays? Or should we be looking for better efficacy? Christopher David O'Reilly: Thank you, Mike. I think both of those questions on our celiac ambitions and aspirations for mezagitamab, Andy you can answer those. Andrew Plump: Thanks, Chris. Mike, it's Andy. So firstly, on the celiac programs, we had 3 programs that were in proof-of-concept studies, one that we've discontinued, which was TAK-062, which was an orally administered glutinase, which failed to show benefits. And two, TAK-227, which is a transglutaminase 2 inhibitor that's got restricted and then TAK-101, which is a tolerizing vaccine. Both of those are still in Phase II studies right now. Of course, this is a huge unmet medical need with no established standards of care. The bar is quite high for moving forward and the science is quite tough. But we're excited to see data in the coming months and over the next year for both of those programs. So I think we can talk more about what the potential long term could look like after we've seen those data. In terms of mezagitamab, obviously, and you're referencing this, it's an incredibly competitive landscape. With mezagitamab, though, we've got a fairly unique opportunity here. I would say that in terms of efficacy, we wouldn't -- based on the data that we've seen, especially from the APO/BAF agents, I don't think that we expect to see more efficacy. I think the real opportunity with mezagitamab is at least similar efficacy. The 96-week data that I referenced that you'll see in the coming weeks at the upcoming ASN Week meeting is quite extraordinary. I think the real opportunity here is the potential for sustained benefit after relatively short-term dosing. And then secondly, the potential benefits on safety. Christopher David O'Reilly: [Interpreted] In interest of time, I would like to make the next question as final, Sogi-san, Bernstein. Miki Sogi: I have 2 questions. First question is about ENTYVIO. So this is to Julie. So you have mentioned that the evolving competition in the U.S. as well as the increasing -- the change in channel mix. I can imagine that those -- the dynamics are -- it's not really easily reversible. So should we assume that the slowing down the growth rate as you have included in the revision from 9% to 6%. Is this the kind of trend we should expect for the 2026 and beyond? And if that's the case, will you be revisiting the peak year sale of ENTYVIO at some point? That's first question. The second question is about the Innovent deal. I have a question about this IBI3001, very interesting product, the ADC -- bispecific ADC. For this molecule, should we think that this is kind of going to work as 2 ADCs in 1 molecule, meaning that it's just kind of working as EGFR ADC and the B7H3 ADC? Or if there's any synergy by putting these -- the functions in molecule? Those are 2 questions. Christopher David O'Reilly: Okay. Thank you, Miki. So the first question on ENTYVIO to Julie and the second on 3001 to P.K., please. Julie Kim: Thanks for the questions, Miki. In terms of the growth, what I would say is this, as I mentioned earlier, ENTYVIO has been able to hold share -- patient demand share in overall IBD. And what I would expect without giving any predictions about growth and whatnot that we'll provide for FY '26 in May. I would say that our growth is in line with market at this point in terms of patient demand, and we expect to be able to hold our share given the fact that we're still the only gut-selective molecule in IBD and the strong track record that we have, particularly in UC. And as I mentioned, where we see the significant competitive challenges is in CD thus far. In terms of the peak at this point, we are not changing our overall peak revenue guidance. Phuong Morrow: Thank you. And to add on related to IBI3001, happy to bring this forward. So we agreed and when discussing the data and the potential for this molecule with Innovent, it was based upon a few elements. The first is the fact that these targets are very well harmonized with our current disease area strategy in solid tumors, particularly in GI and thoracic cancers. These target specifically. And the second element is that we believe that, as they should target 2 elements and then use the same novel exatecan payload as well as platform that they would be able to very specifically harness a payload and result in more encouraging efficacy. We've seen some elements of that thus far in the earlier doses, as I noted, and we will continue to monitor as we progress up the dose levels. Christopher David O'Reilly: [Interpreted] Thank you very much. With this, we'd like to conclude today's webinar. Thank you very much for your participation today. We'd like to ask for your kind continued support. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
Operator: Good morning, everyone, and welcome to Portland General Electric Company's Third Quarter 2025 Earnings Results Conference Call. Today is Friday, October 31, 2025. This call is being recorded. [Operator Instructions] For opening remarks, I will turn the conference over to Portland General Electric's Manager of Investor Relations, Nick White. Please go ahead, sir. Nick White: Thank you, Michelle. Good morning, everyone, and thank you for joining us today. Before we begin, I would like to remind you that we have prepared a presentation to supplement our discussion, which we will be referencing throughout the call. The slides are available on our website at investors.portlandgeneral.com. Referring to Slide 2. Some of our remarks this morning will constitute forward-looking statements. We caution you that such statements involve inherent risks and uncertainties, and actual results may differ materially from our expectations. For a description of some of the factors that could cause actual results to differ materially, please refer to our earnings press release and our most recent periodic reports on Forms 10-K and 10-Q, which are available on our website. Turning to Slide 3, leading our discussion today are Maria Pope, President and CEO; and Joe Trpik, Senior Vice President of Finance and CFO. Following their prepared remarks, we will open the line for your questions. Now it's my pleasure to turn the call over to Maria. Maria Pope: Good morning, and thank you all for joining us today. We delivered another strong quarter in Q3, and we maintain our laser focus on execution, driving value and advancing our five strategic priorities. Starting on Slide 4. First, investing in customer-driven clean energy goals. Second, working to keep customer prices as low as possible; third, supporting data center and high-tech growth in the region's economic development, fourth, reducing risk through operational execution, system hardening and wildfire policies; and fifth, promoting an investable energy future. Our industry and Portland General are seeing tremendous growth. Since 2019, high-tech manufacturing and infrastructure investments have resulted in over 8% industrial growth, which is expected to only increase, driving our overall load growth of 3% through the end of the decade. Portland General's customers and our region remain focused on clean energy. We are also focused on affordability as we work to keep our cost structure flat and customer prices as low as possible, in turn, providing stable competitive returns to shareholders. I will cover the progress we've made in each of these five priorities before highlighting this quarter's results. Clean Energy. Given the dynamic policy and market environment for clean energy, our state and company are accelerating to meet the moment. Earlier this month, Oregon Governor, Tina Kotek, issued an executive order aimed at accelerating renewable energy development before federal tax credits expire. An important step that supports continued progress for the state's goals. This dovetails with the multipronged procurement strategy PGE deployed in July to maximize the approximate 30% of federal tax credits that directly lowers cost for customers. As part of the 2023 RFP, we undertook a price refresh to capture the impacts of The One Big Beautiful Bill and trade tariffs, which culminate in an updated shortlist filed with the commission earlier this month. The short list reflects a rigorous least cost, least risk approach designed to yield reliable, affordable outcomes on time lines, responsive to evolving legislative requirements. In parallel, we saw community-based renewable energy and bilateral PPAs for energy and capacity, which are yielding additional projects. Finally, we took a critical step forward in the 2025 RFP, was also launched in July. All bids have been received, and we are now evaluating projects and building towards contract execution in 2026. Every element of our strategy prioritizes reliable delivery of energy to customers while maximizing the window of several clean energy tax credits. To date, we have secured over $1 billion of PTCs and ITCs for our own clean energy portfolio, and we estimate as much as another $1 billion from long-term third-party energy contracts. This is just one part of our approach that enables clean energy affordability allowing our customers to receive the full benefit of high-value clean energy resources at the lowest cost possible. Customer affordability. The customer affordability commitment, our multiyear management program continues to deliver great results. This work touches every corner of our company as we focus on safe, reliable service while keeping customer prices as low as possible. Joe will cover more about our progress in detail shortly. Customer growth. We continue to see significant load growth with total load up over 5% compared to the same quarter last year. Our industrial customers, led again by data centers and semiconductor manufacturers grew their energy usage by over 13%. As these customers expand their existing facilities and develop new sites. This builds upon over a decade of high-tech manufacturing and infrastructure expansion in the region. We are continuing to plan and execute alongside our customers as they scale and ramp their operations. The passage of Oregon's data center legislation which will be implemented through regulatory proceedings concluding next March, provides rate-making clarity, improved cost allocation, and importantly, margin expansion from PGE's fastest-growing industrial customers. Building on this supportive policy, we're investing in new transmission and utilizing a combination of system upgrades. These include dynamic line ratings, AI data analytics and customer-sided solutions to maximize new investments and leverage existing infrastructure. PGE recently completed a project with AI start-up GridCARE, that leverages flexibility in data center usage, applying generative AI forecasting to unlock additional system capacity. We also achieved a first-of-its-kind solution alongside distributed storage provider, Calibrant Energy and digital infrastructure provider, aligns data centers. The agreement will deliver a battery system to aligned campus, enabling the facility to come online and scale operations years earlier than previously expected. High-tech manufacturing and digital infrastructure are important contributors to the strength of Oregon's economy. I'd like to reiterate that for Portland General Electric, this load growth isn't theoretical. For years, we have been meeting this significant and growing customer energy usage quarter-over-quarter. Today, we're working with regulators and parties to ensure that costs are fairly allocated across customer groups. Industrial growth is helping us spread fixed costs of our system across a larger base, support affordability for all customers. Risk management. Wildfire season has officially ended in our service area. Our comprehensive year-end mitigation programs continues as we work to deliver results. Hardening the system, enhancing situation awareness and deploying technology to protect our communities and improve the liability. We recognize that more is needed to address the collective risk presented by wildfires and extreme weather. We remain committed to working with policy makers to find meaningful answers to these complex issues. Wildfire risk is a societal wide problem, and we are working on operational, legislative, regulatory and other outcomes to deliver societal wide solutions. An investable energy future. Lastly, an update on our regulatory proceedings and proposed update to our corporate structure. Last week, we received the order on the Seaside Alternative Recovery Mechanism for the largest stand-alone battery on our system. The order represents a constructive outcome and was supported by the memorandum of understanding reached with parties back in the spring. This is an important step forward in our ongoing cooperation with the regulatory stakeholders. We appreciate the careful consideration of the commission and the collaboration with staff and intervenors. The distributed system plan arm remains on track and we continue to expect a resolution in the first part of next year. The proceedings for PGE's proposed creation of a holding company and transmission company, are also progressing as expected. The docket now includes a procedural schedule with a target date of June 2026. The proposed holding company update aligns PGE's corporate structure to industry standards. Both the holding company and the transmission company enable improved financing flexibility that will yield benefits for customers and shareholders. We look forward to continued engagement with stakeholders to reach outcomes that encourage investment in Oregon and advance our customers and state's long-term goals. I'll now turn to Slide 5 for our financial results. For the third quarter, we reported GAAP net income of $103 million or $0.94 per diluted share. On non-GAAP basis, net income was $110 million or $1 per share. This compares to third quarter 2024 GAAP net income of $94 million or $0.90 per diluted share. Similar Q2, our non-GAAP results exclude business transformation and optimization expenses from the customer affordability commitment and updates to our corporate structure. Results this quarter underscore the mission of our company and my commitment to executing with discipline, advancing our strategy and delivering value to customers, communities and shareholders. Our team is laser-focused on execution and results, finishing 2025 strong and building off our momentum of our continued success in the years ahead. With that, I'll turn it over to Joe. Joe? Joseph Trpik: Thank you, Maria, and good morning, everyone. Q3 was another solid quarter and reflects the strength of our strategy. We are serving significant demand growth and executing our cost management program with discipline and focus. Turning to Slide 6. Total load increased 5.5% overall and 7.3% weather adjusted compared to Q3 2024. Residential load increased 2.2% quarter-over-quarter but increased 6.7% weather-adjusted. Residential customer count increased by 1.2%. Commercial load increased 1.3% overall or 1.9% weather adjusted. Industrial load again saw significant growth with Q3 demand increasing 13% or 13.2% weather-adjusted led again by our diverse group of data center and high-tech customers. Given our robust load growth, we've observed and our forecast for the Q4 demand, we are updating our weather-adjusted 2025 load growth guidance to 3.5% to 4.5%. Now I'll cover our quarter-over-quarter earnings drivers. We experienced a $0.44 increase in total revenues driven by a $0.16 increase from our 5.5% demand growth and a $0.28 increase due to our higher average price of deliveries from improved recovery. A decrease from power cost of $0.24 driven by a $0.38 from favorable power cost in 2024 that reversed for this comparison and a $0.14 benefit from the cost to serve load in Q3 2025 driven by stable market pricing and power cost recovery timing. A $0.06 EPS increase from lower operation and maintenance expenses driven by our continued benefits from our cost management work as our teams drive efficiencies and realize savings across our business. A $0.23 decrease from impacts in support of our ongoing rate base investments and execution of our financing plan made up of $0.14 of depreciation and amortization, $0.05 of dilution and $0.04 of interest expense. A $0.07 increase from other items, including an $0.11 increase from our prior year deferral reserve that did not recur and $0.04 of various miscellaneous items. And lastly, a $0.06 decrease from business transformation and optimization expenses, bringing our GAAP EPS of $0.94 per diluted share. After adjusting for this impact, we reach our Q3 2025 non-GAAP EPS of $1 per diluted share. Turning to Slide 7 for our capital forecast. Our plan continues to focus on expanding our transmission capabilities, optimizing our distribution system and maintaining a reliable generation fleet. As Maria highlighted, the 2023 RFP continues to advance towards resolution, and we are pleased with the over 1 gigawatt of solar and battery projects on the updated final shortlist. We have requested OPUC acknowledgment in the fourth quarter, and we continue to expect the projects will be in service by the end of 2027. We will update our CapEx plan for the incoming 2023 RFP projects as those negotiations finalize and contracts are executed in the coming months. Overall, these projects bolster our rate base growth trajectory as we serve the significant demand we're experiencing and support Oregon's clean energy goals. On to Slide 8 for our liquidity and financing summary. Total liquidity at the end of Q3 was just over $1 billion. Our investment-grade credit ratings and outlook remained stable since the last quarter. We continue to see strength in our cash flow metrics, including a trailing 12-month CFO to debt metric of above 20% -- for financing during the quarter, we completed our ATM pricing activity for 2025 in support of our base equity need for the year. In August, we drew $49 million and earlier this month drew an additional $72 million, both for rate base investment and general corporate purposes. We now have $137 million of equity priced but not drawn under our ATM, which satisfies our needs through the end of the year. We will carefully assess our equity needs for the 2023 RFP projects as negotiations proceed, and we'll provide financing clarity in tandem with our final CapEx expectations. We are also continuing to work closely with key stakeholders on the proposed holding company formation aimed at creating important flexibility as we seek the most efficient financing options for our customers and shareholders. This structure can help reduce costs and create optionality in how we fund critical grid investments with the potential to displace future equity needs for both base and RFP CapEx. As we look back at our progress over the last 3 months -- or 3 quarters and turn to Q4, we are proud of our results and disciplined execution. We are optimizing our business while advancing important regulatory items, all while remaining laser-focused on serving the growth in our area and delivering value to our customers and shareholders. In Q4, we expect the continued impacts of load growth, moderately favorable power costs, CapEx supported financing and benefits from our cost management work. Given our results through Q3 and line of sight to Q4, our plan remains on course. We are reaffirming our 2025 adjusted earnings guidance of $3.13 to $3.33 per diluted share. Our progress in 2025, underpinned by our rate base investment pipeline, sustained confidence in our service territory and sharpened operational performance has also solidified our long-term expectations. Therefore, we are reaffirming our long-term EPS and dividend growth guidance of 5% to 7% and our long-term growth guidance of 3% through 2029. As we look to the balance of the year and beyond, we are excited to continue delivering on our strategic plan, safe, reliable and efficient service, advancing the priorities of our company, communities and region and maximizing value for our customers, communities and shareholders. Now operator, we are ready for questions. Operator: [Operator Instructions] The first question will come from Julien Dumoulin-Smith with Jefferies. Julien Dumoulin-Smith: Look, let me just start off on this energy deliveries trend here. I mean 3.5% to 4.5%, that's a solid trend. Full year, obviously, we've seen some gyrations over the years. But given what you're describing here, data center -- data center-centric driven, how does that impact or revise any kind of longer-term thoughts? What are you seeing on this front? Clearly, adjacent states also seeing kind of positive revisions as well? Maria Pope: Thank you. And Julien, yes, we've been very fortunate to have both a robust and diverse semiconductor manufacturing in this region and growing a number of data centers. Most of the data center forecasts that we have are folks that already have built out their facilities as well as those who are turning dirt and have existing sites. So we have a -- our pipeline is really solid and reaffirms that we're confident in our 3% long-term growth. Julien Dumoulin-Smith: Got it. Okay. So no gyrations yet. Understood. Just maybe if I can come back to the holdco outcome. And how do you see that progressing here? I mean, any updated thoughts on this front in as much as that could impact, obviously, Joe, the financing strategy as you think about heading into '26 and being a month out. But separately, just any feedback in that process, et cetera. Obviously, it's a big deal as you think about '26 priorities. Maria Pope: Sure. Let me take the Holdco timing and what we're seeing from parties and then Joe can talk a little bit more about financing. We're getting lots of questions on the transmission company. In particular, discussions around what's jurisdictional to the OPUC versus what's jurisdictional to FERC. I think it will take us a while to work through all of these questions. But we are getting very few questions with regards to the holding company. This may give us a window of opportunity to separate the filings, probably maybe extending the transmission company filing a little bit and pulling in the holding company filing. I would note that our filing is very similar to others in the region. And Northwest Natural, a little while ago was able to conclude their holding company filing earlier than the statutory allotted time. Joe, do you want to talk a little bit about financing because this provides us with some opportunities. Joseph Trpik: Yes, Julien. As it relates to the holdco, we anticipate understanding the filings proceeding that we will operate the holdco and use it as financing very consistent how virtually all the other utilities in our sector have been operated that holdco. Under the right scenario, we agree we will have the ability to displace certain equity needs. Currently -- we have strong financing metrics. I mentioned that we're above CFO. Our metric on CFO to debt is above 20%. And we'll be thoughtful as we work towards the RFP outcome and the holdco project or process matures, as Maria mentioned, to really align that to our financing plans as we have more clarity. Julien Dumoulin-Smith: Just quickly, lastly, on the refresh and the '25 RFP, obviously, ongoing in parallel here. What's the scale of scope? I mean the refresh seems to be fairly similar in opportunity set for you guys, but you've got these things in parallel. I mean, could we see an acceleration? Or how do you think about the timing, given the way that this is all kind of been backed up, if you will. As you think about forward-looking CapEx ultimately translating? Maria Pope: So first of all, I just want to remind us of why we're doing this. With the One Big Beautiful Bill, we continue to have investment tax credits and production tax credits that have been very important to reducing the overall cost of clean energy and battery storage on our system. And as I noted, between our projects as well as third-party contracts, it's about $2 billion of roughly what we can estimate of benefit that we've brought back to this region. So we're refreshing the 2023 RFP, as you noticed, there's a lot of tariff issues. And then also, we have a PPA focused RFP as well as the 2025 RFP. Joe, anything more you want to talk about in terms of timing of when we can see resolution? Joseph Trpik: Julien, I think really what you get to -- you sort of talk to size here of the two RFPs. Obviously, this RFP, the '23 we mentioned has just over 1 gigawatt of power between the solar and the batteries. We used as a foundation for this RFP and the '25 RFP that we're accelerating the IRP action plan that was filed that last updated at midpoint would say, overall, we need 4,000 megawatts before the end of the decade, understanding you have to back out this '23 RFP result and some PPAs, I mean you would expect that as you work to the next RFP, both in size and the timing, hopefully to accelerate, you could see something of the need of 2,000 megawatts, something maybe even a plus there. We'll have to see there's a lot of factors to that again, what other PPAs get entered into, how demand moves, how the clean energy policy plans evolve. But it would expect to be a more meaningful and robust RFP than the one that we have currently -- that we're working to contract. Operator: And the next question will come from Sophie Karp with KBCM. Sophie Karp: A couple of things. Is there a scenario where you get your holdco but not the Transco? Given that you're saying that questions seem to be concentrated on the Transco side? Joseph Trpik: As it relates to -- and I think it's more a matter of timing, is there a scenario where the holdco and the Transco approval process gets separated and the holdco occurs more promptly? I think the answer is, yes. In the right circumstances, we could see that occur. We would anticipate over time that ultimately both are approved but we could see a longer path on the Transco. Just as we relate to our finance, each is a very different financing functionality for us. The holdco, we think, drives more valuable for the customers and shareholders more currently and the Transco does have a little more time, and therefore, it's okay to have a little more time to evolve. Sophie Karp: Got it. Super helpful. And then just a more strategic question on the transmission, right, and it kind of, I guess, dovetails into the Transco conversation. What would it take for you to direct CapEx and your efforts away from generation RFPs and more into transmission? Like is there a case to be made that this is a better approach for growth, right, just given recovery mechanisms or demand, a variety of factors that you may consider? Joseph Trpik: Currently, I mean, as you can see in our plan, right, we have $1.8 billion in transmission spend, including 2025. I do think -- so we do have a relatively balanced growth to your question if there would be a reason to shift more towards that transmission. If that really facilitated the needs of our customers and the clean energy plan and also drove to affordability, that could be a case where we will drive more to transmission. But right now, we are driving to serve the overall needs of our customer, which has really been a balanced transmission and generation approach. Maria Pope: And so the long term and as well as in the past, what we have found is that it's really important to have a robust competitive environment for generation build. And we need to continue to move forward to drive customer prices as absolutely low as possible. Sounds good? Operator: And the next question will come from Gregg Orrill with UBS. Gregg Orrill: Congratulations on the year-to-date. On the financing plan, just what are your assumptions within the growth rate guidance as it relates to your commitments around RFPs? And assumptions around tax credit monetization versus equity. How do you think about that? Joseph Trpik: Sure. So as it relates to the financing plan, and again, this is -- we assume that a 50% -- 50-50 financing structure on the RFPs currently and that is net of tax credit monetization, which has historically been at this 30% credit. This year alone, we've monetized about $150 million of tax credits to offset our financing needs. And then to your comment, our historical -- I apologize for using another 50%, right, our outcome on RFPs has historically been at about 50% of the overall projects. Gregg Orrill: Okay. Maybe another question as well. Just what are your thoughts around the extension of the reliability contingency event framework and how is that proceeding? Joseph Trpik: So currently, within the PCAM filing, we are having discussions on the RCE. RCE are reliability contingency event, we feel has been a pretty consistent and effective tool to date. We are -- we continue to focus and dialogue with them. Would we like something like that to proceed to further align the energy cost? Yes. Because it helps support our just overall approach to a more efficient pricing of energy. That's an open dialogue right now. I don't know that I really want to handicapped it. I know that it's more of a broader discussion on how to address energy costs here. I will just say it is a -- it is a nice tool. It works effectively for us now, and we'll continue to work towards as modern and effective in energy recovery mechanism as we can with our regulator. Maria Pope: Gregg, let me add a little bit to that. The events that we saw in January of 2024, we're also impacting other utilities in the region, and we saw similar issues across the entire Pacific Northwest and West Coast in terms of energy markets. So we're pretty similar in terms of the impact of those storms to other utilities. Longer term, we are working towards joining the energy data head market with the California independent system operator. We're expected to go live with that in October of next year. That will very much change our overall energy procurement and I'm not so sure that the PCAM mechanism with the RCE will be the best going forward. We're going to need to align the state's policies to the broader market as we are doing more scheduling of energy and optimization versus energy management and purchases. Operator: And the next question will come from Shar Pourreza with Wells Fargo. Unknown Analyst: It's actually [ Constantin ] here for Shar. Maybe just a little bit of cleanup just with the kind of quarter up 5% loan growth and the full year step up. Is that significant enough to incorporate financial plans? And kind of what's the threshold for some of this higher load growth to start kind of making more impact within the kind of base financial plan? Joseph Trpik: So as it relates to the load growth to your question of how does the -- how does it drive more to the plan. It will be as we clarify and get the tariff as it relates to margin, right now, the new data center tariff is with -- on the regulatory side to get drawn out. And so being able to take advantage of that growth at a more balanced margin, we'll do two things. One, it will balance out the cost to our residential and other customers, but then to also to the extent you see this growth will incrementally drive further value. So that for us, we're a bit in a wait and see. We expect that tariff -- we'll get that tariff when we get that tariff. But that will be a nice metric point to be able to capture some value, and I believe that's scheduled for March. Unknown Analyst: Okay. And that's kind of when you would start incorporating some of that into the forward-looking financial plans? Joseph Trpik: Well, I think that's the place where you'd start to be able to identify to the extent that you continue to see that growth, you would start pricing that growth a little bit differently and you'd be able to start to determine if there's incremental value there -- because you'll have a clear cost structure. Unknown Analyst: And then just one follow-up on the '25 RFP process. You kind of noted that there's some lessons learned kind of being incorporated there. Just maybe given the cyclical nature of the RFP process and generation needs, is there kind of any changes in the framework that we should be thinking in terms of long-term assumptions, like volumes, ownerships just in light of the '23 outcomes? Joseph Trpik: I don't think as it relates to the ownership and anything like that, no. I mean, we continue to work with the commission on a multipronged approach here. I mean I do think like the key message, if you ask me right now, what is it for '25, it is we've accelerated the process, right? The change this time is instead of having a consecutive RFP process, we have a concurrent process that is looking to optimize the credits that are out there, and that's part of this design. We will continually work to balance the procurement, both between ownership and PPAs. But for right now, the main changes to drive as much of the benefit as we can tax credit wise out of these projects. And that could either lead to the acceleration of projects from what is the requested date within the RFP. Other than that, I don't think we'll see any other changes. Other than to continue to just work with all the constituents to continue to align to the market. Operator: And our next question will come from Paul Fremont with Ladenburg. Paul Fremont: You gave sort of $150 million of tax credit for '25, and I think you've talked about sort of $2 billion. Can you give us sort of an annual estimate of what tax credits you expect to realize? Maria Pope: So what we're really looking at is anywhere from 30% upward of renewable energy projects battery storage. And so we will continue to focus on maximizing all available ITCs and PTCs and really, we make a determination on which one based on the net present value. Batteries and solar tends to lean a little bit more to our ITCs and wind tends to lead a little bit more towards PTCs. But this is an important way that we're bringing federal dollars back to reducing customer prices for renewable energy and creating investment opportunities with the state of Oregon and regionally. Joseph Trpik: And Paul, just to add the -- there is a bit of a cyclicality as we have these cash flows. So as we have these projects, the ITCs will come through for the RFP, obviously, what we are talking about here, and you're seeing the cash flows this year you're seeing are both the remaining ITCs that came from the Constable project last year and then the ITCs from the Seaside project this year. On an annualized basis, the foundation that we come from, is the PTCs as related to our wind projects, call that around $50-ish million a year, and then the cyclicality would be the ITCs that come from RFP projects at least, currently, the way cash flows. Paul Fremont: Then with respect to the wildfire action by the legislature last year, I think there was a proposal that would have created a fund of I think it was $800 million. Are you -- number one, I mean, is that amount -- an amount that you would feel is adequate? And is that what you would like to see the legislature do to create sort of a wildfire fund of 800? And what other action would you hope for out of the legislature? Maria Pope: Sure. So we're still actively engaged with legislators and stakeholders across the state and the region. But this isn't just a legislative strategy. It's also a regulatory strategy as well. This next coming year, we have a short session. It's just about 5 weeks. And there are a number of state-wide priorities, meaning that we could see more results out of the legislature in '27 versus '26. On the regulatory side, we continue to work with regulators and staff on solutions. First of all, starting with all of the work we do operationally to reduce wildfire risk. And that's all detailed in our wildfire plan. And obviously, the recovery associated with that as well as standard of care and then also mechanisms for self-insurance and other sorts of things. Paul Fremont: Great. And then last question for this year, can you give a sense of -- are you expecting to experience any regulatory lag in terms of earning your authorized ROE? Or what would -- if there is lag, how many basis points would you expect that to be this year? Joseph Trpik: Paul, using our sort of approach this year with the Seaside battery approach as well as the cost management, we've tried to put some downward pressure to squeeze that lag, and we believe we're down to something around 70 basis points or less that we expect to see here and into the future as we balance a selection of regulatory filings and cost management. Paul Fremont: I'm sorry. You said 3 basis points? Joseph Trpik: I said 70. Paul Fremont: 70. I'm sorry. Okay. Joseph Trpik: Yes, that is -- and just as a reminder, that is a compression from what we had experienced historically. Paul Fremont: Right. And then you would expect then to achieve on a go-forward basis, sort of a maintenance of that level, that 70 basis points go forward? Joseph Trpik: Yes. We expect to do that and we expect to continue to apply downward pressure on that as it relates to our cost management work as it continues to mature. And so we expect to see at least somewhat of a little bit more compression there as we execute and get fully into the cost management program in 2026. Paul Fremont: So that could be -- in other words, that could be diminished, let's say, to what level? Joseph Trpik: We haven't disclosed to what that level is. I mean the way we look at it is a balance to where we think to next year using the DSP as our regulatory approach as well as the cost management and others. We sort of think of it as a basket of items to help us continue to drive within our earnings range. But it is a goal of ours to just be as tight as we can. Operator: And the next question will come from George Sanoulis with Mizuho. George Sanoulis: So I know the DSP was filed in July, but I'm just wondering if you had any preliminary discussions with parties ahead of that filing? And given the Seaside proceeding resulted in the balanced outcome, do you think we could see that in the DSP proceeding? Joseph Trpik: As it relates to the DSP consistent with the Seaside filing, we did have an MOU, we do have an MOU in place with them. So the MOU does govern the DSP as well. The -- just as a reminder, the reason we took the approach with the DSP here was really to drive clarity for parties, right? The DSP is a filed and accepted docket from -- that lays out our sort of our action plans for the distribution. And so we felt that you get to the clarity to say we'll have a case that focuses on projects that are agreed to have benefits for the customers. So that -- then using that and then looking to Seaside, right, the Seaside, we felt that the MOU really and having an MOU and spending the time before really allowed us to have a focused dialogue and have a constructive dialogue and outcome when we look to both the testimony and some of the intervenor work, and we would expect that to continue here with the DSP. George Sanoulis: Great. And can you talk a little bit about how you plan to utilize GridCARE? And what initial tests you've done or you plan to do and when you expect to see measurable impacts to unlock additional system capacity? Maria Pope: Sure. So first of all, we're really excited about the opportunity that we've seen with our partnership with GridCARE. It comes out of the work that we've done with other start-ups and innovative companies at Silicon Valley and Stanford's school of engineering. The program is essentially takes a lot -- enormous amount of data, AI analytics. It actually takes compute that exceeds most capabilities and for which we actually went to Stanford to do the work. Right now, we have about 80 megawatts unlocked, but that's just in a pretty narrow portion of our system. So we would expect to advance. I would also say it's not just the AI analytics and also the dynamic line ratings, which gives us much more information on temperature and wind speeds that can unlock additional capacity and then having battery storage in different places across the service territory further enhances the work that we're able to do to get the maximum amount of capacity out of existing and new transmission infrastructure. Operator: I show no further questions in the queue at this time. I would now like to turn the call back over to Maria for closing remarks. Maria Pope: Thank you. And thank you all for joining us today. We appreciate your interest in Portland General, and we hope to connect with you soon. In particular, I assume that we will see many of you at EEI shortly in Florida. So thank you very much. Have a great day and a nice weekend. Operator: This does conclude today's conference call. Thank you for participating, and you may now disconnect.
Operator: Thank you for standing by. This is the conference operator. Welcome to the Eldorado Gold Third Quarter 2025 Results Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Lynette Gould, vice President, Investor Relations, Communications and External Affairs. Please go ahead, Ms. Gould. Lynette Gould: Thank you, operator, and good morning, everyone. I'd like to welcome you to our third quarter 2025 results conference call. Before we begin, I would like to remind you that we will be making forward-looking statements and referring to non-IFRS measures during the call. Please refer to the cautionary statements included in the presentation and the disclosure on non-IFRS measures and risk factors in our management's discussion and analysis. Joining me on the call today, we have George Burns, Chief Executive Officer; Christian Milau, President; Paul Ferneyhough, Executive Vice President and Chief Financial Officer; Louw Smith, Executive Vice President, Development, Greece; and Simon Hille, Executive Vice President, Operations and Technical Services. Our release yesterday details our third quarter 2025 financial and operating results. This should be read in conjunction with our third quarter 2025 financial statements and management's discussion and analysis, both of which are available on our website. They have also both been filed on SEDAR+ and EDGAR. All dollar figures discussed today are U.S. dollars, unless otherwise stated. We will be speaking to the slides that accompany this webcast, which can be downloaded from our website. After the prepared remarks, we will open the call for Q&A. At this time, we will invite analysts to queue for questions. I will now turn the call over to George. George Burns: Thanks, Lynette, and good morning, everyone. We are pleased to welcome Christian Milau as President joining as part of my succession planning. Christian has already been actively engaged with our leadership team through recent budget and strategy discussions and has met with a number of our shareholders and analysts since joining last month. He brings a fresh perspective and a strong focus on our key priorities. His appointment further strengthens our leadership team as we continue to advance our growth strategy and position Eldorado for long-term success. Turning to the outline for today's call. I'll begin with an overview of our third quarter 2025 results and highlights. I'll then hand the call over to Christian for his remarks, followed by Paul on our financials and then Louw and Simon with an update on projects and operations. Turning to Slide 4, our third quarter highlights. We achieved safe production of 115,190 gold ounces and generated approximately $77 million of free cash flow, excluding securities investment. Operational performance remained strong at Lamaque, benefiting from early processing of the remaining portion of the second Ormaque bulk sample. Kisladag had fewer tonnes placed on the pad and lower grade stack as a result of reduced equipment availability and short-term mine plan resequencing as well as placement of ore on a test pad for the whole ore agglomeration project. Efemçukuru maintained stable production, while Olympias had challenges from stockpiled ore containing the viscosity modifier used in the tailings paste backfill that negatively impacted the process water chemistry in the flotation circuit. During the third quarter, we improved management of the stockpile of ore but modest negative impacts on metal recovery may persist as we continue processing material from affected backfill stopes and stockpiles. Given our strong performance through the end of the third quarter, we are tightening our 2025 guidance range on gold production and now expect to be between 470,000 and 490,000 ounces. Turning to cost. We have revised our 2025 guidance upwards. Total cash costs are now expected to be between $1,175 and $1,250 per ounce sold and all-in sustaining costs are expected to be between $1,600 and $1,675 per ounce sold. These increases were primarily driven by: one, record high gold prices and recently enacted higher royalty rates in Turkiye driving higher royalty expense; and second, lower-than-expected performance at Olympias has resulted in lower byproduct sales, higher processing costs with production expected to be at the lower end of the guidance range. Additionally, for 2025, we also expect sustaining capital cost to be at the higher end of our $145 million to $170 million guidance range. In line with previous 2025 guidance, operations growth capital is expected to be between $245 million and $270 million. Lastly, at Skouries, project capital investment for 2025 has been revised upward to between $440 million and $470 million as a result of the acceleration of work originally planned for 2026 across several noncritical path areas and proactive derisking efforts. The estimated overall project capital remains unchanged at $1.06 billion. We are on track with accelerated operational capital and are maintaining our guidance of $80 million to $100 million for 2025. Turning to Slide 5 in the third quarter. Our lost time injury frequency rate was 1.21, an increase from the LTIFR of 1.10 in the third quarter of 2024. We recognize there is always room for improvement and remain committed to continually strengthen our safety performance. Throughout 2025, we're advancing health and safety initiatives. These efforts are reinforced by the multiyear rollout of our Courageous Safety Leadership program launched earlier this year. On sustainability, our team in Quebec recently welcomed a delegation of external and internal verifiers to complete the verification against the standards of: one, our sustainability integrated management system; two, the Mining Association of Canada's Towards Sustainable Mining initiative; and three, the World Gold Council's Responsible Gold Mining Principles. The objective of the integrated verification was to demonstrate our commitment to health and safety, social and environment performance. While the reports are in the process of being finalized, we are encouraged with the preliminary results and look forward to sharing our performance when they become available. During the quarter, we continued to execute on our share repurchase program, buying back and canceling approximately 3 million shares for a total of $79 million. For the 9 months ended September 30, 2025, repurchases have been approximately 5 million shares for a total of $123 million. The program reflects our continued commitment to disciplined capital allocation and returning value to our shareholders. With that, I'll turn the call over to Christian to say a few words. Christian Milau: Thanks, George, and good morning, everyone. I'm very excited to be joining you today in my new role at Eldorado. While I've only recently joined the company in September, pleased with the company's strong culture, talented people and high-quality asset base, including operations and projects in attractive mining jurisdictions with long average mine lives and significant prospectivity throughout the portfolio. I have already spent considerable time with our leadership teams through initial budget strategy meetings. These sessions have given me a strong sense of the ambition, opportunities and discipline that will guide the company during the next phase of the strategy as well as the strong alignment around delivering sustainable value to all stakeholders. What stood out most to me is the depth of talent, the capacity across the organization and the clear commitment to safety, operational and ESG excellence as well as disciplined capital allocation. My focus in the months ahead will be on supporting our teams as we advance our near-term priorities and ensuring that we positioned -- we're positioned to deliver our long-term strategy as we go through the Skouries' cash flow inflection point in 2026. Having just returned from our sites in Turkiye and with visits planned to Greece and Quebec in the coming months, I'll have the opportunity to see all the mines firsthand. The visit so far stood out to me with the excellent commitment and pride on display. It's been impressive to witness the energy and collaboration of our teams on the ground, and I look forward to continuing to engage with more of our sites, communities and investors in the months ahead. With that, I'll now hand over to Paul to walk through the financial results. Paul Ferneyhough: Thank you, Christian. Moving to Slide 6. Our third quarter results reflect consistent operational performance and are aligned with our tightened full year production guidance. Robust gold prices have contributed positively to cash flow from our operations, further supporting our capacity to execute our strategic and operational investments in the coming months. In Q3, Eldorado reported net earnings from continuing operations of $57 million, equivalent to $0.28 per share. Excluding onetime nonrecurring items, adjusted net earnings were $82 million or $0.41 per share for the quarter. The principal adjusting item was a $22 million unrealized loss on derivative instruments, primarily due to gold commodity swaps. Free cash flow for the quarter registered a negative $87 million. However, underlying free cash flow, excluding capital investments in the Skouries project amounted to positive $77 million. Turning to our producing assets. Cash flow from operating activities before changes in working capital totaled $184 million during the quarter. Our corporate gold price collars will continue to settle monthly through the year-end with approximately 50,000 ounces outstanding for the fourth quarter and an upper limit of $2,667 per ounce. Following the expiration of these collars, we will be fully exposed to market gold prices with only minimal hedging derivatives remaining tied to the Skouries project financing facility. Production costs for the quarter reached $164 million, representing a $23 million increase over Q3 2024. 1/3 of this increase is attributable to higher royalties while the remainder stems from the rising labor costs in Turkiye, where inflation continues to surpass local currency devaluation, and at Lamaque where additional labor and contractor expenses were incurred due to the planned deepening of the Triangle Mine. In Q3, total cash costs were $1,195 per ounce sold and all-in sustaining costs or $1,679 per ounce sold. Gross capital investments at our operating mines totaled $58 million for the quarter. At Kisladag, these expenditures included planned waste stripping and equipment costs related to construction of the North Heap Leach pad second phase. At the Lamaque Complex, investments focused on the Ormaque development as well as construction of the North Basin water management facility and initial procurement for the recently approved paste plant. Progress continued at Skouries, including facility and process construction as well as early mining activities in both the open pit and underground areas. Throughout the quarter, approximately $138 million was invested in the project, supplemented by an additional $18 million in accelerated operational capital for self-performance of open pit mining operations. Current tax expense for quarter 3 was $52 million, reflecting a $13 million increase from the prior year period, attributing to improved profitability in Canada and Turkiye. Deferred tax expense stood at $2 million compared with a recovery of $11 million in Q3 2024. This included a $4 million expense related to net movements against the U.S. dollar, mainly driven by the lira and euro partially offset by the reversal of temporary differences. Advancing to Slide 7. Our balance sheet remains robust, providing the flexibility needed to support growth initiatives and return capital to shareholders. With liquidity totaling approximately $1.1 billion, we continue to be well positioned to invest in our cash-generating assets, advanced Skouries towards completion and create additional value through disciplined capital allocation and the NCIB program. Earlier this month, and with Skouries production coming ever closer, several staff members attended LME Week in London, the foremost annual event for the global metals community. Productive discussions were held with traders and smelters regarding the sale of our high-quality, clean copper-gold concentrate from Skouries. As a result, we anticipate finalizing initial multiyear offtake contracts by year-end. With this overview concluded, I will now hand the call over to Louw, who will present the highlights of our Greek assets. Louw Smith: Thanks, Paul, and good morning, everyone. Let's begin with Slide 8, which highlights the progress at our Skouries Copper Gold project. As of the end of Q3, overall progress on Phase 2 construction reached 73% and 86% when including Phase 1. We remain on track to achieve first copper gold concentrate production towards the end of the first quarter of 2026. With commercial production expected in mid-2026. We now have approximately 2,000 personnel on site, including 236 members of the Skouries operational team. This strong workforce has enabled us to derisk several areas early. Our skilled labor ramp-up began with concrete, structural and mechanical trades and is now transitioning to electrical, piping and control systems. While we've exceeded our labor targets, our focus remains on aligning skilled resources with active work fronts to support our execution plan. From a productivity standpoint, construction performance continues to track at or slightly above plan across the site. On the bottom of Slide 8, you'll see a photo of the open pit. This week, our fourth crew started operating, enabling the transition to a 24/7 rotation. As of the end of October, we had stockpiled approximately 531,000 tonnes of ore from the open pit and an additional approximately 93,000 tonnes from the underground, containing an estimated 21,000 ounces of gold and 5.5 million tonnes of copper, positioning us well as we prepare for commissioning and initial concentrate production. Turning to Slide 9. The photos here and on the following slides illustrate the steady advancement of work underway. Infrastructure around the process plant continues to progress. Final foundations for support buildings were completed in early October and structural mechanical piping and electrical work are ongoing across the key areas, including the substation, line plant, flotation blowers, compressors at guar area. The control building structure is complete with electrical installations underway on the first 2 levels. We have completed pre-commissioning of the concentrate filter presses and water testing of the flotation cells and tanks, preparation for pre-commissioning the pebble crusher are in progress. Moving to Slide 10. Progress continue on the thickeners, water testing of the first two thickeners is complete and piping installations have commenced following completion of the pipe rack installations. Slide 11 focuses on the filter tailings plant, which remain on the critical path. As of the end of October, structural steel installation at the filter tailings building was approximately 92% complete. The time lapse video showcasing this progress is linked for reference. Mechanical work progressed with the assembly of the filter presses with 4 complete at the end of the third quarter and the remaining tool on plan for completion in November with each press equipped with 98 plates. The compressor building steel structure is 98% complete and all 6 compressors and all -- and air receivers have been installed. As seen on Slide 12, construction of the crusher building structure is progressing. Concrete workers reached the final elevation above the foundation with the final wall lifts advancing. The primary crusher is assembled in position and work is underway on cable tray and internal structural steel stairways and platforms. Conveyor foundations between the primary crusher and the process plant, including the coarse ore stockpile are now complete. Conveyor preassembly and support steel installation are well underway. At the coarse ore stockpile on Slide 13, the stockpile dome foundation is nearing completion and assembly of the dome has commenced. The first of the 3 reclaim feeders and associated chute work has been installed with preassembly continuing on the remaining 2 feeders. Moving to Olympias on Slide 14. Third quarter gold production was 13,597 ounces and total cash costs were $1,869 per ounce sold. Production was impacted by flotation circuit stability issues earlier in the year, which led to a modification of the paste backfill blend to eliminate viscosity modifiers in the backfilled stopes. While plant operations recovered substantially in Q2, affected stockpile ore continued to be processed in the third quarter despite efforts to minimize negative impacts in the processing circuit, ongoing process water chemistry challenges further reduce the metal recovery during the quarter. While mitigation measures are underway, modest negative impacts on the metal recovery may persist as we continue processing material from affected backfill stopes and stockpiles. Progress continued on the planned mill expansion to 650,000 tonnes per annum during the quarter, with the early works advancing and demolition activities underway within the concentrator. All of the major equipment, including the verti-mill, flotation cells, thickeners, cyclones and E-room have been delivered. We expect progressive commissioning and ramp-up in the second half of 2026. We remain committed to driving transformation at Olympias. A comprehensive program is now underway to modernize and optimize the process plant and surrounding infrastructure alongside leadership and skills development program aimed at strengthening capabilities across all levels of the organization. I'll stop there and hand it over to Simon to discuss the Turkish and Canadian operations. Simon Hille: Thanks, Louw. Starting in Turkiye on Slide 15. Kisladag production totaled 37,184 ounces with total cash costs of $1,309 per ounce sold. The decrease in production during the quarter compared to Q2 2025 was primarily due to lower tonnes mined as a result of lower-than-planned equipment availability and the resulting short-term resequencing of the mine plan. Fewer tonnes placed on the pad and lower grades from prior periods along with the placement of ore on the test pad to support the whole ore agglomeration study. The decision has been made to proceed with a whole ore agglomeration at the capital cost of approximately $35 million, reinforcing our commitment to enhancing permeability, improving leach kinetics and shortening the leach cycle. Over the life of mine, we expect operating and capital cost savings driven by a shortened leach cycle specifically the shortened leach cycle is anticipated to reduce sustaining capital expenditures through lower consumable requirements such as liners and associated pipeline. Installation of the agglomeration drum is expected in 2027, with long lead items expected to be ordered in Q4 of 2025. We made a strategic decision to decouple the whole ore agglomeration from the HPGR screening reflecting our continued focus on capital discipline. To support future optimization, geometallurgical studies, continue in order to characterize future mining phases and will evaluate the benefit of additional screening for the HPGR. These studies are expected in the first half of 2026. On Slide 16, at Efemçukuru. Third quarter gold production was 17,586 ounces at total cash costs of $1,522 per ounce sold. Gold production throughput and average gold grades were in line with the plan for the quarter. And now moving to the Lamaque Complex on Slide 17. Lamaque delivered production of 46,823 ounces at total cash costs of $767 per ounce sold. Third quarter production was positively impacted from higher throughput driven by processing the remaining portion of the second Ormaque ore sample. The high-grade ore was treated in a blend with Triangle ore and performed very well. I would also like to congratulate our team at Lamaque hosting during the quarter nearly 30 Quebec members of Parliament of Canada. The visit was a proud moment for our team as they showcased our commitment to innovation, operational excellence and sustainability leadership. And with that, I'll turn back to George for his closing remarks. George Burns: Thanks, team. Before concluding today's call, I'm pleased to announce that yesterday, we finalized the sale of the remaining gold project, Certej. This transaction marks the end of a lengthy process aimed at divesting noncore assets within the portfolio. I look forward to monitoring the progress of the project given our retained equity and royalty. Gold prices have remained strong, but we've seen some sharp swings lately. Through this environment, we remain strongly committed to disciplined cost management, to protect and expand our margins. Capital allocation continues to be a key priority. We're returning capital to shareholders through our enhanced share buyback program while at the same time advancing our high-return growth initiatives across our global portfolio. This positions us for sustained growth, margin expansion and driving enhanced shareholder value as we enter the next phase of Eldorado's transformation. Thank you for your time. I will now turn it over to the operator for questions from our analysts. Operator: [Operator Instructions] The first question comes from Cosmos Chiu with CIBC. Cosmos Chiu: Welcome, Christian. Maybe my first question is on the transaction that happened earlier today. Fresnillo buying Probe gold with the support of Eldorado Gold. I guess my question is, George, has this always been the desired outcome for that investment? And then I guess broader scale, M&A is heating up in the sector. How do you see Eldorado positioned? George Burns: Sure. On Probe, I mean, we took a toehold in Probe a number of years back with the view that there was a property package that could have potential supplemental ore to feed our really permitted mill capacity that exceeds our current run rate. And so our hope was that they would discover some high-grade, high-value underground opportunities that subsequently could be part of the Lamaque complex. Really how that has evolved as they've discovered a large, low-grade open pit opportunity. And as we assessed that opportunity, it really didn't stack up with our other capital allocation opportunities. And so when we heard this week that Fresnillo made an offer, it didn't fit our strategic initiatives going forward. And so we didn't agree to sign on to support that acquisition. On the bigger, broader M&A opportunities ahead, I mean, at Eldorado, our focus is head down, deliver the high-value project Skouries, Olympias expansion and other investments across the portfolio. That's our priority. As we come out of delivering Skouries in the first half of next year, and we're going to be positioned to continue to invest within the portfolio, but look for other opportunities externally. So I think we're in a great position in a great market. But for now it's head down focused on what we're doing. Cosmos Chiu: Perfect. Maybe switching gears a little bit to Skouries. Certainly, sounds good to hear that it is on time for first concentrate in Q1 2026. As you have mentioned, the filter tailings plant is on a critical path. Louw did a good job in terms of summarizing it. But is there anything else that's on the critical path? That's number one. And number two, it is a fairly tight schedule, delivering first concentrate by Q1 2026 and it kind of straddles your holiday season. I know there has been some changes in the schedule in terms of work schedule. But how have you factored in potential workers taking time off during the holiday season. Does it really go kind of dead in Greece during those months or during those weeks? And how should we look at it in terms of kind of like looking at the risk on the time line for delivery by Q1 2026? George Burns: Thanks for the question, Cosmos. Yes, so for a critical path, the dry stack filter plant given the short or the small footprint that we're dealing with there is the key focus for us. Obviously, everything in front of that has to be done and constructed on time to be able to put ore through that filter facility. But I did tell there's nothing at this point that we're worried about. Now looking forward, you hit the nail on the head. It's the transition to get the additional trades on piping the electrical and control system that are critical to delivering everything ahead of the dry stack filter plant. I'd tell you we have good visibility on that. The transition is evolving week-over-week, month-over-month and will continue right up to the first quarter, and then there'll be a dramatic drop off in construction workers and a huge focus on preparing for commissioning. So we're feeling good about that transition. We've got visibility on the required workers over the next 5 months, say. And as we say, we're on track to deliver first concentrate at the end of the first quarter. Cosmos Chiu: Great. And maybe just one last question on Kisladag quickly, the whole ore agglomeration project. Could you maybe remind us what's the potential impact here on recovery, on throughput? And is it really just overall kind of potentially having less wear and tear on the HPGR longer term? Is that what we're trying to do here? Simon Hille: Thanks, Cosmos. It's Simon. The whole ore agglomeration, the purpose of that is primarily to enhance permeability in the leach pad, so that we get a good contact with the lixiviant and the ore particles. And so where we see the best benefit there is, as we've reported previously, we've got a very long leach cycle. Our leach cycle currently is sort of around 300 days on average with enhanced permeability that comes with the whole ore agglomeration. We expect to see that reduced to 200 days. That provides us with the primary benefit of obviously getting our returns faster in terms of metal recovery, but also less infrastructure requirements in the longer term because we need less footprint in order to leach the tonnes in the plan. So at the moment, we're not planning any enhanced recovery in the model but faster kinetics generally are a positive sign for that in the long term. Cosmos Chiu: Yes. Thanks, Simon. I forgot that the leach cycle is that long at 300 days. So 200 days certainly gives it much needed benefit. Operator: The next question comes from Tanya Jakusconek with Scotiabank. Tanya Jakusconek: Welcome, Christian, on board. So maybe, George, can I start with you? Just on Skouries, can I just review with you, we've got that end of Q1 for the concentrate first gold pour. We are then going commercial by mid-2026. Can you remind me again what your definition for commercial production is so that we can monitor the correct 60% of the mill or whatever, however you're going to define it, so we can model that? And then can you remind me from commercial, when do we actually get to steady state? And what do we need to get there? So that's my first question. George Burns: Yes. Thanks for the question, Tanya. On the commercial production, we're expecting to be at 80% of design nameplate throughput at that point and then expect to get the rest to 100% by the end of the year. So that's the key criteria. We're feeling comfortable with that given that it's a single floatation circuit. Olympias is much more complex with 3 concentrates. And we've got already some of our operators from Olympias at Skouries going through training on that particular facility. And I think we're in good shape to deliver that ramp up. Tanya Jakusconek: Okay. 80% of designed nameplate capacity to go commercial, is that 80% over 30 days? George Burns: I believe that's correct. Tanya Jakusconek: Okay. And then from midyear, you expect 6 months really of ramp-up to get to nameplate by the end of 2026 is what I heard. Is that correct? George Burns: That's correct. That's what we're assuming. Tanya Jakusconek: Okay. And then -- sorry. And with that, the old technical report and I say old because it is quite outdated, when are we going to have a better understanding? Obviously, as soon as you operate, you have a better understanding on operating costs, but when is the market going to be given an update on costing for this operation, both on the operating and sort of the capital sustaining costs? George Burns: Yes. So we'll be updating the market on our 2026 guidance in Q1. And with that, will include the remaining capital spend and the operating cost post commercial production. So that will be the first window. Just to reference back to the technical study. So I mean we completed that technical study just prior to getting the financing in place and then initiating construction. So it's only as stated as the construction has been. But again, we'll be updating that as we work our way through next year and getting the actual results that can then be built into an updated technical study. Tanya Jakusconek: Okay. So we would -- so you are expecting to give us an updated technical study in 2026? George Burns: No, I'd say we're going to collect the data from 2026, and that will inform the timing and results in an updated study. So we haven't had a date on that. We're waiting for the results. Tanya Jakusconek: Okay. All right. And then just secondly, as we come towards year-end, I know in December, you'll be releasing your -- and we're literally a month away or thereabouts for your reserves and resources. Can you talk to me about how you were thinking about cutoff grades? What are you thinking about inflation on your costs, gold price inputs. And how do these reserves look and resources? George Burns: Yes. So I mean, the first thing on metal prices. So we're in the process of determining where to land on update on our reserve price assumptions. We use a look back on metal prices as well as staying consistent with our peer group. So we're expecting a modest increase in metal prices. Our focus is to keep our reserve price conservative, ensuring we have very strong margins to drive profitability in the company. So I'd just tell you, it won't be consistent with the peers, a modest increase in metal price assumptions, and we do all this in the fourth quarter at Eldorado so that we have the latest and greatest information to support our budget for next year and our guidance that we'll set in the first quarter. So -- and then in terms of inflation, cutoff grades, I mean, we're working through all those as we speak, and we use actual data and project through our life of mine studies that are done during the summer to set those assumptions. So it's work in progress. I would tell you we're not expecting any radical change in any of those inputs, a modest increase in metal price assumption. Tanya Jakusconek: Okay. And do you expect to replace, do you think your reserves this year? George Burns: Yes. I mean, we haven't finished the work. We're feeling good about it. Stay tuned. We're not far away from releasing that information. Tanya Jakusconek: Okay. And then I guess my final question would be to Christian. Welcome on board, Christian, and you've mentioned in your opening remarks that you're looking forward to the next phase of the strategy and you visited all of the operations. So maybe you can share with us as you look at the company, what are your top 5 priorities for the next 12 months? Christian Milau: Yes. Thanks, Tanya. And actually, just to clarify, I haven't visited them all yet. I said in the next month, I'll visit Quebec and Greece. I'm sort of following along with the preplan visits in our budget strategy cycle here. But I've been really impressed with what I've seen so far. Obviously, I've seen a lot of mines around the world and the ones at Tüurquie I got to visit last week and the week before, very impressive in terms of an ESG approach, in terms of how they operate, the longevity of the team and just the skill and experience and reputation in the industry. In terms of priorities, really for me right now, it's really getting an opportunity to settle in for me when I came in, looking at the culture and how I can slot into a team and really the transition with George, I think it is a wonderful period of time for me to just get caught up without the pressure of having a quick change. And you see in our industry, it happens quite often overnight and get up to speed with the budgets. We're going through that next phase of strategy for the 5 years coming once Skouries is up and running. And I think critical to us will be that post-Skouries cash flow inflection point and how to allocate the capital. So in our sort of 2030 strategy planning, that will be something we're going to be looking at very closely. And I don't have any answers for you today specifically because I think we're going through that process, but it's a wonderful time to be joining a group like this where, for me, the culture fit was really good. I think the team is diverse and deep. And I think the spread of assets is wonderful and the exploration upside and the long lives already in the portfolio are really exciting. And there's growth projects here are very valuable from our own cash flow. So it's kind of building all those into that next phase of the strategy as it sort of inflects and turns to cash flow generation from pure spending and building Skouries over the last couple of years. Tanya Jakusconek: Okay. So I guess what I'm hearing from you, and maybe I don't want to have my own assumptions, but maybe you can tell me if this is correct. So you've taken a look at the team, the culture, you're happy with that. You're looking to get Skouries behind and producing so that we can then, number two, look at capital allocation, whether that's continued share buyback, dividends, et cetera, et cetera, for return to shareholders. Maybe you can talk about the portfolio itself, like what does Perama stand in here? Any of the other assets, Probe is noncore, anything else that you see noncore, other assets that you want to push through further in the Eldorado strategy? Christian Milau: That's a fulsome question, Tanya. I think at this stage, when I looked at it, exploration and just continuing to extend and advance mine life is critical. And now there's an opportunity with these kind of gold prices in this environment. And again, my superficial early look is there's real opportunity to spend some money and focus on that. There's a great team here, I think, that has some plans and excitement around our current assets and in the countries we currently operate. So I think that will be one of the key elements. And Perama Hill, I mean, literally going through that phase of, I think, getting GIA updated and submitted. So assuming there's a permit over the next year or so, it would be nice to put that into the plans. I don't think we're quite ready to actually build the timing in yet. But I think there's been a good job done in Greece to build the sort of social license and the acceptance of the relationships. And when you look at Skouries and Olympias, there's a really nice platform. So I think Perama could come in afterwards, but I can't commit to timing at this stage, obviously. And as George alluded to, I think there are these opportunities, which Simon was saying in Turkiye to continue to improve, enhance and some of the operations are already underway and are performing well. In Quebec as well, there's exploration opportunities. There's already good results coming out of Ormaque underground, and there's an ability to expand that plant if there's enough ore there. So all those things could be part of the plan, but timing and specific commitments, I think it's a little bit early on that, but that's a good place to park some of the capital over time, I think. Tanya Jakusconek: Okay. Well, good. Look forward to working with you. Christian Milau: Thanks, Tanya. Operator: The next question comes from Don DeMarco with National Bank Financial. Don DeMarco: Maybe I'll just start off with Olympias. So obviously, the challenges in the flotation circuit were evident in Q3. And I heard on the call that they may persist for some time. And then concurrently, you've got this expansion underway. Does that expansion perhaps complicate things with regard to resolving the challenges in the flotation circuit? And maybe if you could just give a little bit more detail on when you think you might see a rebound in recoveries? George Burns: Well, maybe starting with recoveries. I mean, we've seen a rebound just in the last 2 months. So when we're successful at managing the ore fed into the plant and not getting a slug of this viscosity modifier in the plant, we're seeing good recovery. So it's been good in the last 2 months. But if we get a slug of this material in, it messes up the process water, and it takes time to clean it up. So we end up lowering throughput. We end up getting lower recovery. And that's the reality looking backwards. As Louw mentioned, this is a cut and fill mining method underground. And so these -- we put this viscosity modifier in the cemented backfill in stopes between Q3 of last year and Q1 of this year when we realized we have this problem. So as we mine next to all those stopes during that period, we have the risk of getting the viscosity modifier into that fresh ore. And that residual risk will remain until the second quarter of next year. Obviously, our mine operators and our plant operators are day to day, shift by shift, managing the blends. We do have a design to take the higher risk stockpile ore and -- ore will be coming out of the underground and process it before it goes into the plant. So there were crushing and screening and taking the coarse material. It won't have a significant amount of that modifier in it, and that goes into the mill. The fine material, we're looking at permitting and the ability to wash it and remove that most of that viscosity modifier. So later on, that could be put in the plant. So these are the things that we're doing. And it's fair to say there's some risk remaining into Q2, but I'd say we're getting better at managing it. We're trying to be as proactive as we can to not have another significant upset. But as Louw said, the risk will remain. In terms of the expansion, really, there's no connection between this problem and the expansion. We're basically having to move some of the infrastructure like piping and cable trays to make room for the equipment that we're installing. So that work is in progress. We'll get that construction completed next year. It will be a staged approach. Some of the equipment will get stalled earlier in the year that will help improve the performance of the mill. The throughput won't happen until we get the grinding mill in and that happens in the second half. So we're expecting some really exciting results that come out of Olympias once we get this expansion completed. That's no longer the bottleneck. It will be back on the underground mine ramp up. And as we've talked over the last 2 years, we've done a really good job of debottlenecking the underground. So we get this mill expanded. Production goes up, margins expand, and we get this viscosity modifier behind us, Olympias will be a key contributor to cash flow. Don DeMarco: Okay. And then on to something else then. With the guidance adjustment that we saw with Q3, costs are higher. But of course, some of the drivers of those costs are outside of your control, such as the Turkiye royalty rates and so on. Could you just give us maybe a rough percentage of looking at the delta in that cost increase, how much was within your control and how much was not? Paul Ferneyhough: It's Paul here. So I think I heard you, you were breaking up a little bit, but the question is around our increase in our guidance for all-in sustaining costs. There's 2 things basically that have driven that. One that is in our control and that we've been dealing with and one that isn't. And they split about 50-50 in terms of how it's impacted our guidance for the rest of the year. So the first one is around gold price. If you remember, our original budget was set with a gold price of around $2,300. We're now assuming an average price to the end of the year of $4,000 an ounce. And at that level, we continue to see increased royalties, both from the absolute cost, but also the increase in the slate of royalties that we saw in Turkiye early in the year, and that's responsible for around 50% of the increase. And then the second 50% is really just a reflection of Olympias performance with those recovery issues and lower volume, and that has pushed up our per ounce costs. So it's 50-50 between them. We're not actually seeing any real inflation in costs in terms of -- versus our guidance for the year outside of that. Don DeMarco: Okay. And then just as a final question. Also in Q3, we saw a big increase in your share buybacks quarter-over-quarter. So I just was wondering, going forward, do you expect to maintain the level of buybacks in Q3 or maybe ease a bit, increase a bit? Just kind of -- just to get your sense at this point? And then also while on the top of capital allocation, maybe even any additional color on the dividend or the timing of the dividend as I know Christian brought that up in his response to Tanya. Paul Ferneyhough: Yes, sure. So as far as the share buybacks are concerned, we signaled at quarter end Q2 that we had extended our NCIB program for another 12 months with a maximum repurchase of 5% of our outstanding share capital. We do intend to be opportunistic around that. We think our shares are incredibly good value at the current level. But really, it's when there's opportunities in the market or if we're underperforming, then we will actually use the NCIB program to purchase those shares. As a good sort of working average, I would assume over the next 3 quarters that we continue to buy at approximately the same rate, okay? As far as dividends are concerned, I think we haven't changed our messaging around this. Next year is an inflection point for us in terms of cash flow generation as Skouries comes into operation. And that feels like a great time for us to then be considering if it's the right moment to put in place a sustainable dividend that we can stand behind going forward. And so I think that will be back on the agenda for us in terms of capital allocation as we move into next year. Operator: The next question comes from Lawson Winder with Bank of America. Lawson Winder: Thank you for today's update. If I could maybe push you a bit more on 2026 and the CapEx outlook. So for 2025 sustaining CapEx, we're running at the high end of the $145 million to $170 million. When you look to next year, I mean, is that higher end of the 2025 a pretty reasonable baseline for 2026? And actually, you know what I had asked a similar question for the growth capital at the operations. I mean, is that is the current $245 million to $270 million range, a decent level heading into next year? George Burns: Well, again, we'll be updating you in the first quarter on next year's guidance, maybe a couple of comments that might help. So the Olympias expansion, that's obviously underway in Quebec. We're completing the second bulk sample, but we're in the middle of permitting for a paste backfill plant, an operating permit. So the timing on that is uncertain, but there'll be capital to spend on Olympias when we get those permits. So stay tuned for that. As well, Simon's walked through the whole ore agglomeration, and we've committed that $35 million. So we got to build all that into next year's plan depending on permitting. I'd say those are the moving parts. The rest of the portfolio is pretty consistent. And then on the growth capital, well, beyond that is Skouries, obviously, we've kind of walked through that Q1 is the bulk of the spend next year in Skouries and we're commissioning in Q2. So there'll just be some residual growth capital happening there. As you look forward on Skouries though, remember that the pit is up and running, we're in good shape there. The plant will be running next year. We've got the first blast on the test, but over the next 3 years, we'll be investing in that underground to get the infrastructure in place for it to ramp up to be the sole feed to the plant at the end of the next decade. So there's incremental growth capital that will be happening over the 5-year plan. Next year, some of that capital on the underground will begin to be spent, but the ramp-up really starts happening at '27. So it's hard to give you specific numbers on next year. Hopefully, I gave you a little bit of color there, and it's not too far away from given the specific updated guidance on '26. Lawson Winder: Yes. Actually, that summary was very helpful. And I just would want to say, it's impressive that, that Skouries remains on track. And if I may, and just to cover off potentiality, should there be any delay, what would be a rough weekly or monthly holding cost of just keeping that going for a slightly extended period of time? George Burns: Yes, the way I would describe it, we're comfortable. We have all the equipment and materials there. So there's no risk on that side. We have the workforce. We're over 2,000 people at site right now, construction and operations ramp up. So the impact next year if for some reason, it took a little bit longer to get the first concentrate, those fixed cost that we were going to spend on a monthly basis is about $15 million. So that's really the impact of a delay. Lawson Winder: Okay. Relatively small percent of the overall CapEx. And then if I could -- I think I've asked you this before, but like I acknowledge you do not like to give guidance on gold production for -- on a quarterly basis. Just with Kisladag, there's obviously a lot of variability when it comes to the leaching times. Can you give us any sort of directional point or hint here on Q4, just when you consider what was stacked at the end of Q2, what was stacked in Q3? And yes, I'll just leave it there. Anything would be very helpful. George Burns: Yes. I mean, again point you back to guidance, although Q3, we had some negative impacts, we're still going to hit our guidance at Kisladag for the year. As you say, Q4 is a little bit tough. We had lower placements, precisely understanding how that's going to impact Q4 versus Q1, it's difficult to say. There's a bit of art and science in heap leaching. But all I can tell you at this point, we're comfortable we're going to be within guidance at Kisladag for the year. And so Q4, don't expect anything dramatic one way or another. It's going to be a good year at Kisladag. Operator: That's all the time we have for today. This concludes the question-and-answer session and today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
Operator: Good morning, ladies and gentlemen, and welcome to Vivo's Third Quarter 2025 Earnings Call. This conference is being recorded, and the replay will be available at the company's website at ri.telefonica.com.br. The presentation will also be available for download. This call is also available in Portuguese. [Operator Instructions] [Foreign Language] [Operator Instructions]. Before proceeding, we would like to clarify that any statements that may be made during this conference call regarding the company's business prospects, operational and financial projections and goals are the beliefs and assumptions of Vivo's Executive Board and the current information available to the company. These statements may involve risks and uncertainties as they relate to future events and therefore, depends on circumstances that may or may not occur. Investors should be aware of events related to the macroeconomic scenario, the industry and other factors that could cause results to differ materially from those expressed in the respective forward-looking statements. Present at this conference, we have Mr. Christian Gebara, CEO of the company; Mr. David Melcon, CFO and Investor Relations Officer; and Mr. João Pedro Soares Carneiro, IR Director. Now I'll turn the conference over to Mr. João Pedro Soares Carneiro, Investor Relations Director of Vivo. Please, Mr. Carneiro, you may begin your conference. João Carneiro: Good morning, everyone, and welcome to Vivo's Third Quarter 2025 Earnings Call. Christian Gebara, our CEO, will start us off by commenting on Vivo's connectivity and digital services performance as well as present our main ESG highlights for the period. Then David Melcon, our CFO, will give more details on cost and CapEx management, free cash flow generation, profitability for the period as well as an update on shareholder remuneration for 2025. With that, let me turn the call over to Christian. Christian Gebara: Thank you, João. Good morning, everyone, and thank you for joining us today. I'm pleased to announce that Vivo delivered another set of strong results, presenting real growth across all key lines fueled by a powerful commercial performance and our relentless focus on customer experience. In mobile, our postpaid segment continues to lead the way with access growing 7.3% year-over-year. Postpaid now accounts for 68% of our total mobile customer base, which has reached approximately 103 million connections. On the fiber front, we have 7.6 million homes connected, an impressive 12.7% increase year-over-year, and our footprint covers 30.5 million homes nationwide. Total revenues rose by 6.5%, driven by consistent results in both mobile and fixed services. Mobile service revenues grew 5.5%, while fixed services saw a 9.6% increase. This balanced growth highlights the strength of our diversified portfolio and our ability to meet demand across multiple segments. EBITDA grew 9% year-over-year with our margin expanding to 43.4%. This reflects our continued focus on operational efficiency and disciplined cost management. As a result, operating cash flow reached BRL 11.2 billion in the first 9 months of the year, up 12.4% compared to the same period last year. Net income rose 13.4%, totaling BRL 4.3 billion, while free cash flow approached BRL 7 billion with a margin of 15.6%. These strong financial results enable us to return BRL 5.7 billion to shareholders by the end of September, reaffirming our commitment to sustainable value creation. Moving to Slide 4. We show how our top line continues to grow at a strong pace, driven by an increasingly robust and diversified revenue mix. In the quarter, total revenues reached BRL 14.9 billion, once again led by the solid performance of our postpaid and FTTH segments that grew 8% and 10.6%, respectively. These 2 pillars clearly demonstrate how high-quality convergent services can boost monetization. Our new businesses also continue to gain traction, now accounting for 11.7% of our total revenues over the last 12 months, an increase of 2 percentage points year-over-year. This evolution underscores the success of our strategy to diversify and modernize our revenue base, ensuring sustainable growth in a highly dynamic and competitive market. Now on Slide 5, we highlight the key drivers behind our continuous ramp in mobile. In the third quarter, we recorded our highest ever postpaid net additions, surpassing 1 million net access machine-to-machine and dongles. These outstanding results reflect the success of our value-driven strategy and reinforces our leadership in the mobile market. Postpaid access grew 7% year-over-year, reaching nearly 50 million customers, while 5G adoption continues to accelerate with more than 21 million customers now benefiting from our award-winning technology. In fact, in September, Vivo's 5G network was recognized by Opensignal as the fastest in the world for the second consecutive year. Customer retention remains a top priority. Postpaid churn ex machine-to-machine and dongles reached just 0.98%, a testament to the loyalty of our high-value customer base, though we still see room for further improvement. ARPU rose 3.9% year-over-year, reaching a record high of BRL 31.5, supported by upselling and growing demand for data. These results demonstrate the effectiveness of our customer-centric approach, our ability to innovate and the strength of our mobile platform as a key growth engine. On Slide 6, we explored the continued capabilities of our fiber business and its convergence with mobile. FTTH access once again posted double-digit year-over-year growth, continuing the strong momentum we've seen in recent quarters. This performance is largely driven by our flagship convergent offer, Vivo Total that saw an impressive 52.7% increase year-over-year. Notably, Vivo's convergent base already nears 62% of all fiber access. This reinforces the market's clear shift toward bundled solutions. Our fiber footprint also continued to expand. In the last 12 months, we passed over 2.2 million new homes, reaching a total of 30.5 million. The take-up ratio improved to 24.9%, reflecting stronger demand and better conversion. Churn continues to trend downwards, marking the fifth consecutive quarter year-over-year improvement. For Vivo Total specifically, churn is 50% lower than our already below market fiber churn, highlighting the stickiness and value of the offer. Today, nearly 85% of FTTH sales in our stores are done through Vivo Total. This not only boosts lifetime value, but also drives higher user expenditure with gross ARPU reaching BRL 230 per month for Vivo Total subscribers. On this plan, we have reached 1.7 mobile postpaid lines per fiber connection, a clear demonstration of how convergence supports both lower churn and sustained ARPU growth for mobile and fiber. Turning to Slide 7, we dive into how our B2C segment is evolving with focus on how new businesses are driving incremental value and enhancing customer monetization. Over the last 12 months, total B2C revenues reached BRL 44.1 billion, up 5% year-over-year. This growth is supported by both our core connectivity services and the expanding contribution of new businesses that grew 15.3% and now represent 3.1% of total revenues. Revenue per RGU continues its upward trajectory, reaching BRL 64.6 per month. This reflects our success in deepening customer engagement and expanding share of wallet. Looking at the breakdown of new businesses, we see strong performance across key verticals. Our video and music OTTs remain a major growth driver, with revenues up 19.9% year-over-year. Meanwhile, our -- one of our health and wellness initiative, Vale Saúde Sempre now has around 450,000 subscriptions, up 27% versus last year, with plans starting at just BRL 17.90 per month. In financial services, Vivo Seguros continues to scale rapidly, already counting with 600,000 insured devices, a growth of 42% year-over-year. Today, over 40% of our smartphones sold in Vivo stores are bundled with insurance, underscoring the relevance of this offer. These performances emphasize our strategy of positioning Vivo as a comprehensive digital platform, where connectivity is just the starting point for a broader ecosystem of services tailored to our customers' evolving demand. Heading to Slide 8, we highlight how our B2B segment is increasingly being driven by expansion of digital services. Over the past 12 months, B2B revenues reached BRL 13.2 billion, up 15% year-over-year. This performance was led by digital B2B that grew an impressive 34.2% and now accounts for 8.6% of our total revenues. Connectivity also continued to grow steadily, rising 5.6% in the same period. A major milestone this quarter was the signing of the largest IoT deal in the world with Sabesp. This partnership includes installation of approximately 4.4 million smart water meters in the cities of São Paulo, São José dos Campos by 2029. Vivo will also provide the platform to monitor and process the data generated by these devices, reinforcing our leadership in large-scale digital infrastructure. This combination of robust revenue growth and strategic partnerships positions Vivo as a key enabler of digital transformation across multiple industries. With regards to ESG, on the next slide, we reinforce Vivo leadership now with both new commitment to biodiversity and long-term environmental stewardship. This quarter, we launched the Futuro Vivo Forest, a 30-year initiative dedicated to regenerating the Amazon. This project will preserve 800 hectares of native forest by planting nearly 900,000 trees in the states of Maranhão and Pará, bringing back the local fauna in the region. Beyond its environmental impact, the initiative also brings benefits to the local communities aligning sustainability with social inclusion. The announcement was made during the Encontro Futuro Vivo, an event that brought together acknowledged leaders to reflect on the future life of our planet. It marks a new chapter in our ESG journey focused on long-term regeneration and climate resilience. In governance, Vivo continues to stand out. We ranked first place across all sectors in B3's Corporate Sustainability Index, ISE B3, and received recognition for excellence in Corporate Social Responsibility under the ISO 26000 standard. We were also honored with several awards this quarter. Vivo's Compliance Program was named Program of the Year at the Leaders League Compliance Summit, and we were recognized as the top company in TMT category in Exame Magazine’s Melhores e Maiores ranking. Finally, we are proud to be ranked sixth among the best companies to work for in Brazil by Great Place to Work and to be the only Brazilian company and the only one in our industry featured on Fortune's Change the World list. These achievements reflect our ongoing commitment to creating shared values for society, the environment and our stakeholders. With that, I will hand the floor to David, who will walk you through our financial performance for the period. Thank you. David Sanchez-Friera: Thank you, Christian, and good morning, everyone. Starting with Slide 10, we take a closer look at the evolution of our cost structure and provide an update on the sale of concession-related assets. On the left-hand side, you will see that total cost reached BRL 8.5 billion in the quarter, up 4.6% year-over-year, growing below inflation for the period. This performance highlights our ability to strike the right balance between commercial intensity, operational efficiency and ongoing digitalization efforts. Cost of services and goods sold rose 9%, driven by the increase in service costs. This was due to the accelerated growth of digital solutions, particularly in the B2B segment. On the other hand, the cost of goods sold declined by 5%, benefiting from an improved margin profile in the sale of handsets and accessories. Operating costs grew just 2.6% year-over-year. Personnel expenses increased 3.2%, mainly due to the salary adjustments, which we partially offset with a more efficient management of our benefit programs. Our largest cost line, commercial and infrastructure rose slightly above 4% with higher commercial activity being mitigated by gains from digitalization. This quarter was marked by the acceleration of the sale of assets related to the fixed voice concession, resulting in a net gain of BRL 232 million, up from BRL 95 million in the same period last year. These gains include BRL 199 million from real estate and BRL 34 million from copper. We reaffirm our confidence in delivering BRL 4.5 billion in asset sales over the coming years. As a result, EBITDA grew 9% year-over-year, reaching BRL 6.5 billion with a 100 basis point expansion in margin to 43.4%. Moving to Slide 11, we highlight our operating cash flow performance. CapEx totaled BRL 6.9 billion in the first 9 months this year, up 3% year-over-year. Important, our CapEx to revenues ratio declined 60 basis points to 15.7%, reflecting our ongoing focus on efficiency and prioritization of high-return investments. As a result, operating cash flow before leases reached BRL 11.2 billion, a 12.4% increase compared to the same period last year. After leases, operating cash flow rose 15.2%, totaling BRL 7.2 billion with a 16.4% margin. This performance underscore the strength of our result profile and the effectiveness of our investment strategy. Looking ahead, we see significant potential to further optimize leasing costs. On average, there are 1.4 operators using the same towers as us. But in similar mature markets, this number exceeds 2 operators per tower. This opens opportunities for contract renegotiation and increased infrastructure sharing that will further enhance our ability to generate cash. On Slide 12, we present how our resilient operating performance continues to support profitability and cash generation. Net income for the first 9 months this year reached BRL 4.3 billion, up 13.4% year-over-year. This growth was consistent across all quarters this year, where we have been growing double digit, reflecting our solid execution and financial management. Our net cash position strengthened further, reaching BRL 3 billion at the end of September, a significant increase of BRL 1.7 billion a year earlier. Including IFRS 16 effects, our net debt stands at BRL 11.1 billion with a leverage ratio of just 0.5x EBITDA over the last 12 months, underscoring how robust our financial structure is. Free cash flow generation remains healthy, totaling BRL 6.9 billion in the period. While this represents a slight year-over-year decline due to some phasing effects, the third quarter already shows a 5.5% increase, signaling a positive trend. These results reinforce our ability to consistently generate value even in a recovering macroeconomic scenario. Moving to the last slide of the presentation, we reaffirm our commitment to shareholders' return. From January to October this year, we have already distributed BRL 5.7 billion to shareholders through a combination of interest on capital, capital reduction and share buybacks. In addition, we declared another BRL 2.7 billion in interest on capital to be paid before April 2026, further supporting our guidance to distribute at least 100% of net income for both 2025 and '26. Since the beginning of the year, we repurchased 48.4 million shares, equivalent to 1.5% of our current capital stock. Our buyback program of up to BRL 1.75 billion to be repurchased until February next year remains active and aligned with our capital allocation strategy. It's also worth noting that our share continues to gain market relevance, now ranking as the 34th most liquid share in the Brazilian Stock Exchange, an improvement of 11 positions year-over-year. These actions reflect our strong commitment to value creation and consistent shareholders' remuneration. Thank you. And now we can move to the Q&A. Operator: [Operator Instructions] Our first question comes from Luis Chagas from XP. Luis Chagas: Congrats on the robust results again. So my question regards mobile services revenues. So we saw a slight deceleration in MSR in this quarter. So how do you see the competitive environment in mobile did affect your performance in this quarter? Christian Gebara: Thank you, Luis. Christian, okay, I will answer your question. And we grew 5.5% year-over-year. It's good also to split the mobile postpaid service revenue, we grew 8% and the prepaid minus 7.6%. Starting with the prepaid. The prepaid it's a better performance than we had last quarter that's signaling a positive trend. And even when you compare the quarter-over-quarter growth, there is a positive growth. So we are bringing up revenues in prepaid, while we keep migrating prepaid to postpaid. In postpaid, our growth was 8%. It's also a very strong growth considering the amount of revenues coming from postpaid. Out of our total mobile, we are talking about BRL 8.3 billion coming from the postpaid segment. And we had also the best net add performance of the last quarters. Now if you look back to the third quarter of '24 and we follow every single quarter, it's the first time that we surpassed 1 million postpaid net adds. So that's a strong performance. And the churn, if we keep it in the 1% level. If we exclude machine-to-machine and dongles, it's below 1%. At the same time, we've been able to increase ARPU in that around 4% when you compare year-over-year. So that's a positive result. Of course, there is always small seasonality impact of price increase. If you look back in August '24, we increased price for 40% of our hybrid customer base. And this August '25, we increased for the same segment, the hybrid, we just increased for 25% of the customer base. So going forward, although it's a competitive market, we have positive trends of mobile service evolution in the next quarters. I don't know, Luis, if there's anything else that you want me to address. Operator: Our next question comes from Gustavo Farias from UBS. Gustavo Farias: So 2 on my end. The first one on leasing, if you could comment further on the leasing efficiencies you guys are pursuing on specific measures and possibly, if possible, the timing we should expect them to start to have further impact -- higher impact on the leasing payments? That was my first question. And the second question, if you could give us an updated outlook for the sale of assets related to the concession migration? We saw most of it came from real estate. So how should we expect them to behave going forward in the next several quarters? David Sanchez-Friera: Gustavo, thank you for the question. So regarding the first one on leases. I mean, the evolution of lease depreciation and interest accruals, I mean, remain consistent compared with previous period. In fact, if you look to EBITDA after leases grew even more than EBITDA before leases not in the quarter, but also in the full year. So for the first 9 months, around 2 percentage points, even more, 0.2%. I mean when we look about payments, there is always volatility across the quarters. But I think it's important to look to the number we have this quarter, which is around BRL 1.3 billion and this is consistent and is almost flattish compared to the fourth last quarters. So this is important because that shows positive trend resulting from the negotiation that we are having with the towers company. So for the coming years, it's difficult to talk about any precise quarters. But the information that we also show in this presentation has to do with the current tenancy ratio that in Brazil, we believe is quite low. We are talking about 1.4 tenancy ratio in Brazil. When we talk about other countries where they have the same number of carriers, we are talking about above 2 tenants per tower. So this brings opportunity to negotiate not only in terms of unitary costs, but only -- also being more rational in terms of deployment strategy, but more importantly, increasing the infrastructure that we share with other operators. So all the deployment that we will do in the coming years will be -- our aim is to maximize the compensation with the unitary costs and sharing more. So we are expecting also positive trends coming for the next year in this line. Christian Gebara: Can I go to the second one, Gustavo, if you have any other doubts about leases, David can follow on or otherwise, I go to the copper and real estate. Gustavo Farias: Yes. David was pretty clear. Christian Gebara: So going to the second question, Gustavo. As we stated and now we restated, we -- from the migration, we will capture no benefits coming from the sale of copper, approximately BRL 3 billion positive cash effect, net of extraction costs from the sales of around 120,000 tons of copper and cable coating, okay? That was what we said and restate here again. And then additionally to that, BRL 1.5 billion proceeds from the sale of assets here, the real estate piece net of the mobilization costs, okay? So these are the 2 figures that we stated before. And now for the third quarter, we started delivering that. So we recorded like BRL 232.4 million, and that's divided in sales of copper, BRL 33.7 million and real estate BRL 198.7 million. That compared this BRL 232.4 million compared to BRL 95 million that we had 1 year before in the third quarter of '24. That is also what we anticipated the benefits of the migration are starting now, but it will ramp up and accelerate in '26 and '27 with the project expected to be completed in 2028. So if you compare also what we had in the next -- in the last year, copper was around BRL 63 million and real estate was BRL 32 million, adding to BRL 95 million. Now we had BRL 34 million actually in copper and BRL 199 million in real estate. Copper seems to be like in a positive trend and will be in a trend because we have been able to sell more and more and real estate, it depends on the asset that we sell each quarter. So adding to the BRL 1.5 billion that I described before. Gustavo Farias: Christian, just a follow-up. So is it fair to think that the sale of real estate could be a little volatile based on what you commented, right? Christian Gebara: You are right. Sorry, it depends on what we sell. And some quarters, we're going to see more and some quarters, we're going to see less. So this quarter was a good one to the total of BRL 1.5 billion, we are talking about around BRL 200 million, but we still have another BRL 1.3 billion. Gustavo Farias: Okay. And about the copper, it should follow a more volatile or more stable pace of sales. Christian Gebara: I think it's more positive evolution, positive evolution. We are going up. Starting next quarter, we will be in January that we are going to -- because as you know, we have 1.2 million customers connected to the copper. So what we are doing now, we are replacing to new technology, in this case, fiber and liberating the copper and the extraction will start in full speed starting next quarter. So we're going to see a positive trend in copper and a more volatile in real estate, although out of the BRL 1.5 billion, we talked about BRL 200 million here now. Operator: Our next question comes from Marcelo Santos from JPMorgan. Marcelo Santos: The first question, I wanted to go back to something that was asked first about the mobile, specifically on prepaid trends. I mean you mentioned that you had sequential growth, but actually, that's the second quarter of sequential growth in prepaid. So it looks like a different trend than we have been seeing despite you continue to migrate clients to postpaid. So can you talk a bit what's going on, on the prepaid? Is it something more like Vivo led some initiatives you're putting forward or the market is a bit better? Just want to know if you could throw us a bit some more color on the positive trends we are seeing in prepaid. And the second question is regarding M&A in the ISP space. So I would like to better get a feeling of what's your appetite for inorganic moves, specifically on the ISP space. Christian Gebara: Right, Marcelo, we see a positive trend in the prepaid. Here is each company works in a different way. What we see here is the customer base that we have recharging every month is going up. Also, our ability to offer more data to our customer base is impacting and also digital services is impacting in a slight ARPU increase. So although there is a very challenging landscape for prepaid more competitive and also our strong migration to hybrid that has a negative impact in the prepaid revenue results. We see, yes, a positive trend for prepaid as well. As much as we see also a very positive in the postpaid, as I said before, net adds are in record numbers. Churn is in lowest levels. So the combination of both give us optimistic trend for mobile service revenue for the future. About ISPs, the specific question was how do we see -- can you repeat it, please? Marcelo Santos: I just wanted to get a sense of your appetite for inorganic moves in the ISP space, whatever you can talk about this. Christian Gebara: Okay. Great question, Marcelo. Like we reached like almost 31 million home passed in fiber. The number of customers that we have are also growing. As you could see, net adds of Vivo has been in the highest level and compared to the other players in a very strong gap in a positive gap for us and churn is going down. Also, we highlighted our churn level at 1.46%. But when you go to the Vivo Total fiber churn level is low as 0.7%. as you follow the market, that is a record churn level for any player in our market. So going forward, of course, we believe that considering the size of the Brazilian market that getting more homes passed is in our objectives. Brazil has 90 million homes, maybe 60 million are more addressable to a fiber deployment. And we have, at the moment, a little bit less than half of it. So we want to be in a more strong -- a stronger position in this market. So we could do that organically as we've been doing. We have CapEx for home pass in a very low level. We've been improving that, optimizing that. So we are talking about lower than BRL 200 per home pass. And we need to connect more over our own network. So the first one, deploying more network, we're going to do by our own, although we find a network that follows some of our criteria, technical quality and also not so much overlap with our network and in the right pricing. So far, we haven't found any like this. There is some movement in the market. Some of these assets, we already assessed and analyzed. We couldn't get to an agreement due to maybe failing in one of these 3 criteria that I just described for you. Also, we have the opportunity to penetrate more of our network. We have just acquired FiBrasil and still waiting for the antitrust final approval. Their take rate was around 16%, actually, our take rate over their network. But I do believe now having the full control of the network will allow us to improve this take rate closer to the one that we have in our own network that is around 25%. So it will be a combination of more network organically or if we find an asset that comply with the 3 criteria that I just described and more penetration in our own network. And this penetration will be following this very strong and positive trend that we have. As you could see, net adds are above 225,000 clients. That's the best result that we have this year, and we are in a positive trend because we are acquiring more customers and we are retaining more customers as churn level is in a very low historical situation. Operator: Our next question comes from Lucca Brendim from Bank of America. Lucca Brendim: I also have 2 from my side. So the first one is regarding concessions, a follow-up on the previous question on the migration. Not only talking about the assets that were being sold, but also on the synergies and efficiencies that you mentioned we would be seeing in terms of cost savings. Have you already started to see anything now? And how is the time line for those to be captured and we start to see them in results? And then the second one on B2B digital, it continues to perform really well. And do you guys think you should continue to see this pace of expansion? And what are the verticals within this segment that you think will be the drivers for the coming quarters? Christian Gebara: So going to the first one, Lucca, yes, we're not giving numbers of this like saving related to cost efficiency. Of course, it will mostly impact our commercial and infrastructure line, but it will be captured gradually until 2028. We're not like showing like what's the number quarter-by-quarter. Here now, the focus is in trying to capture as quick as we can, what I just described before of the copper extraction and the sale of real estate that is required for that to migrate customers. We're going to do that as fast as we can, protecting the revenue, protecting the customers. And again, when we do that, of course, we're going to be in the end, capturing a lot of other synergies of people that are dedicated to that and other indirect costs that we have to deal with this concession. For the moment, we're going to be more -- giving more clarity in the number that we gave to the market that is the BRL 4.5 billion. Going to the second question about B2B. Yes, we are very positive about the evolution of the B2B digital services. As you described before, it has a very strong positive trend. If you look at the last 12 months revenues, it is a year-over-year growth of 34.2%. The areas that we see growth are the same. Cloud, important one. Here, we've been doing many things. We bought IPNET. So we're expanding our portfolio, trying to be much more diversified, going -- just not only having a very strong dependency in Microsoft, but adding Google, Oracle, among others. Also going up in the managed services. That's why these acquisitions, Vita and IPNET were essential because we could bring in some talent and certified professionals to help us in managed service, and we are looking to other assets. Then there is IoT messaging. I think IoT, we gave the great example of Sabesp. We see that the beginning of a huge opportunity in IoT. That's in the water business, but we also see in the agribusiness, and we are closing many deals there. So we grew 25% year-over-year in this line as well. Cyber is the one that had a very strong growth, but the volume is still lower, maybe is where we're going to focus in the future as well as a group and as Vivo, we see great opportunity for cybersecurity. And then there are other solutions and IT product sales that we also see a positive trend. So we do believe that the penetration of digital services in B2B through Vivo will grow. Today, on average, we have 15%. It's much higher in the top segments of our portfolio of clients, but we want to increase it much more in the SME segment. And we see huge opportunity to leverage our channel capability. We have 5,000 sales reps and of course, the brand and the combination of connectivity with digital services. Operator: Our next question comes from Vitor Tomita from Goldman Sachs. Vitor Tomita: Two questions from my side. The first one is that you cited the competitive environment when discussing mobile in some prior answers. Could you give a bit more color or a bit of an update on how you are seeing the competitive situation in mobile going into Q4? And my second question would be if you could give a bit more color on the topic also of sales and copper and real estate assets, but more from an operational standpoint in terms of communicating with copper users, as mentioned, moving them to fiber, mobilizing field teams to extract copper, negotiating real estate, et cetera. How has that execution side been going, whether there have been any surprises on that execution side relative to what you expected? Just so we can have a bit more of a qualitative view of how this is going? Christian Gebara: Okay, Vitor, I will start with the second one. Okay, it's a good question. It's important to highlight that we've been doing that for a long time. It's not that we have started doing that. If you look at real estate, even during the concession period in the last years, we were able to get authorization from ANATEL and we sold important assets during the last years and that we needed to mobilize and take out everything related to the concession from the real estate, and we were able to do that. So we sold Martiniano de Carvalho that was an important building for us. We sold others in important neighborhoods of São Paulo. So we had already established a real estate process to analyze and evaluate and demobilize all the assets that we wanted to sell, and we continue doing that now with much more flexibility because we don't need more authorization to do that. Regarding the copper and the customer that you said, that's also a very good question. We did that in the past as well. It's not the first time that we do that. We were already very focused on replacing copper with fiber. But in the past, we needed to get full authorization of the customer. Now of course, we communicate, we explain the benefit of fiber. But in the end, if the customer doesn't want to, we have also the possibility to say that we are running out of any type of assistance to this technology that give us the right to replace it. Mostly what we see in most cases is that customers want to have the migration. We put in place a very robust process. We have a dedicated team in a PMO focusing on doing that. And what we see here is not only we migrate customers, but we also can see opportunities to upsell. An example of a pure corporate client that we offer fiber to the voice and we can also offer broadband and ended up having a much better ARPU with these customers. In other cases, copper plus fiber in a very low speed offering, we could also be able to offer upsell and also Vivo Total. So it's working pretty well. That's why it's giving us opportunity to sell important assets in important neighborhoods where we were like finishing, concluding the migration to fiber to all the customers that we have. I think -- I don't know if I answered it. Otherwise, I go Vitor, to the first question. Vitor Tomita: Yes, that was clear. Christian Gebara: Okay. Let's go to the first. Look, the market dynamics is, of course, competitive. It's not very different from what we saw in the previous quarters. We've been doing as we normally do, adjusting price based on the inflation and the period that we can do that, focusing a lot in customer experience to retain as much as we can, playing convergence in the best way, innovating in our offering. We just launched the Vivo Easy Lite that is based in credit card that has been a huge success. And we've been doing that in a very positive way, as you could see in the performance that we had in net adds. I think net adds is a great example of the trend going forward. For the first time, we surpassed 1 million customers in postpaid net adds and the postpaid churn is in a very low level. Now we're also able to increase ARPU. So competition is there. We have different competition depending on the region, being able to respond to that, both in prepaid, hybrid and postpaid and also playing strongly the opportunity to sell more service to the same customer, adding not only the fiber to the mobile, but also the digital services. Now our success performance selling digital services, mainly entertainment for these customers is also given here. We are reaching 4 million customers, both mobile and in some cases, convergent, in other case, just fiber that we are able to sell digital service. This is only one example of one digital service, but we are also able to sell others. We expect this positive trend to continue, keeping the very competitive environment that we have. Operator: Our next question comes from Maria Clara Infantozzi from Itaú BBA. Maria Infantozzi: I have 2 questions here on my side. So the first one, can you please provide us an update how you perceive the competitive landscape in the fiber business? It caught our attention that ARPU continues to fall for the second quarter in a row this time. And the second question would be related to CapEx. It also caught our attention the sequential increase this quarter. And with the integration of FiBrasil soon, how should we think about the CapEx evolution in the following quarters? Christian Gebara: On the fiber, again, not to repeat myself, but it was a very strong quarter for us. We are talking about a revenue that's already BRL 2 billion with a growth of 10.6%. Net adds is also a record level. If you look back the last 5 quarters, that's the strongest one. And churn, if you look back many years, is the lowest one. When you talk about specific ARPU, here, you need to put into account. First, we are deploying new areas because we're expanding our network. Sometimes we have promotional entry offers. But more importantly is that we are selling 85%, if you consider just one channel, our stores, fiber with mobile in Vivo Total. And then there is a change in the allocation of ARPU because we're selling 2 services or more to the same customers. And we also stated here that on average, a Vivo Total customer has fiber, but has 1.7 postpaid lines. Add to that, that we also sell a lot of OTT, video OTT. So more than just looking at a specific service ARPU, we should look at the customer ARPU or we should look at the line of the absolute number of the fiber that, again, is growing double digits and is reaching BRL 2 billion per quarter. So we are very happy with our performance. As I stated before, we want to expand to more areas. We want to penetrate more our network. We want to sell more convergence to our fiber customers. And also, we launched new speeds, even 10 gigas as one of the last -- gigabytes one of the speed that we just commercially launched. So we also see opportunities to upsell in our customer base to 1 to 2 and up to 10. So the competitive scenario is hard. As you can see, we have thousands of customers, but I think we have assets and attributes that are very difficult to be replicated, and that's shown in our net adds that is well above the second player. Sorry, regarding CapEx, we are keeping the low intensity that we have right now, CapEx over revenues, and I think this should be the metric to look forward. Maria Infantozzi: So even with the acquisition of FiBrasil, we should think about a continuation of the declining CapEx over revenue stream, right? Christian Gebara: Yes. The acquisition, if it's approved, it's going to be less than 2 months, and it brings EBITDA and brings a little bit of CapEx. Operating cash flow impact is almost 0. It is slightly positive. Impacting CapEx is much more than replaced or compensated by the positive impact in EBITDA. So you shouldn't be worried about the CapEx impact of FiBrasil. Operator: Our next question comes from Mathieu Robilliard from Barclays. Mathieu Robilliard: I had 2 follow-up questions. One on the lease costs. which you are saying could be contained or decline. I was wondering if this is still due or linked to the acquisition of some of the Oi towers, and it was basically the prospects of continuing to rationalize your tower portfolio linked to that acquisition or it was something more structural? The second question was about B2B and more specifically data centers and cloud. Now that may be very euro-centric, my question, but certainly, what we're seeing over here is that with the geopolitical changes, sovereignty has become a big topic. And so a lot of countries and companies are thinking about having locally owned data centers. And I was wondering what was the debate there in Brazil and whether you guys had any data centers directly or plan to have in that context? And lastly, just to make sure I got the question about the fixed ARPU right or rather the answer. Are you basically saying that one of the reasons why the ARPU is down is because I guess there's a discount to the sum of the parts in your product and maybe you're allocating a bit more to the fixed business than the mobile business? I mean that's really an accounting question. Christian Gebara: Yes. This is Christian here. I'll go to the last one, and then David will jump to the first and then I go back. Yes, there is an allocation decision here, and I addressed that when we talk about Vivo Total. If you look the number of customers that we have in fiber 7.6 million, 3.2 million are already in Vivo Total. And I guess that's looking at a specific service ARPU, considering that our strategy is driven by selling more to the same customer, convergence being the key element of this strategy is going to be hard because there is some allocation here. What is important is that in absolute numbers, we are growing revenues in double digits. And commercially speaking, net adds are in a very high level and churn is in the lowest level. Yes, and there is some accounting that may be impacting the distribution of revenues among the 2 technologies. David Sanchez-Friera: Mathieu, this is David. So the first question about the leases. Look, this quarter, we have no impact from what you mentioned about other carriers that just left the business a few years ago. What is benefiting the trend is that before we were 5 carriers, now we are 3 here in Brazil. That means that we have -- we had to review all the strategy of sharing infrastructure that before we were sharing because we were 5, and now we end up being single tenant in a percentage of our sites that we see a big opportunity. So as I mentioned before, in the next -- let's say, in the next 3, 5 years, we are going to renegotiate a significant part of our sites where the contracts are about to expire. And therefore, we are prepared to face those negotiations with an approach where we can maximize the value in terms of return on capital, particularly to understand which are the strategic sites, which are the sites that we could pay less, which are the sites that we could share with someone who is just having a similar site, very near our existing infrastructure. So we will see synergies coming from this process that will be shown in our cash flows in the coming couple of years. So our plan is to continue showing positive numbers in terms of free cash flow. And we will keep you updated on the number that we have just shown this quarter. So we are talking about a 1.4 agent per tower compared to other countries where it's about -- it's above 2. We could be talking about specific countries where U.S., we're talking about 2.2. So here, the 1.4, we want to keep you updated to see how we are progressing, make this number higher, and this will fund all the new deployment that we need to have to keep having the best quality of 5G in Brazil. Christian Gebara: Going to the second question. No, we don't see the same issue that you described in the U.S. Here, what we are like trying to have is a more diversified portfolio of vendors to have it much more spread among different players. Many players are now entering strongly in the cloud area, and that's good for us because we are the key commercial partner of all of them, and we have a relationship with customers that these players don't have. What we see some companies, they want to have a hybrid strategy, having some on-premise servers combined with a cloud solution, but nothing related to what we described it before at the moment here in Brazil. Mathieu Robilliard: Okay. That's very clear. And just a follow-up on that. Do you guys have data center capacity? I mean, do you have infrastructure you own in Brazil that is important in size? Or is it essentially hyperscalers? Christian Gebara: Yes, we have a sales leaseback that we used to have a data center that we sold, and we have an agreement to occupy part of this data center. Apart from that, we don't have other data center. We use other big players in data center, and we hire capacity from their data centers and resell it. So we have a commitment to use part of their capacity, but it's not ours. Operator: The Q&A session is over. I would now like to hand the floor back to Mr. Christian Gebara for the company's final remarks. Please, Mr. Gebara, the floor is yours. Christian Gebara: Thank you. Thank you all again for participating in our call. Just want to highlight the strong results that we just presented and more importantly, the positive outlook that we foresee, especially based on our strong and consistent commercial performance and our ability of monetize and retain customers in all services and in all segments. If you have any other additional doubts, please reach our team. Thank you again, and see you soon. Operator: Vivo's conference call is now closed. We thank you for your participation and wish you a very good day.
Xia Yangfang: Dear investors, analysts, good morning. China Merchants Bank 2025 3rd quarter result announcement will now begin. I am Xia Yangfang, General Manager of the Office of the Board of Directors of CMB. We have announced our third quarter result in this Wednesday, and this conference will be conducted via audio webcast. And now allow me to introduce the attendee first. And they are Mr. Peng Jiawen, EVP, CFO and Secretary of the Board of Directors; and General Managers from the Asset and Liability Management department, Financial Accounting department, Corporate Finance HQ, Retail Finance HQ and relevant departments. And at the same time, we have also invited independent directors Li Menggang, Liu Qiao, Tian Hongqi, Li Chaoxian and Ms. Li Jian to attend the meeting online. On behalf of China Merchants Bank, I would like to extend a warm welcome to your participation, and thank you for your warm support and investment in CMB. There are 2 sessions in today's meeting. First, we will -- introduction given by Mr. Peng Jiawen on the performance of our third quarter results, takes around 15 minutes. And the second session is the Q&A session, takes around 1 hour and 15 minutes. There will be simultaneously interpretation from Chinese to English for this conference. Now I would like to give the floor to Mr. Peng. Jiawen Peng: Dear investors, analysts, good morning. This Wednesday, we announced our third quarter results, and I am happy that together with the general managers of relevant departments in the head office, I can communicate with you. First of all, I would like to thank you for your attention and support. And I would like to briefly introduce our operational performance for the first 3 quarters. According to standard practice, the below mentioned statistics are under the IFRS calibre also the H-share announcement calibre. Since this year faced with complicated environment, we stick to our strategic target of building a value creation bank and stick to a dynamically balanced development philosophy of quality, profitability and scale. And our general development has extended to be development in a good momentum, and there are 5 features of our operation. Firstly, our core profit indicators remain stable and trending towards good trajectory, ROAA and ROAE and CAR maintained at a high level. The group's net operating income was RMB 251.28 billion, a year-on-year decrease of 0.52%, with the decrease narrowed by 1.21 percentage point compared with the first half. Net profit attributable to the bank's shareholder was RMB 113.7 billion, year-on-year increase of 0.52%, up by 0.27 percentage points compared with the first half, ROAA and ROAE were 1.22% and 13.96%, up by 0.01 and 0.11 percentage points compared with this half. We continue to strengthen cost management. Our cost-to-income ratio was 29.86%, maintained at an appropriate level. We maintained sufficient and high capital level and under the advanced approach, our CET1 CAR was 13.93%, Tier 1 CAR, 16.25%. Capital ratio -- total capital ratio 17.59%, down by 0.93, 1.23 and 1.46 percentage points compared with last year-end. We also strengthened asset liability management and secured both increase in loan and deposit scale. We cope with multiple challenges and promote the growth of our low-cost core deposit. We maintained optimized liability structure. As of the end of September, our total asset was RMB 12.64 trillion, up by RMB 4.05 trillion compared with last year-end. Total loan RMB 7.14 trillion, up by 3.6% compared with last year-end. Retail loan RMB 3.7 trillion, up by 1.43% and accounted for 51.8% of the total. Corporate loan, RMB 3.15 trillion, up by 10.01% compared with last year-end. Financial investment balance totaled RMB 4.03 trillion, up by 10.52%. Our total liability was RMB 11.37 trillion, up by 4.12% compared with last year-end. Total customer deposits RMB 9.52 trillion, up by 4.64%, accounting for 83.73% of the total liability. The average daily balance of demand deposit accounted for 49.45% maintained at a high level. Thirdly, our NII maintained steady growth and our NIMs decrease narrowed. We continue to strengthen our low-cost funding advantages, influenced by LPR cut and other influence along with insufficient effective credit demand, especially in the retail loan, we have pressure in our loan yield of the interest-earning assets. For that, we continue to optimize our structure and strengthen liability cost control to drive the improvement of our liability cost and offset the pressure brought by the narrower spread. For the first 3 quarters, our interest-bearing liability cost ratio was 1.31%, down by 38 bps, among which customer deposits average cost ratio, 1.22%, down by 36 bps year-on-year, driven by the above-mentioned factors. Our NII was RMB 160.04 billion, up by 1.74%. For the first 3 quarters, our NIM was 1.87%, down by 12 bps year-on-year. The decrease was narrowed. The decrease was narrowed year-on-year. Fourth, our Wealth Management business has shown good growth momentum, and our net fee and commission income recorded positive year-on-year growth for the first time in 3 years. Since this year, we see recovery in the capital market and the bank sees opportunity to achieve good growth in the wealth management business. Our retail clients totaled 220 million, up by 4.76% for the Sunflower and above client, 5.78 million, up by 10.42%. Our retail AUM was RMB 16.6 trillion, up by RMB 1.67 trillion compared with the end of last year, a growth rate of 11%. For the first 3 quarters, our wealth management fee and commission income was RMB 20.67 billion, up by 18%, a faster growth than the first half. Agency sales of wealth management products, mutual fund trust scheme grew by 18%, 38% and 46% year-on-year. Our agency sales of insurance policy was decreased by 7.05%, and driving by the above factors. The group's noninterest income has decreased, narrowed. And for the first 3 quarters, the net noninterest income was 91.24% and accounting for 36% of the total net operating income, among which net fee and commission income was RMB 56.2 billion, year-on-year increase of 0.9%. First positive growth since the year 2022. Fifth, we maintained stable asset quality. Our NPL has maintained an increase in its balance and decrease in its ratio and the NPL balance was RMB 67.4 billion and the NPL ratio was 0.94%, down by 0.01 percentage points. Our new formation of NPL was RMB 48 billion. Annualized NPL formation ratio was 0.96%, down by 0.06 percentage points. The company closely monitored the change of the external environment and enhanced our risk management capability to prevent risk in key areas. Under the bank's calibre, the NPL in our property and manufacturing sector were 4.24% and 0.45%, down by 0.5 and 0.05 percentage points. NPL in retail loan ratio was 1.05%. The risk was under control. The group continued to stick to its prudent and stable provision policy. Our annualized credit cost was 0.67%, up by 0.02 percentage points. Our allowance coverage ratio was 405.93%, down by 6.05 percentage point. Loan loss provision ratio, 3.84%, down by 0.08 percentage point and maintained at a leading position in the industry. The above are our characteristics of our operation for the first 3 quarters. Since this year, China's economy maintained stable and our high-quality development has made good results, but there are still risk ahead, and many uncertainties were still lying in the external environment. This month, we see the fourth plan recession of the 20th CPCCC approved the 15th 5-year plan, mapping out the new blueprint of the next 5 years China's development, also providing good opportunities for the Chinese banks. We will continue to promote our transformation into international comprehensive and differentiated and intelligent development and provide better value for our customers, employees, shareholders, partners and the society. Xia Yangfang: For the next part, we will enter into the Q&A session. Please follow the instructions given by the operator. Please state your name and the agency you represent before you raise the question. Operator: [Operator Instructions] Now we'll have the first question. The first question is from CICC , Zhang Shuaishuai. Shuaishuai Zhang: I have a question for Mr. Peng about your short-term demand and long-term development strategy and the current environment is not favorable for CMB. We don't see sufficient demand from the retail loan, and we see some challenges ahead which will influence CMB's business. We see some of your banking peers. They're trying to make up the lowering pricing by increasing quantity or lower their risk appetite to realize a short-term financial target? And what is your view towards this phenomenon? And how do you strike a balance? I know that the external environment and the capital environment has posed a high requirement on CMB. And what do you think that CMB can use in terms of your new model, your business strategies to balance -- strike a balance between short-term demand and long-term strategy development to realize an offset? Jiawen Peng: Thank you for your question. Well, according to current situation, we need to hold an attitude that is objective enough. The macro economy is stable in a steady progress, high-quality development momentum is still there. For the first 3 quarters from the macro statistics, the environment withstand the pressure and make steady progress. But objectively, we still see some challenges ahead. The bank's operation, of course. It requires our attention. For instance, you have mentioned that the demand from the retail loan and the fee card, these are all challenges posed to CMB in terms of our operation. But generally speaking, CMB have withstand those pressure. For the first 3 quarters, our performance has shown that we have met our expectation. And we have realized good growth momentum. I would like to briefly introduce my view. Beyond the 5 characteristics I mentioned above, there are some other highlights within our performance. I think to some extent, that could answer your question as well. Through our hard work in this field, we have realized a good development, and maintain good momentum. And these are the aspects I would like to mention. Besides on the revenue and our profit, even though they are under pressure. I won't mention too much about it, but I would like to emphasize that behind our financial indicators, there are some situation that I would like to seize your attention. One is that our customers grow, our customer base growth should show good momentum, no matter our corporate client or our retail clients, we see the client growth as our base of development. And if you take a look at our detailed figure of customer growth, our mid- to high-level clients has secured a growth of over 11% in terms of customer number. Within it, some high value client number, value client number, these growth type are showing good momentum. The CMB's wealth management business have also picked up and realized a double-digit growth in terms of its income. The wealth management income has realized a year-on-year growth of over 18%. If you take a look at excessive wealth management business, our income has secured a growth rate of over 11%. Our AUM when surpassing RMB 16 trillion level. By the end of September, we have already secured a retail AUM of over RMB 16.6 trillion, an increment for the first 9 months of RMB 1.67 trillion, which is quite impressive. Influenced by the external environment, we see the recovery of the capital market, and this has also bring us opportunity. We see these opportunities relying on our good customer base, relying on our capability, and this is what we will continue to nurture. And I also see some other highlights. I want to especially mention that our subsidiary are also showing good growth momentum this year. By the end of September, the total assets of our subsidiary companies were RMB 900 billion, surpassing RMB 900 billion, a growth rate of 8%, representing compared with the end of last year. And the net profit growth has surpassed 16%. We see the current opportunity and they have emerged into CMB's overall development. Besides the highlights in our subsidiary, I think we are also developing in our international business. The total asset of our overseas institutions has surpassed 10% in terms of its total assets. We seize the opportunities arising from the Hong Kong market. And our Hong Kong subsidiaries grew 10% in terms of its total assets and 27% in terms of its profit and income. And our cross-border business, the international BOP has surpassed 90,000 customers. In terms of FX business, we maintained good momentum of growth, a growth rate of 15% for business on behalf of customers. So to -- from the 2 highlights, our subsidiary and our cross-border business, this is 2 of our 4 major developments. We have also captured some highlights from it. And of course, we maintain a good foundation of our asset quality. This is the base of our development. Without a good asset quality, we cannot secure what is building above the asset quality, that is our performance, our customer base and et cetera. So through this year's effort, I think that can reflect what we have withstand. And to coping these pressures, I think we still have some measures that are going to take in response to the insufficient effective credit demand of retail loan, we still regard the retail loan as the cornerstone of our business. And I think we cannot -- we will not change in maintaining relevant market share and our market position in the retail loan business. So in this year, we have also made some efforts in developing corporate loan under insufficient credit demand from retail side and our asset growth in the corporate loan grew by 10%. And these loan growth are in line with the government's guidance. And later on, I will ask our relevant colleagues to introduce the detailed situation. We will also maintain a good management of asset allocation and maintain a stable momentum of our NIM targeted at current risk situation, we will maintain good risk management capability. You have also mentioned some long-term strategy. No matter on the beginning of the year or the interim report or our daily communication with our investors and analysts, we have also mentioned about what we are considering about the future development. We have got our layout for the future development, combined with the recently announced 15th 5-year plan, CMB has also mapping out our own 15th 5-year plan. So generally, we will stick to our plan of value creation bank, building a value creation bank. And for some certain direction, we will continue to focus on the modern industries to enlarge our efforts in the opening up and et cetera. These opportunities arising from some window opportunities, we will seize these opportunities. We will combine the strategic focus of our own 15th 5-year plan with the national's 15th 5-year plan. Of course, I would like to mention again that developing retail business will still be our focus. And the third is that the transformation of the 4 development will continue to be our focus, the international development, the comprehensive development, the distinguished development and the intelligent development. We will speed up this transformation. This will be implemented thoroughly into our own 15th 5-year plan. Besides our efforts in the business development, we are still paying special attention to our daily management, including NIM management, asset quality management, financial management, expense management, all cost management. These all we will continue to pay attention to and also including risk management, we will guard our bottom line to secure our bottom line of risk management. So generally, for current pressure, we are calm, and we have made early preparation. This will be all reflected in CMB's own 15th 5-year plan. Xia Yangfang: The second question, please. Operator: The second question is from Mr. [indiscernible]. Unknown Analyst: Congratulations for your results for the third quarter. I'm from PICC. And I think that you have a positive profit growth in the third quarter. And also you have maintained sound asset quality. My question is for Mr. Peng for NIM. Just now, you mentioned about the weak demand in the retail side. So my question will be, what kind of impact will the weak demand be on for your asset structure? What will be the impact on your NIM? So how long do you think that the NIM will continue to decline and whether the declining period for CMB will be longer than that for the state-owned banks? Jiawen Peng: Thank you for your question. I think NIM is a concern for all the investors. And during the interim results conference, I shared with you my judgment on NIM, namely, we will continue to maintain a leading NIM level, absolute NIM. But for the marginal change, we are under pressure. But I think the decline will be under control. These 3 judgments are made during the interim results. And NIM is -- will be -- is still affected by structure of our asset and liability and also our active management, which is why we have maintained a sound NIM in the past. Nowadays, we are seeing that our retail loans are still under pressure, which is 51% of our total loan portfolio in the past is kind of the backbone of our loan book. And it's also the main reason why we can maintain a leading NIM. So as for -- currently, retail loan are facing pressure in loan growth, but still it has made quite a big contribution to the NIM. And at the same time, we need to see that if there is a slowdown for retail loan growth, definitely, that will have some marginal negative impact on the NIM. That is why I say the NIM marginal change will be under pressure. I think there are main 2 reasons behind the pressure. But of course, we will continue to maintain a leading absolute NIM level, but for the marginal change will be under pressure which is affected by the following factors. The first one is a slowdown of retail loan growth, especially for credit card loan growth and also for consumption loan growth, micro loan growth, all growth rates are slowing down. This has made some challenge to the asset structure. And as for -- compared to the peers, we have a higher proportion of retail loan. So that is why we are facing higher pressure than peers. Second factor is that from the liability cost, just I mentioned, our liability cost is around 1.02%, down by 36 bps, which means that since we have maintained the lowest level of liability cost among peers, and at the same time, we continue to reduce that by quite a big amount, which means that in the future, the further room for us to further lower down the deposit cost will be smaller because if you look at the demand deposit ratio is around 0.05%. So there's a little room to go. And more room coming from the term deposit but we have an even higher demand deposit ratio, which is why we can benefit less compared to peers in the future from the lower down of the deposit cost. And third judgment is that we think that the future trend will be under control, which means that we have our judgment on how deep that the NIM will go down. We have our own analysis and also we have done strategy considerations about how we can counter with the NIM decline. So firstly, I think we'll continue to focus on retail loans. This year, even though retail loans growth is slowing down, it is around 1.34%. But this number is a strong number, but compared to the overall banking industry, we are still higher than the average level, which means we are increasing our market share. And the thing I would like to -- the point I would like to point is that the slowdown of the retail loan is mainly affected by the macro situation. At the same time, we don't want to lower down our risk criteria. That is why we have a slower growth rate, but our market share has continued to increase, which means that retail loan is still a focus of our business. And we are stepping up our efforts and also putting more resources into our retail business, we have made adjustment to our retail business unit and also credit card unit. We are confident that we can continue to improve our market share. And just now Mr. Zhang Shuaishuai from CICC also mentioned about whether we will choose to lower down the risk criteria. I think lower down the risk criteria will not be our choice. The other words to say that is that to make up the shortfall of the loan growth by compromising risk. This is something we will not choose to do. Some say that we need to -- if the price comes down, we need to grow more loans. This means that to grow more amount to make up the shortfall coming from the pricing coming down. But we will not choose to lower down the risk appetite or sacrifice risk to -- in order to gain amount growth. And I think in the future, that the risk from retail side will be stabilized. And as long as the government is trying to lay out many procedures to stimulate demand. And I think at the end of the day, the retail loan will grow again. And also, we will have active measures such as for corporate loans, we have our own strategy for how we grow our corporate loan, and we have reconsidered great debt, including for big midsized and small sized enterprises and the major areas that we would like to focus on. So we think there's a big room to go. And also from liability side, we will continue to maintain a sound liability structures such as the demand deposit proportion you mentioned. And this year, we are seeing that the demand deposit ratio is changing or is trending good towards a better direction. This will be also beneficial to our cost control. And thirdly, is the asset and liability portfolio management that will also help with the NIM side to improve the structure so as to improve the NIM level. So overall speaking, I think for the future trend of the NIM, we are confident that hopefully, that the NIM can reach the bottom and begin to stabilize. Just now for your question, I would like to share 1 of my 2 personal views. I think very important for banking industry today. The first one is that we need to take a perspective from customer. Just as I said, the customer is the foundation of our business as long as we have the customer in place, no matter how product changes because product changes according to the external environment, such as if there's less demand for assets, such as you will face the slower growth of retail, but at the same time, your AUM in your wealth management products can continue to grow. So this also will help with the income for the bank. So taking the perspective from the customer to -- will be very important for banking operation rather than purely focusing on 1 or 2 products. Secondly, I think very important is balanced and diversified operations. A bank's operation and development cannot focus on one aspect. It should be very balanced and also diversified structure such as if there's a slowdown of retail loan, then if we can do better in corporate loan or if we can do better for the asset allocation for retail customers, if they didn't choose to place the demand deposit or if when the market is not performing well, you can provide more deposit with the customer, or when the customer doesn't have demand for loan, but they still have demand for wealth management, which means that customers demand will be very multifacet. So if you can provide a balanced products, multi-level products for the customer, you will have a very balanced and also diversified business structure, no matter how customers' demand changes or how the products they choose changes. Then this balanced and also more diversified structure will help you to maintain a more stable income. Xia Yangfang: Second question, please. Operator: Next question is coming from May from UBS. Meizhi Yan: Can you hear me? Xia Yangfang: Yes. Meizhi Yan: I'm May from UBS. And congratulations for your results in the third quarter. It's a very stable results and also trending towards the better direction. My question is still about NIM. Just now you mentioned for liability cost is declining. This will be beneficial for your NIM. Q-on-Q it is around 10 bps down. So the level of the decline is smaller than the peers. I think that CMB has always maintained advantage in liability cost, but now China has ensued a low interest rate environment. So the advantage for you and the liability cost, is that still strong -- as strong as before? How do you view that? Or do you think the advantage is also contracting? The second question is that the capital market is performing better. There are some discussions on deposits moving around to other parts outside the banking industry. So whether there will be any marginal improvement on demand deposit ratio. But in the third quarter, you can see that your demand deposit ratio is still declining. But why? Why the trend is still declining? And also for liability costs, we are seeing that the rental cost, rental linked cost and also the debt costs are also rising. What are the reasons behind that? Unknown Executive: As for liability cost I think just now Mr. Peng has made his judgment on NIM, I think, it's also applicable to liability cost. Firstly, I think we still have a leading liability cost advantage. For the first 3 quarters, the liability cost is 1.31%, down by 38 bps. And our customer cost is 1.22% and down by 56 bps. And for interbank cost is 1.06, down by 54 bps. So in absolute amount, you can see that we'll have a very low absolute liability cost and a very low absolute level, you can see we still have reached quite a big level of decline. And secondly, Mr. Peng just mentioned that for the marginal improvement, we are under pressure. So you might concern about if compared to peers, whether the decline level might not be as big as our peers. I think the main reason is that it's mainly decided by the features of our deposit costs. In liability costs, we have a higher proportion of customer deposit, namely around 85% and amounted around 50% are coming from the demand deposit. These are very high. This structure feature or characteristic means that we cannot benefit more from the rate card of deposits because rate card is more on term deposit side rather than on demand deposit side. And just now I mentioned demand -- customer deposits make up around 85% of the total. That is why when interbank or market rate is coming down, which means we also cannot benefit from that because some of the peers, if they cannot have so high proportion of customer deposits, well, they will have a more higher proportion of the interbank liability, which means they can benefit more. And especially this year, it's very obvious. The interbank costs are coming down quite rapidly, but we have a lower proportion, lower -- that is why when you see the marginal improvement, we might not be big as our peers. But if you look at the absolute amount, we're still having the very absolute leading position. And thirdly, I think that the trend for the cost deposits to decline is continuous. For September, our RMB demand deposit is only around 1%, and this trend actually continues into October. And for demand deposits for RMB level, we have a daily average growth of over RMB 200 billion. The demand deposit cost is around 1% and it's mainly coming from the demand deposit. So currently, we can see we still have a leading position in the liability cost. And we are continuing to see the trend that the deposit cost is coming down. The only thing is that if you -- from the marginal improvement, since we have a very low absolute amount, that is why the marginal improvement might not be as big as the peers. So I would like to confirm that we are very confident to have a leading liability cost advantage in the future. Second, to your question about the demand deposit ratio. So for this year's trends, we are seeing for the whole banking industry, it's quite obvious that we have a term deposit trend. And this year, I think this term deposit trend is continuing, but from third quarter with the warming up of the capital market, and also M2 and M1 gap are narrowing, we think that there are more and more deposits becoming demand deposit. In September, for the single month, our demand deposit ratio have increased again. So demand deposit ratio is still our advantage. We will take active liability and asset management measures to promote those settlement-related business so as to gain the source of the lower-cost demand deposit. And when the market -- in the market, people tend to have more demand deposit. If this environment continues, we definitely are confident that the demand deposit ratio will continue to ratio will continue to improve. And also for thirdly, for the cost for bonds. Just now I mentioned that since we have a very high proportion of customer deposit, 85% of the total deposit. So for RMB side, we do not have any demand to raise RMB from RMB bond market. So this year, we have done some funding raise from the bond market in the overseas market. And this year, since our overseas branches, they have demand for overseas assets. That is why they have underwritten some overseas bonds, so as to raise the funding side, that is why have led to an increase on the RMB side on the cost on the payable bonds. So marginally, you are seeing for the cost has risen, this is mainly because foreign currency-denominated fundraising. And for the rental cost, this is more related to the rental agreement. Rental agreement is set on a certain date. And that is why we are seeing that the agreement was signed previously, so that cannot change for the time being. Xia Yangfang: Next question, please. Operator: Next question is from Zhu Chenxi from Guotai Haitong Asset Management. Zhu Chenxi: I am Zhu Chenxi from Guotai Haitong. I have a question regarding the income from agency distribution of mutual funds. I noticed that this income realized in the single third quarter, there is a growth rate of 98%, around double. It is relevant with the recovery of the capital market. I would like to understand your outlook towards this income. The growth rate is quite high. Is it sustainable? And the industry itself, the mutual fund industry, we see the third phase fee cut in the mutual fund industry. And what is your understanding of the future influence of this policy, the introduction of this policy. Jiawen Peng: Thank you for your question. Regarding your first question, my answer is as follows. For the third quarter, the agency distribution of mutual fund is growing fast. It is mainly because of the following reasons. One is that thanks to the recovery of the capital market and the rising risk appetite of our investors. And on the other hand, we have also optimized our structure of mutual fund product, and we enhanced our supply and optimization of the equity-related products. And looking into the future development, the above mentioned 2 factors will continue to give great contribution. But considering the same period of last year, there are some high base effect that we need to take into consideration. I think these 2 factors will marginally become milder in their contribution. And for your second question about the third phase fee reduction in the mutual phone industry, what kind of influence will it bring to the income of this sector? I think there will be influential reasons align behind. And of course, we will be put under the pressure of the influence itself. But we understand that we are still in the phase of advice consultation, and there will be a transitional period for further implementation. So I think that for the income of 2025, the influence is limited. In the year 2026, the influence will be rather negative, and there will be some pressure on our income in mutual fund business. And generally speaking, regardless of the redemption fee and subscription fee and also the self-service fee, the 3 dimensions will be put under pressure internally speaking. But to see from the industry level, it is not the first time that we have overcome this kind of fee cut policy arrangement. We will act aligned with the market trend and the customer demand and to make efforts in the following 2 aspects. Firstly, we will continue to follow our high win rate and diversified allocation strategy and take active measures to enlarge our sustained and retained AUM foundation. And for the second aspect, we will continue to follow the market change and understand more and adjust to customers -- adapt to the customer demand to optimize our structure, enhance our resilience and increase the fee rate and increase the return of our product and realize a high-quality development. These are my answers. Xia Yangfang: Next question, please. Operator: The next question is from China Securities, Mr. Ma Kunpeng to raise his question. Kunpeng Ma: I am Ma Kunpeng from China Securities. I have a question regarding the micro -- small and micro finance business. So in recent years, we see fierce competition in this kind of business, but the demand is quite weak. Especially for the recent period, the asset quality, we see some deterioration and the pricing is also declining. I would like to understand from you about the loan pricing of small and micro size loan. Well, considering the cost, the credit cost, the funding cost, operational cost, when you cover all these costs, will there be further room for making profit? And have you made sufficient provision -- and from a RAROC perspective, will small and micro finance business still become your priority in your retail credit business? These are my questions. Unknown Executive: Thank you for your questions. I would like to briefly answer in the following aspects. So small and micro finance, these are a sector under the retail finance business. And just now Mr. Peng has mentioned that in the whole market, the retail loan is under a thorough -- a very tough growth trajectory. So from the market perspective, I think the market is still growing in retail finance business, but the trend is slowing down and the social financing, resident loan and the corporate loan, the structure -- the loan structure itself have all reflect the pressure in the industry itself in growing retail loans. But CMB, our market share is undoubtedly increasing. And of course, for small and micro finance, we are still faced with challenges such as insufficient credit demand and et cetera. Banks are quite -- are having very difficult situation and trying to find a way out. For some banks, they're trying to expand their volume by using lower loan pricing. But for CMB, ourselves under this difficult situation, we choose a more balanced strategy to cope with current situation. In response to current situation, we will put risk management in priority. And based on good risk management, we will strike a balance between the growth in quantity and pricing. And of course, the first I'd like to especially mention is that we manage a good control in our risk. We maintain a leading position in the industry in terms of our risk control. The second is that we have secured our pricing in retail loan. We have not used a low-price strategy to enlarge our risk loan volume. It's a reasonable growth, as you can see. In safeguarding our pricing, we have realized a reasonable growth, a year-on-year growth of around 4%. The growth rate itself is quite leading in terms of our commercial banking peers. I would like to talk a bit more about the risk that you have mentioned. We have increased a quarter-on-quarter increase -- a mild quarter-quarter increase in our risk itself, the NPL ratio. Well, based on the industry trend of increasing risk, we cannot be alone. We cannot stand alone to be having an opposite trajectory. We have been doing a lot of assets in studying industry, in the industry chain and to try to seize more qualified clients. And the second strategy, we pay special focus on regions with higher quality developments such as Yangtze River Delta, Pearl River Delta. And for the third strategy, we have maintained good control in having good collaterals and nearly 90% of the collaterals are secured by ourselves in terms of our small and micro finance loans. And our asset pricing has continued to evolve and to reevaluate in terms of its collaterals. So we have quite good buffer for our asset quality of retail of small and micro finance loans. And for the provision itself, we are quite confident that we can maintain quite a good leading position in the industry. About quantity and pricing balance that you mentioned, we have always followed a balanced philosophy in quantity and pricing. We will continue to stick to this principle. And for the second aspect, I believe that under the guidance of anti-involution and self-disciplined mechanism in the industry. I think, to some extent, given some time, the industry will be back to its reasonable competition. I believe that it is quite a good trend that is beneficial to the industry itself. So I believe that the retail finance, the retail loan, the small, micro finance loan will still be the milestone of our business. And of course, I believe that for the external environment, we could be positive that the trend is still there. The Chinese economy is stable and developing in a good progress. So there will be future room for the growth of retail loans. So in conclusion for CMB, small and micro finance loan is under our guidance, our principles of balanced development, and we will continue to maintain a quite certain proportion of small and micro finance loan in retail loan and also balanced proportion of retail loans in total loan. We will also making efforts to ensure that we have certain market share in the industry. Xia Yangfang: Next question, please. Operator: Next question is coming from Shen Hu from North Rock. Hu SHEN: My question is for asset quality. After I read our third quarter results, in the bank's asset quality are moving in the same direction. For CMB, we can see that NPL has rose by 1 bps. It's -- can I understand it is a normal volatility among quarters? Or does it mean there will be continuous pressure on your asset quality? If you look at other figures like you are seeing the overdue ratio are declining but a slight increase on NPL and also stable special mention loan ration. Does that mean that asset quality is still under pressure, but at the same time, still under controllable or we might not be seeing very obvious improvement in next phase. So can you share with us about the NPL formation trend per month? And how do you look forward to the future trend such as in the fourth quarter and in next year, what other factors? What major factors will you have? Jiawen Peng: Thank you for the question. Firstly, I think for the volatility, I think it's a normal volatility. It's all under control and under controllable range. Secondly, about the future trend of asset quality or what the challenges ahead. I think for asset quality, I think overall, it's under control. But in different phases for different time point, we might face challenges, such as currently for corporate banking. And I think the major impact will be coming from the real estate sector, even though we are stepping up our efforts in controlling asset quality in this area. But periodically, we might see some volatilities and also see some periodic challenges. And secondly, for retail, like consumption loan and micro loan, NPL formation, we are seeing it's still increasing. So these are the major challenges we are facing, and this is also the cause for the volatility of our asset quality indicators. So overall, I think everything is still under the controllable range and maintaining a stable trend. Xia Yangfang: Next question, please. Operator: Next question is from Gary Lam from HSBC. Jia Wei Lam: I'm Gary from HSBC. My question is about your CET1 ratio and also your RWA. In the second and third quarter, we have seen that the CET1 ratio has declined quite rapidly and also RWA growth rates are also faster than what we have expected. So what are the reasons behind? And also what will the -- will this trend continue in fourth quarter in 2026? And whether it will affect your capability of endogenous capital growth and also the continuity of the sustainability of your dividend payout? Jiawen Peng: Thank you for your question. Indeed, in the second also in the third quarter, as we can see that the RWA growth rate has been quite fast. And as for risk-weighted approach and also for the internal rating approach, we see the RWA growth are speeding up. There are several reasons behind. Firstly, last year in order to -- in line with the new regulatory capital rule, so that is why there was a low base for RWA growth rate last year. And secondly, this is mainly because of the structural change of business this year. And since retail loan is growing lower for the whole banking industry, so all the banks, almost you can see are having a faster growth on corporate side, retail loans slowing down. This is the same with CMB. As we can see its growth rate for corporate loan till now is 10% and also retail only 1.4%. We all know that the risk weight for corporate loan and retail are different. So this structural change has led to RWA growth. And thirdly is that for bill discounting, discounting rate is coming down. So we hold less bill discounting this year. And we invested -- shifted the investment into interbank lending and the risk weight for bill discounting is also smaller, but risk weight for interbank lending are higher. So this also lead to a higher RWA growth. And fourthly, in order to improve our profitability, we also have increased our investment for trading purpose, just even though we have lowered down the holding of bill discounting, but we have done more bill discounting for trading purpose on behalf of our customer. So we have slowed down some of the bills after we bought in according to the regulation before we sell down, it still occupies even for the trading purpose, we still occupies the periodic RWA. This also lead to RWA growth. And fifthly, in order to gain some trading profitability, so we have increased our holding in the PO account and also have done more trading. That is why -- which has led to a higher market risk and also which lead to a higher RWA growth. So all these together, we can see that some are in part due to the business structural change. Some are short period, or volatility lead to a higher growth RWA, especially for the trading parts are lead to RWA growth. And sixthly, definitely -- and also just you mentioned about the CAR ratio, one is due to the RWA growth and the second one is that another factor, except from the RWA growth rate is because from the OCI account. Last year, we have seen a quite a big decline on the bond holding in OCI account, which were quite beneficial for the CAR ratio last year. But this year, we have seen more volatilities in the bond market, which also affected the overall other income in the OCI account, which definitely has affected the net amount of our capital. So these are the main reasons why the RWA growth are faster, but CAR ratio are coming down. And I would like to say that the capital management is very important for our internal management. So in the future, I think from 1 perspective, since we have relevant strong capital base, and that is why we will definitely support the business since the all banking industry's profitability are under pressure. And I think we need to expand our trading parts so as to make profit from the trading gains. So we need to support the trading business. And also secondly, we need to make more precise management of capital. As for different products have a different return on capital, we will analyze that and also to put more resources of capital into the products and business units which have a higher return and also control the resources, which have a lower return. And looking forward in fourth quarter, I think with all measures taken and with more precise management and also we have more -- we need to manage the trend of the CAR ratio. So in the mid and short -- in the mid and long run, no matter the CAR ratio or the Tier 1 ratio, I think we will continue to maintain our leading advantage, but also at the same time, we also need to utilize the capital to support the business, which are effectively will bring us more profitability. So even though there are some marginal volatility. But in the future, in the long run, I think we will still continue to have a sound CAR ratio and also have a leading position and also stable CAR ratio. Xia Yangfang: Next question, please. Operator: Next question is coming from Katherine Lei from JPMorgan. Katherine Lei: My question is for fee income. I thought your fee income has been positive in the third quarter, whether it's a trend that is sustainable. And in the fourth quarter, whether -- since you have a high base, whether it will slow down or become negative. And looking into the detail of fee income, you see that the asset management fee for the third quarter has -- from turning from negative to positive. What's the reason behind that? And also for the banking fee decline, whether the decline level will contracting or slowing down? Jiawen Peng: Thank you for your question. So firstly, for fee income, I think it's moving in line with our expectation and is moving towards a better direction. In the third quarter, we have seen positive growth for income. And also, this is a positive growth first time since 2022. And in the third quarter for a single quarter, an increased by 17%. So it's quite a strong growth. And just now my colleagues also mentioned about the reason behind the fee income. So one is coming from the wealth management business. We have seen strong growth on that front, especially from the retail side, including distribution fee coming from agency from the -- and also trust products and also brokerage securities. And just now you mentioned about the asset fee growth. Even though for the first 3 quarters, I think it's down by 1.9%, but the decline level is narrowing down. The reason behind, firstly, I think it's related to the capital market performance. Secondly, I think, it's related to the growth of the asset management, total assets under management. In the third quarter, it has increased by 2.9% compared to the beginning of the year. And thirdly, I think we have seen growth on the custodian part. So among the fee income, we have seen quite good performance on wealth management and asset management and also custodian business. So if we look at the trend, I think the capital market is still moving in a good direction. So capital market-related fee income, we are quite confident on that. And the confidence actually is coming from the strong base, strong customer base, especially for quality customers, we are seeing more and more customer growth and also secondly coming from the growth of our AUM. And also -- but we also noticed that in the fee income among for payment related, fees are quite weak and also still under pressure. And year-on-year, we are still declining. This is mainly because of the credit card business. For credit card business, there are 2 reasons behind the decline or I think it's also a way that we observe the future trend. Firstly, is the recovery of the consumption market. In the first half and also in third quarter, we are seeing that since we haven't seen the data in the third quarter of the consumption data. But in the first half, we are seeing that the consumption has been down by 11% for the whole market. So the whole market is still under pressure. Our transaction value only declined by 8%. In third quarter, it is down by 7.7% for our credit card transaction value. I think the decline level of our credit part is better than the overall trend, but still is under pressure. So that is why payment-related income, especially from credit card is still under pressure. And another thing to look at that is even though payment from credit card is under pressure, but our market share is still increasing, and now we still have the largest market share. In the first half, the market share -- our transaction value market share is around 14.32%. I think it's still the highest in the market. But look in the future, with governments continue to stimulate consumption, we think that the consumption market will continue to improve, which will lead to an improvement on our credit card-related business. So we think that we are thing that the trend will be in line with the whole market. And fourthly, just now you mentioned about the investment related other noninterest income. If we look at the other noninterest income, even though there is still a decline in the third quarter, but still the decline level is also contracting. Amounted income from investment are moving in a better direction. Firstly, the long-term equity investment is improving, including our subsidiary like the CMB Cigna according to the new accounting policy, this is -- we have some increase on the income coming from CMB Cigna. And also secondly, coming from the dividend of our funds we have invested in. And thirdly is from the bond trading account. And fourthly, from the FX exchange, we also have turning from negative growth to positive growth. So even though we are seeing negative growth on the other noninterest income, mainly affected by the bond market performance, but other factors are also turning into the better direction. Xia Yangfang: Next question, please. Operator: Next question is from Xiao Feifei from Citic Securities. Feifei Xiao: I have a question regarding wealth management business. Along with the recovery of the capital market, I would like to understand that about CMB's wealth management business, what are the new transitional direction for you? And how do you evaluate the new gesture or new plan for future development? And what is your assessment of your future performance and income in this business? Jiawen Peng: Thank you for your question. You have just mentioned about a question that we have been considered to think -- the social wealth total volume and the future room to grow, I believe, there are a large room. Well, for us, I think that we would like to seize this opportunity in the overall strategy. We will stick to our principle to develop customer base, especially high-quality customer base. This will be the foundation of our business development. This is the first dimension. And the second dimension is that for CMB, we are unremittedly pushing forward customer service, a new service mechanism of human plus digitalization. We hope that we can implement this new mechanism to realize a further upgrade and further outreach and deepen our service model that we can deliver to our clients. And the third is that we have -- we see there are a larger room to provide professional wealth management consultation service, and we hope that we can provide a stronger service in this area to provide a better customer experience. And for the fourth dimension in the product itself, we think that we need to satisfy our clients' clients and satisfy our clients and center on their demand to realize a high win rate plus diversified allocation strategy to realize our balance in our product metrics to cope with potential changes happening in market itself. So generally, we hope we can enlarge our -- we can deepen our study over the market change and to seize opportunities to maintain a balanced structure and to also be resilient to the market. As you can also see that in the third quarter, our work management fee income actually reflects that what we have been doing is to seize the market opportunity. And finally, in the future. In the financial indicator of Wealth Management business, we think that even though the market has opportunity, we are still faced with many challenges, and these challenges are mainly from these aspects, for instance, the fluctuation, the potential fluctuation of the market, the potential changes in the regulatory requirements, but we are still confident that with the market becoming larger and larger and the increasing of our professional capability that we can maintain a good proportion of the market share and continue to increase our market position, reflecting the financial indicator itself, we will strive our best to overcome the difficulties posed by the third phase fee cut, a fee reduction in the mutual fund industry. And finally, we can realize a stable development, an increase of the fee income and to seize opportunities arising from different types of assets. Xia Yangfang: We will have the next question. Operator: The next question is from Mr. Wai Sing Chang from CIMB Securities. Poyung Chang: I have a question regarding the property sector. We noticed that the real estate NPL is actually decreasing. What is your idea on the progress of exposure in the risk in this sector? And of course, for the next year, we see the maturity of the 16th measure of the property finance. What is the idea on it? And along with the decreasing housing price what is your idea on the influence on your loans LTV? And apart from the property sector, what do you think that the risk that you should pay more attention to? Jiawen Peng: Thank you for your question. For the property sector's risk exposure progress, I would like to talk about my idea from the following 2 aspects. The first is how do we view the current situation? And the second is how do we cope with it. The first one is that I think from the policy side and from the market side, we are both having some views. From the policy side is that the policy will continue, and our target is to stop the decrease and to maintain a stable development manner. And I think from my perspective, the market is also showing a divergent trend. So in the year -- trillion, for the RMB 1 trillion level and trillion meters -- square meters level, I think these are 2 aspects that reflects the decrease in the property market, which is quite sharp. I would like to use these 2 idea to conclude my view on the industry. And from the bank's perspective, CMB in terms of our property sector's risk, I have 3 ideas. The scale maintained stable and the structure is optimized and then the quality is trending towards a stable position. One figure is that from 2019 to 2020, the real estate sector's proportion in our corporate loan is decreasing from 19% to less than 10%, is the decrease in our scale and our structure is further optimized. First is that in Tier 1 and Tier 2 cities, our projects are mostly centered in these cities accounting for over 82%. And the top 10 corporate clients in the real estate sector accounts for over 40% of our total corporate loan and total corporate real estate loans. So by the end of September, our NPL ratio of real estate loan was 4.24%, down by 0.5%, and we make sufficient provision in this sector, which is 2.5x of the average level of our corporate loans provision, which is very abundant and sufficient. We will continue our policy to back to origin to select qualified region, qualified customer, qualified project and make strict management over our real estate business. The second question is about the 16th measures. And I would like to talk about some of my idea. In fact, I think the 16th measures have casting good impact on the market to ensure the smooth development of the market -- of the real estate market, especially the guaranteed delivery of the housing project. So in terms of the maturity of the project itself, it actually extends and help the project to secure a soft landing. So generally speaking, why do I say so? The policy will be continued to the end of the year 2026. And for some projects, if the project cannot meet the expectation of its expected sales volume, so probably the policy will continue to be extended in terms of its maturity. So from the transitioning of the old project to the white list management, I think these management measures are doing beneficiary influence to resident itself, to companies, to government, to local governments. So generally, I think it is a useful measure that is targeted specifically to its audience. So I believe that if the management -- if the project itself could be put under strict implementation. And for the market, I believe that the land price accounts for 60% of the total project volume, I think -- so based on this current situation, our loan is quite secure in terms of the phenomenon. So the 16th measure itself, probably it will be extended in accordance with the current market situation. I think it is -- it could be considered that the safety itself is under control. And your -- another question about other risk areas that we pay attention to is that besides real estate itself, we are still focusing on other areas such as the debt resolution of the local government and also some industries, for instance, the infrastructure and construction, evolution, relevant industries and et cetera, and also small and micro finance and consumption finance sector. I would like to invite Mr. Lu from the Retail Finance headquarter to introduce more about the risk in the retail finance sector and also the mortgage sector. Unknown Executive: Well, for mortgage itself, the mortgage risk is based on our good structure. I could introduce that most of our mortgage are centered, 90% of our mortgages are located in Tier 1 and Tier 2 cities. The collateral rate is maintained at a relatively low level. The LTV level was less than 40%. The collateral is also under repeat and frequent reassessment. Even though we are faced with pressure of decreasing housing price, we have a good reserve in the asset allocation behind to ensure that the overall risk is under control. Of course, undoubtedly, the trend is showing some upward trajectory. It is aligned with the whole market, not just CMB itself. So the mortgage risk, there will be experiencing some uptick. This is about our judgment on the mortgage risk. Xia Yangfang: Next question, please. Operator: Next question is from [ Claire ] from GS. Unknown Analyst: My question is still for asset quality, we can see that the NPL formation has risen a little bit. And just now you have mentioned about the reason already. And at the same time, we have noticed the provisioning level has been down by 7%. But in between the provision for loans are increasing. So how do you see the future provisioning level and also for future provisioning trend? And another question is about interest rate, your view on interest rate after the Central Bank decided to go into market and buy bonds again. So how do you view the interest rate trend? Jiawen Peng: So the first question, in terms of asset quality, we continue to maintain our stance as a stable -- maintain a stable asset quality. And for retail and also corporate loan, we take a prudential view in provisioning. Provisioning level, I think, is more related to the business structure change, such as for corporate provisioning is mainly because more special mention loan for real estate. That is why we have increased the provisioning on that. But at the same time, we definitely see -- have some underwritten for the disposal of the assets as well. So overall, I think the provisioning level is stable. So even though there are some periodic volatility, but overall, it will be -- so firstly, really reflect the asset quality level. And thirdly, I think the volatility will be under control. I have some -- for the provisioning level structure, we can see that we have the provisioning for loan has increased. But for the other non-loan asset provisioning has been declining, and this is mainly related to the total size of the non-loan assets. Unknown Executive: And for your second question, do you mean that the PBOC has decided to buy or sell bonds in the market? I think after Mr. Peng has made a statement, there is a volatility in the market and the rate has been down by 4 to 5 bps. So the market estimation is that after PBOC resumes the operation since there will be more alliance on monetary policy and fiscal policy that will help the rate to go down again. So in the third quarter, they will be affected by many reasons. There's a rebound of interest rates. So last year, for the 10-year bond was stood at 1.86%. And in the third quarter, I think it's around 1.8%. There are many reasons behind that. Some are because of the capital markets and some of the anti-involution expectation, and they are also for new tax rules on the new issued bonds, which will be not affected by that. But after we have resumed the operation of PBOC in the market, I think that will -- our judgment is that, that will be beneficial for the overall investment income. Just now another analyst have asked about the trend of the fee of the noninterest income. So among the noninterest income, other non interest income are affected by the bond market. Last year, we have a -- since the rate was low and that is why we have a high base of other noninterest income. So in the fourth quarter, we are under pressure in this aspect since -- due to the high base. But after PBOC resumed the operation or if they really have done the operation, I think that the market rate will go down for the bond yield will come down, which will be beneficial for our investment gains. Xia Yangfang: In order to guarantee the interest of the individual investors, we have collected individual investors' questions and some are more similar to the questions which you have just raised. And now there is a particular one that has not been asked before, which is -- in the first 3 quarters, CMB's corporate banking loan growth rate exceeded 10%. So what are the major areas that the loans has gone to? And whether you have enough reserve -- project reserve in place for the next year. Thank you. Unknown Executive: And I think by the end of the third quarter, our loan is 2. corporate loan is RMB 2.8 trillion, up by around $26 million compared to the beginning of the year and the growth rate is 10.27%. If we look at the growth structure in terms of industry, the first largest incremental part are coming from manufacturing. The second coming from the power and also -- and third one is coming from the rental and service industry. The incremental power coming from the 3 major sectors compromise around 49.9% of the total income and which is the first 1 coming from manufacturing and for power and also water litigation is around 11.14% of the total corporate loan. And increased level amounted is around -- and also for leasing and also for that is also quite big and also increased by around 23%. So these are the 3 major sectors that we have seen increased for that. And when we look at other regions, we are seeing the Pearl River Delta and also High Sea area and also the -- and also the Bohai Rim region. These are the major areas coming from that. So these are the major areas that our corporate loan goes to. And currently, I think, affected by the overall economy since real estate is not coming up yet, and we are seeing demographically, we are still seeing negative pro income. That is why demand deposit -- for the demand for corporate loans is still under pressure, and there's also a very fierce competition on that. So in the future, I think we still need to look at the right direction to go. And from the reserve and also strategy for next year, from industry and also region strategy, I think that will be similar to the -- this year from industry, we step our efforts also in transportation. And for customer base, except for large focusing on large corporates and large projects, we are also focusing on the midsized corporates to hope that we have more balanced customer structure. And also from a product perspective, we have increased fixed income projects and also M&A projects, which have a longer duration and hope that we can have a more diversified product structure. So we hope that we can keep our balance among scale and also pricing and also asset quality. And can have a dynamic balance according to the changes in the external environment. Xia Yangfang: Now I think due to the constraint of the time now we have, the last question please. Operator: And the last question goes to Richard Xu from Morgan Stanley. Richard Xu: My question is still on loan yields and also loan growth strategy. Just now Mr. Peng has mentioned that there are many policies like the anti-involution and also guidance on banks to have a reasonable loan yield. So when you look at the newly disbursed loans, whether you are seeing the yield is coming stabilizing? And also, secondly, you mentioned about for corporate loan, you want to compete for more quality loans. Everyone want to compete in that area. So what will be your major strategy. And thirdly, from the loan growth rate and also the shareholder return, if the loan yield is not good, whether you will consider to slow down your loan growth rate and also to improve the shareholder return, whether that will be a consideration? Jiawen Peng: Thank you for your question. I think it's the last question, that will be the conclude of our today's dialogue. So firstly, for the loan strategy, this year's the loan yield is coming down. One is affected by the LPR rate coming down and also affected by the weak demand in the market, which lead to a lower yield. And I think when we analyze whether the loan yield has reached the bottom, I think mainly we need to analyze whether the demand is picking up or not. And secondly, whether the LPR will temporarily stop to going down. So when we look at the LPR cut, our analysis is that with the macro economy, maintain a stable growth momentum. The LPR cut expectation is smaller. But overall, when we look at the GDP Q-o-Q growth rate, the decline of the growth rate is narrowing down like the third quarter is 4.8%. So we expect that for quarterly GDP growth will be lower than that. If there is pressure on GDP growth rate, we cannot rule out the possibility that the PBOC will continue to have the cumulative monetary policy and continue to cut the LPR rate. So this is from the LPR rate and policy rate. And secondly, if we look at the demand side, if the bank's demand is closely related to the vitality in the marketplace and also vitality in our investment market. But according to the data, we have seen that the investment data relating to investment is not still stabilizing yet. So even though the profit growth of industrials have rebounded a little bit, but demand for loans, still, we haven't seen very obvious rebound. And for demand, definitely, we need to seize opportunities to seek for new opportunities. Just now, my colleague from Corporate Banking has shared with you some of the areas that we would like to work on. I think mainly for strategies, these -- some of the industries that we need to be even stronger for and for some industries, we currently might have some shortfall, but we want to make up for that. So we need to continue to optimize our customer structure, such as in the past, for corporate banking, we have a higher proportion of large-scale customer, and we might have the highest proportion of large-scale customer, it's around 50% of the total higher than peers. So it means that for -- there will be further room for optimization of customer structure. And if we can also expand our midsized customers, especially for those quality customer size, I think that will also help with the loan yield. And at the same time, when we think that there might be further room for LPR to further cut down, but the anti-involution, we need to also take into consideration about the anti-involution policy, namely banks are having a more reasonable or on pricing. So that will also help with the stabilization of loan yield. So taking into consideration of all the factors I mentioned above, I think that the loan yield will be trending to stabilized at a level. There will be less room for the rate to continue to go down. But for the newly disbursed loans there and for the existing loan, there's still a gap between the new one and the existing one. So that will drag down the loan yield overall. But if you look at the newly disbursed loan yield quarter-on-quarter basis, I think it's more and more returning to a reasonable level for all the banks. So this is my judgment on that. And just now, I also mentioned that when I analyze the NIM level, that is why I think that the NIM is kind of stabilizing at the bottom range. And under this pricing environment, how can we see the return on shareholders? As I always mentioned that for return on one customer, we cannot only focus on the loan that they have, but we are -- actually, we are providing comprehensive solution service for the customer. Loan is only one part of the complete measure. So we hope that loan is kind of something that we give to the customer and then to simulate the customer can work us with us in all fronts, including investment, including other retail-related business, including wealth management-related business. So the contribution from the customer cannot purely be measured by the loan side, rather, it should be a very complete measure of the contribution from our customer. And also I mentioned for loan growth rate, I mentioned when the macro economy is stable, our loan growth rate will be stable. But when the macro economy is under pressure. Our loan growth will also be stable. I don't want to see much volatility in the loan growth rate. Volatility means risk. So it should be in line with the total macro economy. In line with that and try to be stable and then to increase the overall contribution from the customer. And I think it's almost -- we're almost done for today's conversation. I think our friends, analysts, your questions are really, really very good questions and also invoked our thoughts on that. And also you focus -- you also care about the future trends. So I would like to share with you some of our views on the future trends of our bank's operation. So when we look at the future, I think some are certain and some are not certain. For certainties, I think, firstly, the overall economy will continue to have a stable growth, and make steady progress like the GDP growth rate per year, 5% and also other macro datas are moving towards a better position. This is something that is certain -- under this certainty of the external environment, we are sure that our customer base, our AUM, these are the foundation of our business will make steady progress. This is also certain. So this is the first certainty I would like to say. Second is that for asset quality, this is to control the asset quality is our pursuit, and it's something that we will always emphasize on. We will continue to make sound asset quality and maintain a prudential risk appetite. This is also the certainty of us. Just how you focus on the RWA growth rate. And many investors asked a question about that. I think you don't need to worry too much about that because RWA growth, there are many reasons, some are periodic and some are calibre reason and some are base reason. What I want to say is our risk appetite doesn't change. And also our pursuit to make a contribution to our shareholder return doesn't change. So our philosophy, our banking operation doesn't change. So you don't need to worry too much about RWA. And also, we have maintained a relatively high CAR ratio. So for asset quality and also for capital management, this is also certain. And thirdly, the core financial indicator of CMB to maintain a leading position doesn't change. We -- namely like ROE, like the CAR ratio, like the NIM, like the fee income proportion and also like the retail business proportion in our total business portfolio, these are certain. We will continue to maintain our leading position in all these aspects. And fourthly, I think another certainty is under this low interest rate, low fee rate environment, for banking industries for quite a long term, the banks may maintain a low net profit growth rate for quite a long period. So this is also certain. I think you cannot have unreasonable expectation, too high expectations for our bank's low profit growth rate. So I think for maintaining a relatively low profit growth rate will be stable for a bank. It's like a marathon our bank is running. It's not a short run as you need to have a stable -- as long as you have a stable growth for the -- in the long perspective, that will be a high return. So this is something that is return. And when we look at the uncertainties we have, I think there definitely are some uncertainties we are facing with. So that is why we cannot give you a very precise prediction on some financial data. The first one is side under the certain direction of the macro situation, but the market still are facing volatilities. Like the capital market, like the foreign exchange market, there are many volatilities. And also for the bond market, the 3 markets are facing volatilities and changes like the foreign exchange market is affected by the tariff issue. There are some judgments on that, but we cannot make sure that it will be applicable for all the times. And also capital market, definitely, people think that there will be a bullish market, but definitely, there will be volatility, and we are not sure that is establishing of a bond market. And also for the bond market, we have analyzed on that. There are many factors affecting it, and it's a normal thing for the volatility in the market. So whether -- how it will go, the market will evolve is something that is uncertain and also which definitely will bring some volatility to the profit and income of the banks. So this is uncertainty lying ahead. And the second one is that when the overall risk is under control for some certain area of risk in certain areas or for a particular individual cases, there will be some kind of volatility. Just now you mentioned about property, some of the retail risk, we cannot say that it's time that we can stabilize or we can rebound the asset quality. But what we can say is the overall asset quality is under control, but we cannot rule out the possibility that due to some uncertain events, there may be some volatilities ahead. So these are the uncertainties we also need to face with. And thirdly, volatilities that the monetary policy and also fiscal, we will also are changing. Definitely, these are monetary and proactive policies, but how they implement that, what instruments they will use, these are uncertain like whether they will cut the rate or whether they will cut the interest rate or whether how much fiscal investment that we'll have. So this will definitely affect the bank's NIM, bank's fee income and also bring some short-term uncertainties. So even though with all the uncertainties, I think more are coming from the certain sides with all the factors I mentioned above, I think the most certain thing is that we will continue to focus on quality and also lay priority on profitability and to have a proper growth on scale. We are confident we are making steady progress and moving towards a better direction. So I would like to take the chance to share with you some of our views on the future trend. Thank you. Xia Yangfang: Thank you. Now it's the end of our third results conference call. If you have further questions, you can go online to see our third quarter results or if you want further explanation, you're welcome to contact us. Our IR team are always there for you. Thank you. Bye. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Jane Morgan: Right. Good morning. Today, I'm here with archTIS Limited, a leading global provider of data-centric software solutions for the secure collaboration of sensitive information based here in Australia, but with significant operations developing overseas, including the United States. Q1 for FY 2026 has been a significant period for the company with major operational milestones, including the successful acquisition of the assets of Spirion based in the U.S. And today, I am joined by archTIS CEO and Managing Director, Mr. Daniel Lai; as well as archTIS Global COO and U.S. President, Mr. Kurt Mueffelman, both of whom are here today to discuss the company's results for the quarter. Good morning, gentlemen. Kurt, I'm going to hand over to you to kick things off. Kurt Mueffelmann: Great. Thank you. Good morning, Jane, and good morning, everybody. Thank you for attending today's presentation. I just want to give a couple of comments that we're going to focus on the financial performance and key growth drivers in the U.S. around Spirion and our expanding engagement within the U.S. Department of Defense. We'll also outline the go-to-market strategies that are underpinning each initiative and how they align with our broader plan to accelerate growth, strengthen profitability and create longer-term shareholder value as we drive the business forward. So I'd like to start by having Dan take us through the quarterly updates. Dan? Chun Leung Lai: Thanks very much, Kurt, and welcome, everybody, to our quarterly webinar. We've got quite a range of information to go through. So we'll do this as best we can. But there's a lot of information to share with you on where we are in the market. But the highlights have been really the focus and pivot to the U.S. marketplace. And that's, of course, one of the great things that we've announced recently was the additional U.S. DoD contract for services about enhancing our product, NC Protect to be able to be integrated and expanded into that environment. That's complementary to the licenses deal that we announced earlier. That's a really confidence building initiative, particularly for us in the market, and it gets us more strongly engaged on a daily basis with that client. The Spirion asset acquisition, that's complementary as well. It's all about us pivoting the business into that U.S. market, which is 40% of the data-centric security market and is the largest market in the world. The acquisition of Spirion gives us other data-centric experience and capability as well as a new client base to cross-sell in the commercial space, which is fantastic as well. That 150 customers is something that we're looking to leverage and grow off. Of course, this acquisition means that we've jumped from an ARR all the way up to $19 million from a $4.2 million licensing revenue of 78%, gives us a solid cash balance after we've done those capital raises and put that acquisition to bed of $13.8 million available funding. Margins are still high at 75% growth. We have, obviously, with that increase in doubling the size of the organization, increased our operating expenses, but a large chunk of that was also one-off costs associated with the acquisition. So I'll get Kurt to jump into some of those financials in more detail. Kurt Mueffelmann: Yes. Great. And so remember, most of these numbers that we're providing are exclusive of Spirion. We closed the deal September 30. So following the completion of the acquisition, the company's ARR increased to just under $19 million at $18.9 million, represents a 377% increase from the prior corresponding period. On a pro forma basis, including in-quarter Spirion revenue, the combined entity would have recognized around $5 million in total revenue. So you can really see the scale that we're driving. For reporting purposes, archTIS itself as a stand-alone, the revenue was $1.5 million, representing a slight increase from PCP. So you really see the scale of the revenue that we're really trying to take under as part of the business. I think the interesting part was as stand-alone, notably, the licensing revenue for archTIS accounted for 78% of the total revenue, up from 64% from the previous period. The high proportion of licensing revenue contributed to our continued strong margins of 75%, highlighting the company's continued strategic transition away from lower-margin services, equipment and third-party software towards the higher-value proprietary licensing solutions and supporting services. Our operating expenses as stand-alone, excluding one-off transaction costs, were up 20% to $2.3 million. This reflected a rise in the headcount that we're predicting as we go into building out the U.S. DoD expansion and the strategy behind that as well as partnership opportunities. The increase also includes the expansion of our product team over in Germany for the development of the acquisition of Direktiv, which Dan will talk about as part of our strategy going forward a little later on in the presentation. We continue to work through synergies toward clear and concise total operating expense levels as we continue to operate from a cost synergies basis and putting together the overall go-forward plan with Spirion standing [indiscernible] inside of archTIS, $5 million, and they're primarily cyclical. We go very cyclical in our cash receipts over the first quarter. I believe the prior quarter was $3.2 million. We got some cash in a little bit earlier that we expected to roll into this quarter. So we'd rather have the cash in the bank a little bit earlier. And despite this, archTIS still ended with a strong $13.8 million in total available funds. So again, good growth balance sheet going forward, really exceptional revenue that we're able to drive and scale the business going forward and really working on where we can keep that operating expense under our control from a management standpoint like we have in the past. So Dan, I think one of the things that we're driving and the key message, I believe, for this quarter was really about supporting the U.S. scalability and growth. So maybe you can take us through the -- both opportunities ahead of us. Chun Leung Lai: Yes. You're starting to see the traction here. We initially announced the 1,000 licenses for the ongoing deployment across the broader DoD and the new and expanded features that we've been -- got the services contract for are about making sure that, that agency can service other agencies as well within that DoD environment and make sure that it's tightly integrated. But these features are very specific to the U.S. defense environment and particularly the M365 deployments. And we've talked about how that can create a cornerstone for the inflection point for the company in the U.S. And why is that? Well, defense is an amazingly big reference for the rest of the Microsoft ecosystem. You know and we work very hard with the Microsoft ecosystem to do that. And that also leverages that asset acquisition of Spirion. And of course, that Spirion gives us not only the footprint to expand and grow with that cornerstone DoD business, but enter new verticals to make sure that we can, I guess, look at those verticals earlier in terms of health, in terms of finance, in terms of manufacturing that we can get into in the world's largest market. That's what they've specialized in that data discovery and our enforcement products run off the back of that. This really -- so for us, those 2 key elements really set us up as a springboard in the world's largest market and that we -- that's the high-growth market that we're targeting. And I think the timing is right because if we've done that earlier, without an opportunity like the U.S. DoD, this will make it a lot more easier for us to get that traction that we want to and play with some really big people, big organizations in terms of competitors and be able to hit a wedge which we can defend and exploit in the market. Kurt Mueffelmann: Yes. I think, Dan, a couple of other things on that. When we look at the U.S. DoD, the services engagement really extends NC Protect and really drives functionality that's not previously in the world's largest Microsoft DoD environment. So for the DoD to come back to us and say, hey, we need these capabilities in this environment, it makes it very sticky. And so by coming in and doing this development, I think it really drives home the need for DoD to really have that broader license across the entire enterprise. Unfortunately, being a citizen over here in the U.S., we've been shut down for the last 30 days. So the larger licensing rollout has been delayed by the U.S. government shutdown, but engagement remains really high and active through the technical validation. We're continuing to work on the statement of work and the underlying technical development on a daily basis with people that have not been deferred. The military people that are still in uniform are still working, and we're working with them day in and day out as well as the commercial people such as Copper River and GDIT. So things are still moving along. But again, we're at the kind of -- the way the DoD goes right now, we're at the government shutdown's will. Chun Leung Lai: Yes. And I think the other aspect of that is we've got Spirion at a very good price. It's got $15 million ARR, and we paid for it 0.9x of that ARR. It adds a multifaceted, not just the client base, the technology and a really good team there that we can pivot into the space and augment what we have to really compete in the world's largest market. I think that's critical. And as you said, the U.S. DoD deal services keeps us engaged with them on a daily basis. I know there's a lot of speculation in the market about these things, and it has been affected by the shutdown. But we are in contact with them, as I said, regularly, and we know what they're committed to and where their strategy is going and where we fit into that strategy, which gives us confidence. Kurt Mueffelmann: So we talk about a little bit about DoD and NC Protect and what we're doing. Why is this so important to the DoD and to the broader Allied Coalition Forces? Chun Leung Lai: Yes. Really great question. And this is the other part that gives us great confidence. Zero Trust and particularly data-centric security has been mandated. It's not like this is optional for these organizations. Why is that? Well, it's really simple. That old system of network security where we put everything inside a boundary doesn't exist anymore. I said recently on the Ord Minnett conference, a Thales report identified that most organizations now have 29 different domains where their data is spread out. Why? Because we've got moving to SaaS platforms and services. We're moving to cloud brokers and SASE and DLP in the cloud in terms of security. We're moving to collaboration tools. We are doing Work from Home. We've got multi-cloud environments where we've got S3 buckets in AWS and M365 out there. This -- all of these different organizations now, how do we secure data and know where our data is to secure it becomes very problematic for the client. And that is no different for the U.S. Department of Defense when it has allied engagements and it's trying to build alliances at the strategic operational and tactical layer. And that's what we're trying to solve for these government agencies and defense departments. It's been mandated. There's standards out there, and we're pushing into this space very quickly, probably not as quickly as a lot of our shareholders want us to. But this is a big market and it's a revenue-rich market. We get it right and we've built a company that's going to be sustainable for a long time and a high-growth company. So mandated compliance requirements by 2027. That's why the U.S. is doing this particular deal. That's why it's so important. We get this right, there is a network growth effect. Kurt Mueffelmann: Yes. And you look at that, right, the alignment positions archTIS to enable that interoperability across all allied defense networks. So whether it's Five Eyes, the QUAD, AUKUS and what have you, it's -- you can pick them off as the network effect across Coalition Forces, but let's look at what we have in front of us today just from a DoD standpoint. And when you start to look at that, this slide really maps the potential scale for DoD adoption or that network sales effect. So from where we are within the COCOMs on the right-hand side where we're selling into today for the Warfighter Network, that carries across all the other areas, whether it's Office of Secretary of Defense, Office of the President, all of the DoD agencies. So our initial 1,000 user deployment is really that entry point, the validation of the security and operational performance we expect will be rolled out the command, the services and that multiyear expansion potential. And so the network effect really stems from the initial license and services today, projected as we discussed back in, I believe, last quarter, to reach 150,000 users, ultimately 450,000 across the Warfighter Network. And then if you start to do the math, this provides a foundation and selected product awards for defense-wide deployments supporting up to 4.3 million users across not only defense, but then entering into the civilian space. Then on top of it, you can start to add Allied Forces. So you see the excitement. So although it's taking longer than what I'm sure everybody would like, it's building that basic foundation that will give us the ability to really do it right and really provide that network effect as we go further into it. Chun Leung Lai: Scary numbers, right, Kurt? Kurt Mueffelmann: Yes, it is. And scary numbers, my compute there we go. All right. Chun Leung Lai: Okay. So how does that then fit in with the archTIS strategy here. Well, really, as our offerings are adopted by the U.S. DoD and NATO and look, we have already announced where we are in some of these deals. NEC deploying us to be demonstrated to JMOD to be their partner of choice. NEC are also engaged with MHI for the future [indiscernible] stuff, which was recently announced here in Australia. But also, we've talked about our engagements over in the U.K. and obviously, this U.S. deal. But that then also has ramifications for the Defense Industrial Base. We have Kojensi here, which is already being used as the shared platform of choice by defense industry. We're partnered with Microsoft. We're trying to solve this in a global way across multiple supply chains. And that means that the Defense Industrial Base is still an opportunity for us, large clients, large revenues, high levels of compliance required, we still look at how we do that. But that also then opens up not just from the Raytheons and Andurils and Kratos and all of those sorts of things, the opportunities for CMMC, which is a standard there in the U.S. Department of Defense for labeling, but that also then opens up that opportunity for those SMB ecosystem. And you can see the numbers that we're talking about in that. It's not a new slide, but what we're really saying here is we've been consistent in our strategy, and we are executing it. But it's the timing and execution of that strategy, which leads to success and the tactical execution to get to those sort of scary numbers that we're talking about. We need to go at the pace where we can sustain this, and we need to build to be able to scale it. So that sort of leads on to the Spirion acquisition there. Kurt, would you like to talk about that? Kurt Mueffelmann: Yes. So Spirion, what a funny name it is, right? And so Spirion is actually SPI for Sensitive Personal Information and Rion or Rion, which derives for ri for meaning King in the Celtic language. So it symbolizes leadership and authority really around that discovery and classification. So when we hear people talk about, well, how could you have stopped that breach? Previously, we couldn't have. Now with the Spirion, we can go in and look at the various breaches of personal information that has taken place, whether it's in Australia, the U.S. or across the globe and play a part in helping to avert those breaches from taking place. So it adds us into a different -- a little bit different part of the market opportunity that's out there today. Slides, they're just going. So Dan, maybe you can take everyone through the acquisition and the reasons for the acquisition itself. Chun Leung Lai: Well, the key reason for the acquisition is that springboard to leverage our market entry into the U.S. We could have invested a lot in Australia and done it all here. But the high-growth market, as I said, is the U.S. and Europe. Between them, they own 70% of the data-centric security market. That's where we need to be for high growth. So Spirion was in the right place at the right time. Most critically, it expands on several fronts. We've talked about the customer base, the blue-chip cross-sell. We've already commenced that. We also have the opportunity. And what's great about those clients is they're already investing in data-centric security. So you don't have to educate these guys from scratch. Now not all of them will convert, and that's great, but some of them will. And some of them will then go on the journey and do that cross-sell up. The other great thing about it is if I'm looking at data-centric security and my data is everywhere in SaaS platform, legacy on-prem, Work from Home, how do I do discovery across all of that plane to understand where my data is, be able to label it, which is a critical point for us to be able to enforce it with our ABAC products. And so it really hits that sweet spot. Now that to us is a reason to start to exploit and push into that marketplace along with that U.S. DoD deal. So critical for us from all of those synergies and we see that as something that we're going to execute and leverage for as an inflection point for the business. So really transformative. Kurt Mueffelmann: Yes. And I think what's really strong about it, it adds a whole new dimension to what we do in our go-to-market around that end-to-end data protection. So Dan, maybe you can go through our thinking from that from a strategic standpoint. Chun Leung Lai: Yes, absolutely. So this is where all these parts start to come together. The first there is the -- where is my data? Is it sensitive? Intellectual property? Is it classified? Who has access to it? What should we do with it? Now what we should do with that and how it should be protected becomes that classification and that label. Then we need to put in policies for who should have access to that, how it gets protected, when it leaves this environment, how is it encrypted, who carries permissions to do what to it. And of course, that enforcement of those policies becomes critical. You've got an end-to-end life cycle here. Our massive differentiator is we connect to the data. So as it transfers from one environment to the other to the other, it's always consistent in terms of the protection and the controls on it. And none of our competitors can do that. That's really critical. So the purchase here is and the competitive advantage is this product and platform is agnostic. Yes, Purview, you can do some of that. Only if all your information is in the Microsoft 365 environment. And there aren't many organizations that have all of their information in an M365 environment or can afford it. That's where we see the real key to success. Over to you, Kurt. Kurt Mueffelmann: Yes. I think though, there'll be -- when we look at the deeper dive into the technology, Spirion's product is a sensitive data platform. It shares a number of similarities with our archTIS offerings. It's agnostic, as you said, to data-centric products. It's feature-rich, similar to the NC Protect, Kojensi and TDI. And our use cases and even more importantly, kind of the stakeholders that we are targeting mirror one another. So when we start to look at the integration of the products, which I saw a demo of the integration today, and it looks fabulous, they really become a great opportunity for not only upsell, but cross-sell. And I had the pleasure to be up in New York City 2 weeks ago with Kevin Coppins, our new EVP of Commercial Enterprise, who is the CEO of Spirion. We spoke to probably half a dozen different existing Spirion customers to bring to them the message around archTIS and specifically how NC could protect and add those layers of governance and enforcement to the data-centric security policy. And one of the customers I wanted to share is one of the largest media companies in the world, only 2 days earlier, I had a conversation with their internal team around how do you secure documents around ABAC technology. And the timing was just amazing because we walked in. Kevin did a great job in talking about what archTIS brings to the Spirion product side and how the technology is going to be supported going forward and the great job, and I believe it was close to $0.5 million renewal that's counting towards ARR and everything. And then all of a sudden, he drops on us that he needs ABAC technology. I think I had the biggest smile, and I don't think I needed a plane to fly home from Florida -- from New York to Florida. I floated home after hearing that because it validated our underlying strategy. It really validated it. And when it goes to the next phase, I want to take everybody through another one on a call that I was similar, a very similar story that they're looking -- all right, you guys identify and classify the data, but how do you really protect it? So one of these discussions was all around this large university medical center. This is an $8.5 billion medical network required a full scan of 50,000 mailboxes and over 500 terabytes of data to identify and remove PHI, which is Personal Health Information. And Spirion's sensitive data platform executed at a scale with 98% accuracy, which is just off the charts. We were on a Gartner analyst briefing the other day, and they thought that was a typo. They thought it was 89% that we did the inverse the numbers. We talked about the 98%. It's a fabulous industry-leading metric. And there were near false -- 0 false positives, which really prove the ability to manage all this regulated data within the environments. And this type of enterprise just validates the credibility for government, defense, education and other regulated industries that we start to look to branch out to. But I thought what was really neat was I sat down with Ryan Tully, our new Chief Product Officer, and we really got into the guts of this, and we really wanted to share with the analysts really how much of the base scan we can really perform. So as I said, we were analyzing over 50,000 accounts, 500 terabytes of data, and we took 215 days to time to completion of scanning all of that, which seems like a lot, but that's a lot of data. We analyze, Spirion did the SDP product, 45 million total e-mails. And within that, we found PHI or Personal Health Information and 36 million. So any one of those e-mails that was leaked or breached would have been a breach announcement back out to the public. So you start to look at the value that we're providing. These numbers are just off the charts. You start to look at data birth, 46 million instances, medical record notices, 136 million, U.S. social security numbers, 130 million identified by Spirion. It's just crazy the amount of data that's out there that people just don't know exists. And so that's what we're really providing to the market. We're identifying it, but then using the NC Protect, TDI or even Kojensi, we'll have the ability to govern and then lock that stuff down so we can't see the light of day. So it's really fun stuff to actually look at and see how you can protect that. And that brings us over to the portfolio, which when you start to combine it, we really start to build out a platform. So Dan, why don't you go through the products themselves as they stand today? Chun Leung Lai: Yes. And I guess what we're really trying to say here is to give the shareholders and those interested investors a view of what we have done and how we're building this up. We've spoken about now we've got products that range right across the data security life cycle from that discovery to labeling to enforcement and governing. Now really what this is about is making sure that ABAC is at the center of it, Attribute-Based Access Control dynamic policy, which then gives you that complete Zero Trust architecture at the data layer, which is very fundamental to people being able to secure their information and particularly sensitive information. And that's what differentiates us in the market. The first one, obviously, that discovery and labeling with Spirion products, NC Protect is an enforcement point for SharePoint Online and the M365 environment. TDI, which was the Direktiv acquisition back in March. Now this is really special because it enables us to be able to glue together the ecosystems, your Varoniss, your Splunks, so your big datas, how do we bring all of those components together to get a view across all of the hybrid and disparate environments, which organizations are struggling with today. So what that gives archTIS the ability to do, and of course, is become the fabric, the Zero Trust fabric between all of these elements and changes us from a direct competitor to an enabler and a partner of all of those bigger companies, and that's the strategy that we're taking across to the U.S. It's something that we've got a competitive advantage in. We're leading in and the referenceability from our defense clients gives us a real sweeping uplift in terms of what the conversation that we're having with our commercial clients as well as our national security clients. And all of that learning about how to do this has come from building Kojensi and being in those classified spaces and understanding the use cases and the problem space with our customers and bringing that back into the design of this. But what we have now is a suite of products that we can turn into a global leading platform for Zero Trust data-centric security. That's what's critical about this journey. And so what does that look like? Well, this slide really tells you that story. We have our own world-class products in NC Protect and then we have competitors for policy enforcement, Axiomatics, NextLabs, Seclore, but we also have those hyperscalers. How do we work with those hyperscalers for the customer to integrate to their multi-cloud. We have the SIEMs, the Splunks, the SaaS services, which they've got to send information out from their environment and get back in or from one of the hyperscalers back into that SaaS service. CASBs, how do they protect that? How do we use the best of breed there, not compete with them, but leverage them. And collaboration tools, including Kojensi, identity sources that need to be trusted, okay? And DLPs and discovery tools such as Spirion and Microsoft Purview. This is the layer which also integrates to the on-premise data that is becoming critical, and that's the excitement. And you need these type of capabilities to solve those defense alliance problems we've discussed, Defense Industrial Base problems. Most importantly, in terms of manufacturing, health, this is now the digital ecosystem and the problem that they're trying to solve. And we believe we can be the world leader and dominate that space, and that's what we're trying to do, build a company up of substance from $4.2 million to $20 million ARR to having a presence in the right marketplace to exploit and expand and to base that off the opportunities, do it when the opportunities arise, such as the U.S. DoD to exploit that. And that becomes this. And Kurt, talk to about the go-to-market strategy we get this year. Kurt Mueffelmann: Yes, it's kind of funny because those who have followed us over the last 4 years, you'll recognize this slide. I think in one of my first quarterly presentations, I presented a version of this slide. We've always seen the value in serving multi-markets, but really needed the right timing, scale, geographic focus and capital to effectively execute on it. And I think with the addition of Spirion and major U.S. Department of Defense engagements, we're now positioned to expand vertically across defense and other highly regulated industries. Our focus remains on organizations managing sensitive and classified data. The Spirion acquisition really strengthens our U.S. footprint, broadens the portfolio and opens up new market segments, as you can see today. When we start to expand beyond government and defense into DIB, that leads into further manufacturing that's out there and then some of the sensitive regulated information you saw one of the educational institutions that I used as an example, financial services, the number of banks that Spirion has is very strong looking for banking information, pharmaceutical and life sciences. Now they start to really understand how we expand that. And so combined, the leadership in ABAC and data-centric security, we're really well positioned to capture these opportunities. With the additional M&A under evaluation, further accelerating growth, you can really see where we're taking the business as we drive it forward. Combine this with the product slide, combine this with the market -- go-to-market slides that we put up about identify, discover, classify, govern and enforce, you can start to see the business model coming together. Now if the U.S. government opens up, we can put a nice deal behind that and push everything else forward and make everyone else happy going forward. So we really see and understand the need to focus on defense and government where we were. But as we drive into new market opportunities with Spirion, we really can see how we can broaden that opportunity going forward. Chun Leung Lai: And how we have to grow. So that's really important, too. We're not denying we have to grow and we have to grow strongly, and that brings us to the strategy. But most importantly, about the strategy, this strategy shifts the conversation completely about archTIS from a best-of-breed player to a strategic layer in a category-defining way and to be that leader in that space. It signals partnership, not replacement. We're not threatening the existing ecosystem and the existing companies out there that have messaging that's similar to us. We're enhancing them and we're enabling them. It clarifies our total addressable market and gives our sales teams a spearhead in which to go to with a message which is compelling and credible to our customers. That's what this is about. And so finally, then on the growth strategy, what does that mean? We're going to -- how do we tactically do that? That's all fantastic. But how do we tactically do that? It starts with winning defense. The U.S. DoD, we can't do anything about that until they open up for business again, and I apologize for that, but we have been trumped and we will wait for Donald Trump to un-trump us in that opening up the government for us to liaise with. But the signs are very positive there, and we are very confident, and that's the indicator from that services deal. You don't invest in a product unless you intend to go and deploy it into that environment. That's the message. The U.S. government has access to all of their products in the world, they're still investing in us. That's the point. Take that, run with it. Second thing there is cross-sell to the Spirion audience who are already investing in this and grow them in a way that is expanding their capability -- DCS capability as we take these products and merge them into a platform to take that longer-term advantage of being that leader in that defined space. And that creates network growth, network growth. And that's really what we want to do, scale and grow. Of course, we continue to have to invest in products. One thing about Spirion and the Direktiv acquisitions, we now have a global presence for not only product development but product support which again, that gives us a base to leverage into the U.K. market once we've established this U.S. market presence and honed our skills and execution. And of course, that's targeting global markets and we also need to look at how do we accelerate that through inorganic growth similar to the pattern that we've just demonstrated with Spirion. We're not afraid of taking this opportunity on. It is a difficult challenge. It is going to be hard. It's going to have its ups and downs. And of course, what we're hoping by this presentation is you get very clear on the strategy that we're executing and come along for the ride because we think it's going to be worthwhile. Kurt, over to you. Kurt Mueffelmann: Yes. Great, Daniel. I appreciate that. So I guess a couple of questions popped up right away. When you showed the TDI slide, a question popped up about, can you talk a little bit about opportunities outside of the U.S. particularly around Japan and the U.K. So I think if you talk a little bit about our POCs with Japan and what we're doing in the U.K., that would be beneficial. Chun Leung Lai: Absolutely. So let me start with Japan. Japan is really -- it has been really exciting for us. I know we don't give out a lot of information on where we are with that. But essentially, this is it. NEC sought us out. They knew that they were part of -- did a worldwide vetting for what data-centric security products they were going to take into the Japanese Ministry of Defense to enable them to join that alliance framework, which we saw in one of those earlier slides and that is part of the QUAD. They also then doubled down when Mitsubishi Heavy Industries won that shipbuilding award here in Australia. Why? Because NEC are already engaged as the IT provider for those ships. Yes. Okay. So they've now got a license, which they engage with us to build those data-centric security products to demonstrate in the -- for the next 5-year budgetary life cycle for the Ministry of Defense. They're going to take that in and they're going to demonstrate that they're hoping to win business in that form. We will know the outcome of that probably in the last quarter of this year. But that's what we're targeting and we have been heavily investing in that. And now Fujitsu have come knocking on the door for -- we're seeing some fruition in terms of that environment as well. So that's fantastic. We obviously have had a global relationship with Fujitsu for some time. Also, Fujitsu in the U.K., a bit of a different story. We were introduced to the U.K. by the Australian Department of Defense. Most recently, a Talisman Sabre exercise demonstrated collaboration proof of concept. They want to now take that proof of concept and rebuild their networks in a data-centric security way. That will come out to tender probably sometime in the first quarter -- third quarter -- our third quarter financial year, so anywhere between January and March. And we are obviously liaising with our partners over there to position ourselves into that space. But we are also being referenced again, as I said, by the Australian DoD. So you can start to see these connections and particularly with AUKUS and supply chain management. So that's why we're confident about this space. And that's why it's really important to get that referenceability from the U.S. and Australia and you come the default. So that's what the activities that we're doing going on in that space. But they're also bringing us other clients. Our SI partners are saying, well you know, Computershare could use this. O2 could use this. And we are seeing that network growth into those commercial spaces. Kurt Mueffelmann: Great. I'll answer the next one because it's actually a pretty good question pretty much for an Australian audience. But given the U.S. DoD is now the U.S. Department of War, is there any reason why archTIS continues to refer to the DOW as DoD, knowing the sensitivity of those leaders? Well, I was up in Washington, as I said, 2 weeks ago, and I was sitting with a couple of military uniform people, and I asked that exact question because when dealing with the military, you want to make sure that you're respectful of what titles are and what the appropriate department names are. So it came down to this that the politicians and nonmilitary are generally considering themselves Department of War, but the actual military and uniform personnel are considered as part of the Department of Defense. Someone got up in front of people and started talking about the Department of War, and you could see the military uniform kind of snicker at it. So it's an interesting breakdown. The official title according to the U.S. government is still Department of Defense. And so that's where procurement contracts and everything come in. Right now, Department of War is kind of a secondary title. So we'll continue to use what procurement uses as Department of Defense until the U.S. government changes that or stipulates to be used in a different manner. We want to make sure we keep the people that are buying the products happy at all times. Chun Leung Lai: Yes. I guess, Kurt, as a politician, they're not the ones that actually go to war are they. So move on. Kurt Mueffelmann: Yes. Dan, I guess one of the questions, a good question. I'm not sure how far we can get into the specific answer. But when you made the strategic decision to acquire the business, Spirion, what metrics do you look at? I don't think we can get into specific metrics of where is revenue going to go next year or where is operating expenses. But talk about the philosophy around the metrics that we're trying to achieve at a high level. Chun Leung Lai: Okay. We've got this fantastic opportunity with the U.S. DoD, transformational opportunity. How do we grow in the U.S., which is the world's largest market. We know we want to pivot to the world's largest market where the biggest opportunities are for growth. That's good for our shareholders. We can grow organically, start going out and trying to find the right people and employ them and maybe they won't work out in 6 months, you try looking for a new or we can go and acquire a company that already understands what we do and complements us from technology, introduces new verticals and skill sets for commercial selling and customer base and has ARR, which we can also build significance because you need to be of a certain size to take on the U.S. marketplace. So behind all of that then becomes the metrics. What do they do? How well as an organization are they running? What's the renewal rate? We go through all of those sorts of things in the due diligence. But really, it becomes what is the strategic value and how fast can I get to where we want to go with buying this company as opposed to building a company. And I think that was the general philosophy behind it. And this one just, as I said, tick all the boxes. It's a data-centric security company. It augments. It has clients investing in data center, here we can leverage and cross-sell and we add value to it from our product suite and they add value to us. And they're in the right marketplace, which we want to address and growing. So that's the philosophy behind it. Kurt Mueffelmann: That's great. Thank you. Let's see. How about this one? We can kind of tag team this. Where does AI enter into the archTIS story? Chun Leung Lai: Well, this is something Kurt and I have been obviously heavily focused on. Look, one of the stories of -- one of the interesting things about what we did with the acquisition of Direktiv to build TDI is to be able to secure generative and agentic AI. It already is in some companies, but it provides a new way of looking at that and provides new controls around how AI is managed. So for as an example, and we are also looking at how we extend NC Protect to policies to generative and agentic AI. So yes, we are looking at that critically. It is a massive question. We believe that we've got a real answer to that problem and it's about scaling up into that space. And if you become the central policy control plane for hybrid environments, including agentic AI services by restricting what tools and products and data it can call to respond to an answer based upon the individual asking the question, that's a really powerful story. Kurt Mueffelmann: Yes, it's interesting. You see when I was up in Boston meeting with Ryan, our Chief Product Officer, you could see the expression just light up when you start to talk about AI, right? It is what NC Protect can do to things like Copilot. You can look at what it can do that TDI can do with some of the existing customers we have today and look at the scope that it has. And as Dan said, it's really about the policies and controlling it. So I think we'll have something pretty exciting in the very near future around that, which really makes, I think, an even fuller suite of offerings that we have to market. Let's see. Where else do we go? Why do we see a large increase in admin and corporate expenses? Well, let me tell you, I live hour south of Tampa, where Spirion is located. And I can't tell you the number of times I saw accountants, attorneys and third parties that are helping us through due diligence for one-off acquisition and integrations of Spirion. It's not cheap to acquire companies. You want to make sure you do it correctly, make sure you have the right people and more importantly, make sure you have correct information and not just make dismissive assumptions into M&A or listen to the bankers that are trying to sell you the deal. They can be very persuasive, but you really have to dig behind the covers, go deep, deep into the onion and peel it back. And so yes, there's going to be one-off expenses. We'll see that coming into this quarter as well. But really, what we're trying to do is what we've shown and I think demonstrated to the market previously is be very cost conscious from a capital expenditure standpoint to make sure that operating costs are in line with revenue. We want to grow top line revenue, but it has to grow at a pace that keeps up with things such as cash and the way that we're spending cash on a regular basis. We can't go out like some of these organizations that have raised hundreds of millions of dollars, but they're spending hundreds of million dollars a year on maybe $50 million in revenue. That just doesn't work for a company like archTIS that's in the public markets, that's a microcap. We need to be very capital efficient. So yes, you'll see increases in operating expenses. And our CFO, Andrew Burns, is over here working with Kevin and myself right now, working on what those synergies are, and we're really finding some really strong synergies, whether it's consolidating CRM systems that cost hundreds of thousands of dollars a year or looking at ways that we can leverage existing systems and really get rid of some existing contracts that may be in place for third-party internal systems, accounting systems, CRM, what have you, consolidating other systems. We're looking after under every nook and creating every rock to find every single dollar we can to either bring it back as capital savings or to push it into growing the market even stronger. Chun Leung Lai: Yes. And thank God, those legal fees have stopped. If I have to have a second life, it might be as a commercial lawyer in the U.S., but you have to have [ a degree ]. Kurt Mueffelmann: We really did do a good job on that career decision, did we. All right. I think one more question, Dan. It's a valid question. For a number of years, the Australian defense led every year at year-end and we saw deals. What happened to the Australian defense market? Chun Leung Lai: Look, it's a great question, and I'm happy to answer it. I think there was 2 things that really have impacted the Australian market. I think the -- let me explain. The first one was, obviously, we had the defense white paper a few years ago, which stopped some spending and then they were talking about projecting force and restructuring and all of that, that affected spending. And then they started to open up the coffers again and we've got some good work back in. We extended licensing in there from NC Protect as well as Kojensi in those classified environments. And then what happened was AUKUS came along. That's great. It's another opportunity. But all the generic or surplus spending or dollars got sucked straight into AUKUS. Establishing an agency that needs to deal with nuclear submarines and getting everybody available and that caused disruption. So obviously, we naturally targeted that space. And we have had some success in that space, which -- but obviously, it's classified and we can't talk about it. But however, what happened next? Donald Trump turned up and said, let's do a review of AUKUS. What do you think happens then? No one spends any money until they find out what the result of the AUKUS agreement is going to be. So that is the natural thing that happens. When these organizations get -- don't have certainty of the way forward, they stop spending, right? And now that AUKUS has now been given the green light again, we have some certainty about what's going to happen. And I expect some of those opportunities are going to open up again. Now -- but that's what's been affecting that marketplace. And in some ways, that's disappointing, but in some ways, that's good. Why? Because it just means that we're more committed to moving into those high-growth markets, which Australia will never be, and there's a risk of dependency in a concentrated form here in Australia. So let's go to those markets where they're bigger, they're better, the revenue can be stronger and there's more opportunity. But let's do it in a way where we can be of a size which can compete, have a strategy that we can exploit, defend and have a message which we can cut through with the white noise. And that's what I think we have now and that's what's exciting about the future. Kurt Mueffelmann: So Dan, I'm going to roll up a couple of questions. So this will be our last question. I'm going to roll up a couple of them into one and then I'll turn it back to you for some closing comments. So there's been a couple of questions around employees, how do you align the acquisition with shareholder interest and what have you. So having done 20-plus buy-sell M&A deals in my career, the employees that you bring on are the lifeblood of the business. We can talk about the technology. We can talk about the customers. But if the employees that we bring across aren't there or they're not motivated or they're not culturally fitting into where we are, the business or the acquisition will fail. So what we've done is we put together a really strong program. I think in the announcement, we talked about an employee incentive program. That actually does a couple of things. One, it allows employees to feel, hey, I did a great job at Spirion. We're really happy to be with archTIS. So over a period of time, people will get retention bonuses. It shows the appreciation that they're valued. We show that they're good to be here and it helps us keep continuity across the entire employee base. We also put equity options in place as well. And it's important to align particularly people that haven't had equity before, align those interests of shareholders with the employees. We make sure that almost every employee has some type of equity in the business itself. We sit down and next week, we'll go through what this 4C was to our entire employee base. We get questions just as difficult questions from employees about where is the share price going? How come it's doing this? How come it's doing that? Why did it go down this much one day, but up the next day? What does volume mean or where is my strike price? So we need to really make sure the employees are aligned to where we need to take the business from a shareholder standpoint to keep everybody on the same page. If you look at it, management right now, we believe we own 15% of the outstanding shares within the business, that's management directors and founders. So that's tight alignment between the shareholders and where we want to go. We feel the pain just as much as everybody else that every tick the share price goes down and we feel related every tick the share price goes up. So we want to see it go up as well. But we want to make sure that we bring the employees on a good ride to make sure that they're compensated properly at a fair market value, give them the ability to bring across their domain expertise and knowledge into the company and then provide that equity incentive where if they win, everybody wins from the shareholders, the employees, the management and the Board. So that's kind of our underlying philosophy around it. Dan, anything you want to add to that? Chun Leung Lai: Yes. Look, in the end, if we can execute and build a sustainable, high-growth company, with a competitive advantage and a technology platform that can execute and solve critical high-value problems, the rest will take care of itself. That's what we have to do. We're on the -- and that's where we start with where we are today. And now we just tactically exploit, I have to execute what we need to do and it starts with this winning this U.S. DoD deal and getting Spirion integrated and moving forward and cross-selling. Kurt Mueffelmann: So Dan, I'm going to ask you to roll your closing comments into one last question. I think it's fair to say that we've heard in other quarters that the future is bright. Why -- what makes this quarter different specifically? So if you can roll that answer into your closing comments --. Chun Leung Lai: One word, progress. We are progressing. The last quarter, $4.2 million ARR, this quarter, $20 million ARR. Yes, a lot of that's been through an acquisition. Where is that acquisition? I think we've explained that and why it's important and where we see the future. If as a shareholder, you can't see that growth, then either we are explaining it wrong or we are doing something wrong, but -- or you're just not getting it. The issue here is, I think it's progress. We have made an enormous amount of progress to where we want to be in the world's largest market to execute what we think we've got a competitive advantage and we can generate strong network growth revenues. That's -- we are a microcap taking on the biggest organizations in the world with the largest companies in the world. That's not an easy thing to do. So that's my answer. And I hope you can see that there is real genuine progress that we've outlined the strategy, and we're executing against it. Kurt Mueffelmann: Great. Well, thank you, everybody for your comments. And I'll turn it back over to Chloe. Operator: Mike, that's all we have time for today. Daniel and Kurt, thank you for taking the time to walk us through the quarter's results and to everyone who joined us today. If we didn't get to your question today or if you'd like to learn more, please feel free to reach out via the contact details at the bottom of our ASX releases, and we look forward to hosting you again soon. Thank you, gentlemen. Kurt Mueffelmann: Thank you. Chun Leung Lai: Thank you.
Operator: Good day, and welcome to BJ's Restaurants Third Quarter 2025 Earnings Release Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Rana Schirmer, Director of SEC Reporting. Please go ahead. Rana Schirmer: Thank you, operator. Good afternoon, everyone, and welcome to our fiscal 2025 third quarter investor conference call and webcast. After the market closed today, we released our financial results for our fiscal 2025 third quarter. You can view the full text of our earnings release on our website at www.bjsrestaurants.com. I will begin by reminding you that our comments on the conference call today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements are not guarantees of future performance and that undue reliance should not be placed on such statements. These statements are based on management's current business and market expectations, and our actual results could differ materially from those projections in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements or to make any other forward-looking statements, whether as a result of new information, future events or otherwise, unless required to do so by the securities laws. Investors are referred to the full discussion of risks and uncertainties associated with forward-looking statements contained in the company's filings with the Securities and Exchange Commission. We will start today's call with prepared remarks from Lyle Tick, our Chief Executive Officer and President; followed by Brad Richmond, one of our Board Directors. We also have Daniel Duran, our Senior Vice President of Strategy and Financial Planning and Analysis, on hand for questions, which we will take after our prepared remarks. And with that, I will turn the call over to Lyle Tick. Lyle? Lyle Tick: Thank you, Rana. Good afternoon, everyone, and thank you for joining us today. I'm happy to report our fifth consecutive quarter of sales and traffic growth as well as our fourth consecutive quarter of profit expansion. From a top line perspective, Q3 delivered 0.5% same-store sales growth, which included a slow start to the quarter, as we discussed on the last call, with the remainder of the quarter averaging roughly plus 1.5% comp growth for the final 2 months, which has accelerated into Q4. On the profit side, we delivered 12.5% restaurant level operating margins and 6.4% EBITDA margins, representing an improvement of 80 and 70 basis points, respectively, year-over-year. We have now lapped the launch of the Pizookie Meal Deal, and I'm pleased with the positive year-on-year momentum in the business that closed Q3 and has continued into Q4. In the last 6-plus weeks, our traffic is tracking at roughly plus 3.5% year-on-year, close to 9% on a 2-year basis and outperforming Black Box casual dining benchmarks again. Our current performance trends, combined with a strong product calendar for the rest of Q4, anchored in our pizza refresh launching next week and 2 exciting seasonal Pizookies gives us confidence to reiterate full year top line guidance of approximately 2%. As I reflect on my first year with BJ's, I could not be more proud of the teams, and I remain very pleased with our progress to date and energized about what we can achieve going forward. 2025 has been a year of building the foundations of a stronger and more consistent BJ's guided by our strategic priorities. We are better positioned today to leverage an incremental dollar of sales and win a return visit and the improvement we're seeing across our guest, operational and team member metrics give me confidence in the durability of the progress we're making. Our restaurants are operating more effectively and efficiently, focusing on being great at what we call the table stakes and both our guest satisfaction scores and team member retention metrics are at multiyear highs. Our ongoing simplification efforts and focus on gross to net have resulted in sustained double-digit improvements in comp food and beverage incidents, improving the guest and team member experience while removing over 0.5 million unnecessary POS clicks for our team members and counting. Our outlier program and drive for accountability has improved overall effectiveness and efficiency as reflected in our restaurant level cash flow. We continue to build the Pizookie Meal Deal into an everyday value platform, resulting in continued improvements in our value scores and traffic, and we're beginning to see these improvements reflected with positive movement in our guest frequency metrics as we now begin to roll out product and experience improvements with our pizza refresh next week. Speaking specifically to Q3, we further embedded our Pizookie Meal Deal as a core value platform our guests can count on, leaned into the power of social media and seasonal Pizookies to drive brand momentum and continued the journey of improvement on table stakes operations. Our strong year-on-year momentum since the Pizookie Meal Deal lap began can, I believe, be attributed to a combination of the foundational work I've talked about, as well as the continued refinement of our marketing strategies and tactics that are helping us codify how to most effectively drive the business. In Q3, we continued to shift our marketing focus towards social influencer and word of mouth. Given it's not our strategy to win a share of voice battle, our effort is increasingly focused on driving social dialogue and relevancy. I want to give a shout out to the marketing team for the great progress they're making. Our earned media impressions are up over 300% year-on-year. The Pizookie Meal Deal continues to resonate with guests, providing a great value and accessible everyday splurge opportunity, driving increased traffic, recruiting new guests and driving frequency with existing ones. We leaned into our All-American Smash Burger as a new feature on the Pizookie Meal Deal and garnered over 2 billion impressions on National Cheeseburger Day alone. On September 17, we also rolled our latest menu update and the Spooky Pizookie has been a social phenomenon. Again, the team has taken a more proactive approach to social and influencer engagement, driving a 350% increase in overall engagement and doubling overall impressions year-over-year, further codifying the role of seasonal Pizookies as both a buzz and traffic driver. In addition to the traction of the Spooky Pizookie, our other menu optimizations are resonating with our guests. The 22-ounce beer pour offering is seeing about a 23% pickup rate and helping to improve checks with beer attached. And the Brewhouse Sampler is a top 3 appetizer, resonating with guests while driving a premium trade-up. In Q3 and through October, our growth has continued to be traffic-driven with broadly flat to slightly down average check. Underlying this performance is an increase in frequency that is more than making up for any check compression. Double-clicking on check, there are 3 factors at play. Primarily, it's the increased traffic and number of checks driven by the growth of the Pizookie Meal Deal, which has continued into Q4. Additionally, the outsized growth we continue to see in late night, which carries a lower check and continued pressure on alcohol beverage attachment are also contributing factors. On the margin side, our operators continue to do an excellent job making progress on the foundations of great operations and hospitality. Despite some choppiness in sales early in the quarter, they delivered another strong quarter of restaurant margin expansion by continuing to focus on the fundamentals. I want to thank all our teams from the restaurants through to the support center for the continued energy, passion and commitment they show every day. As I look ahead through the rest of the year and into 2026, we remain focused on continuing to make progress across our 4 strategic priorities, and I'm excited about what is yet to come. Starting with the team member experience. Our team members are the heart and soul of BJ's. Our job is to make things easier and better for them and the guests and the rest follows suit. I come into this call having just hosted our GM Conference in Dallas 2 weeks ago, and the excitement and engagement was energizing and infectious. We spent 3 days together building alignment and ownership of our brand strategy, learning together and sharing best practices. We rolled out our new company values, which were informed by our engagement survey, co-developed by a cross-functional team and will guide us in how we deliver on our brand promise every day. Our people and training teams led learning sessions that empower our directors of operations and general managers to bring these values back to their restaurants and bring them to life across the system. Maybe most importantly, we began the rollout of a comprehensive refresh to our manager and team member training that will be fully implemented across the system in Q1 2026. This new training establishes one best way for BJ's while also empowering general managers and team members to deliver Wow Hospitality. I think what resonated most with this training was it was created in partnership with our operations, people and training teams and was authored by people who came up through the restaurants. With respect to handcrafted food and beverage, we continue to progress development across our priority categories, identify areas for simplification and are now on the cusp of launching our first major renovation. On November 6, we'll be introducing the refreshed pizza platform across the system. The entire BJ's system is locked and loaded and can't wait to share the new product with our guests. Our team members love the product. And as Chris Pinsak, our Chief Operating Officer and our senior operation leaders remind me, that is the foundation of creating excitement with our guests. We will ramp up the pizza refresh through the end of the year and through Q1, introducing our first LTO pizza product in over 5 years in Q1, continuing to drive engagement and excitement. We also have 2 exciting seasonal Pizookies launching in November with the Monkey Bread Pizookie coming back after much prodding from fans on social media and a Dubai Chocolate Pizookie and dessert martini taking advantage of this current trending flavor. As we head into 2026, our culinary priorities will be to continue to renovate our core categories, to refresh strong sellers with clear NPS and executional opportunities, and to continue work on simplification. In 2025, we have had net reduction in menu items of 6. And in the January menu update, we will be removing 2 more items, eliminating 5 additional single-use SKUs. And then additional simplification will be primarily connected to the category refresh work throughout 2026. Our third priority is delivering Wow Hospitality. Our focus in 2026 is to build off the foundations we have laid and continue to improve guest satisfaction, throughput and efficiency. We will continue to focus on great fundamentals and not ceding conquered ground by continuing to drive accountability through our directors of operations and general managers focused on lifting up our outliers and sharing best practices. As I mentioned earlier in our team member section, the new manager and hourly training is driving a one best way approach to the system, ensuring we're all pulling in the same direction and can deliver a consistent BJ's experience to our guests. Our simplification team continues to work day in and day out to remove unnecessary barriers, and this will be a continued process. Finally, we will advance our technology initiatives to help ensure we have the right people in the right place at the right time with our AI-driven activity-based labor model. This will be rolled out to 30% of our system by the start of 2026, and we're beginning to lay the groundwork for future use cases. In 2026, we will also continue to invest in our remodel program, which consistently has shown strong results and pilot a refreshed BJ's prototype, setting the foundations to grow our restaurant portfolio in support of our fourth strategic pillar, keeping our atmosphere fresh. In 2025, we will complete 20 remodels, bringing the total to 72 over the past 3 years, impacting 50% of our pre-2016 fleet and are pleased with the value-accretive results we continue to see. In 2026, we will continue the program and are refining our 2026 remodel targets now. With the progress we're making on the core business, we're now laying the groundwork of reigniting new unit growth and have signed 2 leases with a number of deals in late-stage development. We're actively building a flexible pipeline as we target up to 2 new openings in the second half of '26 to pilot the refresh prototype and set the foundations for further growth in 2027 and beyond. As we drive towards a strong finish to 2025, we've made great progress in building the foundations of a stronger and more consistent BJ's and now are on the cusp of beginning to introduce product and experience improvements. I will wrap by reiterating what I believe are the 3 key themes coming out of Q3 and looking ahead. The first is continued progress. Q3 marks our fifth consecutive quarter of sales and traffic growth, along with our fourth consecutive quarter of profit expansion. The second is stronger foundations. All of our financial, consumer, and team member metrics continue to indicate that we're building a stronger and more durable BJ's. We are better positioned today to leverage an incremental dollar of sales and win a return visit. And the third is momentum. Since the lap of the Pizookie Meal Deal, we have seen increasing momentum and strong traffic-driven growth year-on-year. This momentum, combined with the strong product lineup through the end of the year with the pizza refresh and 2 seasonal Pizookies, gives us confidence in maintaining strong performance. Before I turn it over to Brad to take us through more detail on our Q3 financial performance and outlook, I'm excited to share that we have finalized an agreement with our next CFO, who brings deep restaurant industry experience and will be starting at BJ's in mid-December. You can expect more details in a public announcement next week. Given that, I also wanted to take a moment to thank Brad and the entire Board for their continued support, partnership and guidance. It has and will continue to provide great value to me and the entire management team. Brad? Carl Richmond: Thanks, Lyle, and good afternoon, everyone. As Lyle has just outlined, BJ's brand is healthy, thriving. During the third quarter, we achieved record sales and profitability levels we have not seen in over 6 years. The cash flow of the business is durable and growing to support our growth drivers with ample excess cash to repurchase shares when the market price is a meaningful discount to its intrinsic value. To the latter point, we repurchased and retired 996,000 common shares for $33.2 million during the third quarter. And for a year-to-date total of 1,838,000 common shares for $62.4 million. With the Board's authorization today for an additional $75 million in share repurchases, we have updated our 2025 annual share repurchase expectations from $45 million to $55 million to $65 million to $80 million. Importantly, our balance sheet remains healthy as we ended the third quarter with a net funded debt of $64.1 million, comprised of a debt balance of $89.5 million with cash and equivalents of $25.4 million. In the third quarter, we generated sales of $330 million, a 1.4% increase versus last year. On a comparable basis, Q3 sales increased by 0.5 percentage point, all driven by traffic growth. This quarter included a little over 2% of year-over-year pricing. The compression in check is driven by 3 factors: the outsized growth we continue to see in the late-night daypart and the Pizookie Meal Deal, both which carry a lower check. These comprised about half of the check compression. Continued pressure on alcohol beverage sales comprised the other half. However, to put the check conversation in a larger context, I would highlight that gross margin, that's check less food and beverage is up 90 basis points and margin after direct labor is up 130 basis points this year over last year. This is a testament to our menu and marketing team's management of the menu and our operations team's delivery of the menu. We achieved meaningful increases in our restaurant level operating profit, adjusted EBITDA and EPS. Lyle highlighted what I call the 4 drivers of this margin improvement. But to briefly recap, it's our focused efforts on table stakes, simplification, restaurant outliers and the Pizookie Meal Deal platform. This has driven our restaurant-level operating returns to 12.5% in Q3, which represents an 80 basis point improvement year-over-year with our restaurant level operating profit increasing 8.8% to $41.3 million. This included approximately 40 basis points year-over-year headwind on this line as we wrote down certain asset valuations this year that's included in the operating and other expense line. Our adjusted EBITDA margins reached 6.4% in Q3, which represents a 70 basis points improvement year-over-year with our adjusted EBITDA increasing 14.1% to $21.1 million. On a line item basis, our cost of sales was 25.7% in the quarter, which was 90 basis points favorable to a year ago. Food cost inflation was approximately 2% on a year-over-year basis, driven broadly by higher beef and seafood costs, partially offset by lower cost for bone-in chicken. Cost of sales also benefits from our 4 margin drivers. Labor and benefit expenses were 37.1% of sales in the quarter, which was flat to last year. Our restaurant teams continue to operate at a heightened level from better guest count forecasting, enabling better labor scheduling and then managing to that schedule. We leveraged hourly and management labor by approximately 50 basis points, but this progress was largely offset by accruals for higher anticipated medical cost inflation related to workers' compensation despite the progress in reducing the number and severity of claims. Occupancy and operating expenses, which includes marketing, was 24.7% of sales in the quarter, which was flat to the third quarter last year. Marketing costs increased by 10 basis points and sales leveraging offset the approximately 40 basis points of year-over-year headwind on the write-down of certain assets I mentioned earlier. General and administrative costs increased 40 basis points year-over-year, largely driven by investments in our strategy and a negative 20 basis points impact of mark-to-market accounting, which is fully offset below EBITDA and other income. Preopening costs declined 30 basis points from fewer new restaurant opening activities this year. Depreciation expense increased 20 basis points compared to last year, reflecting the remodel investment in our restaurants. And as Lyle has already mentioned, we reiterated our 2025 comp sales guidance of approximately plus 2%, restaurant-level operating profit of $211 million to $219 million, adjusted EBITDA of $132 million to $140 million and capital expenditures of $65 million to $75 million. And as I mentioned earlier, we increased our expected share repurchases to $65 million to $80 million, depending on market conditions. Our earnings assumptions include an overall inflation increase from approximately 2% in the third quarter to the mid-2% in the fourth quarter. And with that, we'll take your questions. Operator? Operator: [Operator Instructions] The first question comes from Alex Slagle with Jefferies. Alexander Slagle: I wanted to ask about the drivers of the acceleration in traffic. And it looks like the back half of September and into October, just kind of runs opposite of what some others have seen in the benchmarks show. So just maybe you could expand on that a little bit more on what drove that acceleration. Lyle Tick: Yes. Sure, Alex. Thank you. It's Lyle. As we're looking at it year-on-year, there's a couple of things that I would point to. I think there's kind of a combination of factors that go into it. Some of it, I believe, is some of the foundational stuff that I've talked about on the past several calls. We're seeing improvement in guest metrics, improvement in satisfaction, improvement in value. And eventually, you expect to see that starting to come through in frequency, and we're starting to see those frequency numbers improve across income cohorts and age cohorts. So that kind of works together. Pizookie Meal Deal has continued to grow. So as we came into the lap, the numbers that we were seeing coming into the lap that I think we alluded to probably last quarter is that PMD continued to grow. We continue to see more people coming into it and more frequency. So it made us -- gave us confidence going into that. And then I mentioned the marketing and the lean in on the social side. I wouldn't underestimate that increase in social dialogue and buzz and influencer engagement. I'd say the 2 kind of main platforms for that were the Pizookie Meal Deal and the Smash Burger. But really, the Spooky Pizookie was really a phenomenon this year and the team leaned in, and it really gained a lot of traction on social. And I think that resonated. And we saw it coming through, obviously, in traffic, but we also see that in the rise in Spooky Pizookie incidents. So we kind of can see that correlation there that helps us point to that. Alexander Slagle: Interesting. And I guess you've been here a year and I guess, started the CEO role in June, but kind of curious if there's anything in the business that's surprising you now or just shaking out a little bit different than you expected coming in? Lyle Tick: I don't know if there's anything that is particularly surprising. I mean, look, I'll tell you, I'm pleased with the performance we're seeing and the level of acceleration we're seeing in the business recently. I think the team came together, did the hard work on the strategy and the priorities, and we're remaining kind of guided by that and trying to keep ourselves focused on what matters and continue to build a stronger business, right, over time. And so I'm pleased with the progress we've made. I'm pleased with the progress the team has made, and I'm excited about where we're going with the business right now. Operator: The next question comes from Brian Bittner with Oppenheimer. Brian Bittner: Congratulations on solid results. You clearly have reiterated the guidance for full year same-store sales. And you also said that the 1.5% comps you were seeing towards the end of the third quarter accelerated into the fourth quarter. And getting to that kind of 2% range for the full year would suggest something in the fourth quarter that is closer to like the 3% range. So I'm just trying to level set because there's a lot of outcomes for 4Q to get roughly 2%. Is kind of the 3% range the right way to think about the fourth quarter? Lyle Tick: Thank you, Brian. As we're looking at our models and kind of where we're at today as we speak and how we're rolling things forward, we're looking at about 2% to 2.5% growth, and that will land us right around that 2% for the year. Brian Bittner: And that's still incredibly impressive, the acceleration, given what we're seeing. And just elaborating on Alex's question. I'm just trying to understand what's going on. Are you guys just not seeing any pullback in consumer behavior? Are you not seeing in your data and insights any changes in frequency or anything like that, that basically everyone else is talking about? Lyle Tick: Yes. So I mean, I'll tell you what we're seeing. We're actually seeing an increase in frequency beginning to emerge across all of our age cohorts as well as all of our income cohorts. That frequency is resulting in also an increase in total average spend per customer across those cohorts. Now across all of those cohorts, whether you look at it from an age or an income perspective, we are also seeing a bit of check compression, right? But the frequency is more than making up for that. If you kind of break that out at the lower end, we're actually seeing higher frequency gains and a little bit more compression. And at the higher end, we're seeing less frequency gains and less check compression, but there's not like big, big glaring differences between them. And on the age cohort side, we're seeing actually the older and the younger consumer kind of be a little bit more on frequency and a little bit more on compression. And that kind of between the 2, we're seeing again increased frequency to a lesser extent and a little less check. I think what it might suggest, right, is we've seen the PMD growing in the cohorts where we're seeing the more -- the higher level of frequency and a little more check, that's a higher engagement rate with PMD. But when you look at the frequency resulting in the average spend, it suggests it's also driving an incremental occasion. So that's kind of the way I'm looking at it and dissecting it. And so I'm pretty happy with what we're seeing, but that's kind of the mechanics of it. Brian Bittner: No, it certainly suggests the foundational work you've been doing on the brand is working. Operator: Our next question comes from Jeffrey Bernstein with Barclays. Jeffrey Bernstein: A couple of things you touched on from the unit side of things. The first one was on the remodels. It sounds like you're still on track for the 20 in '25. And I think you said that's 50% of your class of units opened prior to 2016. I'm wondering if you can give us an update in terms of the cost of these remodels, maybe the sales lift and how many you think you might do in 2026 as you move towards presumably 100% of those stores opened more than 9 years ago? And then I have one follow-up. Lyle Tick: Yes. I mean what I'll tell you is on the remodels, we continue to see a return that we're pleased with, which gives us confidence that it is a good use of our capital to continue to invest in the remodel program. As I look into 2026, we're definitely going to continue the program. I'd say it might be at somewhat of a moderated pace next year as we start to also get the refreshed prototype out there and then apply those elements to the remodel. And then as we gain a little bit of experience with that, I think returning to that pace of, like we're doing this year, 20 to 25-plus remodel units as we work through the rest of them. So I feel really good about the program. I want to do a little bit of learning with the new prototype and then accelerate again. But we're going to continue it next year. Jeffrey Bernstein: And then I think you mentioned from a new unit perspective, the reacceleration in growth. I think you said you have 2 potentially that could open in the back half of '26. And then I thought you mentioned something about accelerate from there. So I was wondering how you think about -- obviously, there's no shortage of opportunity across the U.S. for the concept. So what's -- how do you think about what that ramp looks like in '27 and beyond? I mean is it just -- like what's the constraint to that? Seemingly you have lots of opportunity, but whether it's people or real estate or just operations. I mean how do you think about when kind of the sky is the limit what you do in '27 and beyond? Lyle Tick: Yes. I think -- look, I mean, I think part of it is building the pipeline, obviously, which we're doing now. Another part of it is gaining the confidence in the prototype and the return on the spend, which we'll be doing. And so I would think of it as kind of 2026, end of 2026. We'll take a step in 2027. And then in 2028, really starting to see that full run rate come back. When you think of it from a geographical point of view and what's kind of -- how we're going to attack that and what are enablers, we're going to focus on where we already have a footprint, right? So the way we've talked about it is kind of think of it as concentric circles. So we're going to look at markets where we already have restaurants and we either need to fill out that density to get kind of that alchemy on awareness and consideration and also leverage on multiunit management or we feel like we have room to fill in where we already have a decent amount of restaurants, because that gives us a head start, gets us out of the gate quicker. We have the leverage on management, we have the leverage on supply chain infrastructure. And so we'll get to new markets, but building out in kind of concentric circles versus kind of putting one-offs out, because we actually have, frankly, a lot of markets that what I would call our kind of between clubs on multiunit management, where we have just a couple of restaurants. So I think what you'll see, you'll see some of those leases in places like in Arizona, where we're filling in and building out, and you'll see some in places like Pennsylvania or in Illinois, right? So there'll be those types of things, but it will be building out from where we have an existing footprint to a certain extent. Operator: The next question comes from Sharon Zackfia with William Blair. Sharon Zackfia: As we think about those 2 new locations and 2 new prototypes for next year, are there any key changes that we should be looking for either in the size of the box or the features of the box that you're really keen to explore? Lyle Tick: I think the -- as we look at the box, the first thing that we talked about was as we did the positioning work, does the environment and atmosphere itself really live and breathe our positioning and our DNA? Does it feel like it would be familiar to existing guests, but excite new guests and bring us into kind of the next generation kind of contemporized BJ's. I do think there's an opportunity to probably lighten things up a little bit with BJ's that we know we're taking an opportunity to do with the prototype. I am a big believer in right kind of size, right cost, right place. So you're going to see a prototype that has very clear indicators of that you'll see consistently across BJ's, like what are those design elements that make a BJ's a BJ's, which you see everywhere. But we'll see that applied in different markets to different sizes and different costs. In some markets, we'll look to test conversion versus a ground up. So I think we're trying to get really clear on what makes a BJ's a BJ's and then apply it flexibly to get the right return on the investment. Sharon Zackfia: And then can I ask a follow-up on the revamped pizza launch? I mean as you launch that, I mean how do we think about that and the impact to check? I mean, I don't know kind of -- I mean, you already have pizzas, so I don't know how you're expecting the attach of pizza or the incident rate to kind of increase. And I'm assuming that's going to be more value for the consumer than necessarily ordering, everyone ordering entrees for themselves. So I'm curious on how you expect that to play out. And also if you're going to lean into that as another kind of value offering in addition to the PMD. Lyle Tick: Yes, sure. I think pizza inherently does provide a value and fills kind of a different occasion for people, which is really nice. And so I think it's historically played that role. But I think as the pizza kind of quality and satisfaction eroded, it did that less effectively. And so part of what we're doing is refreshing the pizza to help it play the role it's supposed to play in our menu more effectively going forward. I think when you look at kind of the way I think about pizza, it's a core product improvement that I would expect to kind of build over time as we drive trial. And I think of it as just another layer in building a stronger, more sustainable BJ's and kind of working in combination with the other improvements we talked about. So what I don't expect is like a short-term inflection point in short-term performance, but rather another layer in building kind of sustainable growth over time. Daniel Duran: And this is Daniel. I'll expand on that just a little bit here. In terms of the check, what we've seen in the test locations is we've actually seen a little bit of an uptick in our average check in those locations versus control. Part of that is, I think we mentioned previously that we're seeing about a 10% uplift in our pizza incidence overall. So just kind of wanted to add a little color so you get a little more clear answer there around kind of what we're anticipating to happen with our check there. Operator: The next question comes from Todd Brooks with Benchmark. Todd Brooks: First question, Lyle, you highlighted the fact you've been here for a year, and you highlighted the foundational improvements that the team has made in that time frame. We're seeing -- when you talk about unit growth, we're seeing it some maybe on the culinary side. But with a year of foundation building behind you, what's the brand better positioned to play offense on now as we go into '26? Other areas that we should see you guys really start to put your stamp on the business and be a little more front-footed in how you're running it versus stabilizing it? Lyle Tick: Yes. Look, I think -- I mean, one, I guess, I would say I'm pretty pleased with the momentum that we have and the work that we've done. I do call it foundational, but ultimately, it's building a better, more sustainable, more compelling BJ's. I think as you think about getting more on our front foot, it's kind of what I referenced when I talk about like product and experience improvements. And so the 2 kind of probably main drivers of that are going to be the continued work on the menu renovations next year as we start to focus more on kind of the post pizza categories. And then the other one would be obviously the new prototype that we're working on. And so I think those things allow us to -- having the foundation stronger allow us to push a little bit harder on new stuff in the restaurants and the teams will be capable of taking that in and executing it really well. I think probably the other thing that is maybe a little harder to just put your thumb on is, as we get stronger with the foundations and we're running more efficiently, it does give our GMs and our team members the opportunity to do more of the added value hospitality, right. As we're making things kind of more systematic for them, it kind of frees them up to deliver that hospitality more effectively, which, in my view, in our business can't be underestimated. Todd Brooks: And my final question. You spoke on the last call about the Pizookie Meal Deal evolving the platform to have some add-on and kind of check builder type of capabilities for customers that are accessing there. Just wondering, A, success that you've seen with that, any other iterations that you're looking at with the program? And how are the teams doing from a front-of-house standpoint kind of selling that ability to build a higher check on that platform? Lyle Tick: Yes. So I mean, overall PMD, so as I said, it's growing. It's not only growing in frequency and attachment, but the check is actually growing a bit on PMD. So that's good. Now would I say that we've kind of nailed that yet, the answer would be no. The PMD -- I'm sorry, the Pizookie, full-size Pizookie trade-up has been an easier sell for our team members at dinner, not much at lunch. The other add-ons we've had so far have not had much traction. The Smash Burger brought a lot of kind of momentum and news to the Pizookie Meal Deal, which we're excited about. And so we're still working through kind of what is the next iteration of add-ons and check building and menu refresh for PMD. And so that will be things that we test and roll in 2026. But I'd say we're still at the beginning of that journey, seeing a bit of traction, but I wouldn't pat ourselves on the back yet about that. Operator: The next question comes from Brian Mullan with Piper Sandler. Brian Mullan: Just wanted to come back to the pizza launch. In those test locations you referenced in the prior answer, were you doing anything to proactively drive awareness? Or were those really -- those lifts really just happened purely organically? And related to that, just talk about the plan to drive awareness once that does launch next week, whether that's social or inside the restaurant, anything you could offer? Lyle Tick: Yes, sure. I mean in the test market, it was really organic. I mean, we obviously have -- geographically, we understand our loyalty customers that are most frequent at restaurants. So there was a communication that went out to loyalty members that are associated with those restaurants, but there was no really other proactive marketing on pizza outside of in-restaurant merchandising. And I think I mentioned this in my talk, but Chris keeps mentioning to me how much the team members love it and then if they love it, that's when you're going to see them selling it and people picking up on it. So I mean, I think all of those elements obviously continue as we roll out broadly. Then the plan that we're putting in place, we are going to do external marketing about it. It is going to be heavily driven by social PR and influencer. So word of mouth, getting the product in people's mouth, getting people to talk about it and drive it. We'll be doing sampling at a restaurant level, again, to make sure we're driving trial. But yes, we'll be doing marketing, but it will be very much in the spirit of what I was talking about, a bit more of a center of gravity in the social influencer word-of-mouth world. Brian Mullan: And then just a question on the share repurchase activity, notable step-up here in the third quarter. As you evaluate whether or not you want to continue with that moving forward, is there a leverage target we should keep in mind, whether it could be a turn of debt, maybe it's something different? Just any color on the philosophy or the parameters from here? Carl Richmond: This is Brad. I would say, no. I mean, if you look at our balance sheet, you look at our debt levels, we have plenty of capacity. So if the situation presents itself, we'll continue to buy at a heavy rate. But also, we will keep some dry powder, if you will, because we're on the cusp of ramping up new unit growth. We'll get back to brisk pace on remodel. So we want to keep some powder for that. But even with that said, there's a lot of capacity to do that. And so we'll gauge that as each day goes by, but we don't feel constrained at this point. Operator: The last question comes from Jon Tower with Citi. Jon Tower: Maybe just a few quick ones, if I may. First, obviously, you had mentioned that you're seeing a bit of check pressure, particularly from the higher mix of PMD rolling through the business today. But I'm just curious from another perspective, how are you thinking about that informing your pricing power going forward? And frankly, how you're thinking about pricing over the next 12 months and the broader menu? Lyle Tick: Yes. I mean as I think about -- I mean, as we think about pricing going forward, I guess I would take maybe one step back, Jon, and this is Lyle, by the way. The way we're attacking the business is really trying to put that value equation at the center of everything, right? And is our product and experience worth the price and are we delivering kind of a worth it experience in that social splurge occasion. And I think price plays a role in that, but it's not solely about price, certainly. I think that what I like right now is that we're seeing our value score goes up, we're seeing our guest metrics go up, and we're seeing that traffic-driven growth. So clearly, we're hitting a good kind of intersection with that right now. Now I think the other thing is as you see guest satisfaction and value scores go up, as long as you're continuing to deliver on that, I think we will be able to find opportunities for pricing, particularly having kind of those entry points of the Pizookie Meal Deal and Daily Brewhouse Specials, right? Because what we're able to do is give certain consumers an entry point into social splurge with PMD and the Daily Brewhouse Special and other consumers an entry point into it with pizza or a steak for that matter. And so just having all of that work collectively. Another thing that I'm looking at as we go into next year, particularly as we look at category refreshes is how we think about like category and revenue management in the category in order to create opportunities for trade-up for folks and opportunities to drive mix. And so there's really a lot of levers that I think about using as we kind of go forward and drive check. Pricing will be one of them, but we're going to be thoughtful about pricing as we go forward and continue to keep an eye on those guests and value metrics. So yes, do we think we have some pricing power? Yes, we think we do. But we want to be judicious about that and make sure we continue to see the traffic, see the scores go in the right direction. And as long as we're able to lever that in the P&L, which we have been able to do pretty consistently, I feel good about it. Jon Tower: Maybe another question on -- just on your digital and off-premise business. I know that had been an area that you'd spoke to in the past in terms of seeing opportunity to improve the presentation to the guests online. And I'm just curious where you guys are in that process. Lyle Tick: Yes. That is one of -- or will be one of our priorities for 2026. And I think it's really an end-to-end piece of work to improve our off-premise, right? Because it starts with some work that you guys -- it's not as visible to you guys right now, but we're already working on, which is how we attack missing and incorrect. And again, some of the kind of foundational stuff we've talked about. So we've been tweaking things about like our KDS and how the products show up in the restaurants for our off-premise teams and our cooks, and we're seeing improvements in our M&I. So that's encouraging. And as we start to do that, we can then start to have that stronger foundation and then work on the consumer-facing stuff. I think the consumer-facing stuff has to do with eliminating friction in our kind of digital consumer flow, which -- part of that is actually improving the flow from a technological point of view. But part of it is improving merchandising, making sure the things that are relevant for off-premise are presented to people first, not offering our full menu on off-premise because it's not all relevant. So there's a lot of kind of those opportunities for us to improve, and we're going to be attacking them next year, but they just had to be sequenced in the priority this year. And so it's really a 2026 is when we're really going to start to see movement against some of that stuff. Jon Tower: And then just last one, bookkeeping. Fourth quarter, obviously, you gave some commentary on where you think comps might shake out. But is that accounting for some of the calendar shifts? I know Halloween hits this Friday versus, I think it was a Thursday last year. And then I think New Year's Eve falls out of the fourth quarter for you guys this year. Daniel Duran: Yes. Jon, this is Daniel. That's correct. Our guidance there accounts for all the holiday shifts that you just called out. So you can take kind of the full quarter adjusted for those holiday shifts. Operator: This concludes the question-and-answer session and today's conference call. Thank you for attending today's presentation. You may now disconnect. Lyle Tick: Thank you, everyone.
Takamaro Naraki: [Audio Gap] [Interpreted] Sales stood at JPY 22.5 billion, and this was an increase year-on-year by 21.5%. Ordinary profit this time was JPY 8.1 billion, and this was up by 43.1%. And as a result, we released an upward revision on our forecast for the first half of October 23. This page shows our progress compared to our whole-year forecast. And as you see, our sales and ordinary profit are almost 50% of our target for the whole year. To talk about the breakdown of sales and so on, I would like to talk about the number of transactions closed and M&A sales per transaction. We closed 488 transactions, up by 7.5% year-on-year. M&A sales transaction was JPY 44.6 million, and this was an increase of 12.6% and part of the factors that led to the increase in M&A sales per transaction is the number of large transactions closed, which was 46 this time, up by 58.6% About the factors that have led to these results, we believe that the fact that we've ensured thorough project management from the start of negotiations through to closure worked well. About the improvement in M&A sales per transaction, we believe that this is a result of providing a company-wide support system through a specialized department, which is the Growth Strategy Development Center. Next page. I would also like to report on the cost of sales and SG&A. As we reported when we released our results for the first quarter, we have done a reclassification of what we record as cost of sales and what we record as SG&A, and this reclassification has been applied since the beginning of the current fiscal year. As a result of the reclassification, the cost of sales declined by 943 million, while the same amount increased in the category of SG&A expenses for the first half of FY 2024. In the first half, our cost of sales was 8.601 billion, and the cost of sales ratio was 38.1%. And at the same time, the previous year was 7.502 billion at 40.4%. And this indicates that, thanks to growth in sales and other factors, our cost-of-sales ratio declined. Of the items included in the cost of sales, our referral fee and outsourcing expenses stood at JPY 3.2 billion this time, and the ratio of that out of sales was 14.2%. Compared to that, the same time last year was JPY 2.562 billion at 13.8%. This indicates a slight increase in the ratio of referral fees out of sales. About our SG&A expenses this time, they were JPY 5.586 billion at this time, at 24.7% out of the sales. And the same for the previous fiscal year was JPY 5.164 billion at 27.8%. So the SG&A expenses amount increased while the ratio of SG&A out of sales declined. Summary of the stand-alone quarter of the second quarter. The summary is as we've written at the top, that the further benefits occurred from the implementation of policies for mid-cap companies, resulting in a significant increase in M&A sales production. To talk about our leading indicators on the next page, about the number of our new sell-side mandates, this was 327, and this is a decrease of 15.9% year-on-year. About the number of new buy-side mandates, that was 388, down by 4%. Below that, the number of new transaction negotiations was 297, down by 4.8%. The reason why we have declined in the number of new mandates, be it sell side or buy side, is a result of our focus we put in Q1 and Q2 on growing sales and the number of transactions we closed. Another factor that I should mention is that to increase the success rate of completing transactions, some sales channels became far structured in screening new mandate opportunities. This means that out of the many more mandates that we could have accommodated, we decided to be more selective and decided to choose the mandates that we believe have a higher ratio, a higher likelihood of getting closed eventually. So we have to have a more thorough or more strict screening process. However, in order to generate solid results in the second half and for the next fiscal year onward, it is necessary that we have a recovery in the new mandate numbers. Therefore, we have launched a campaign that's active this month and the month after, especially targeting young employees or consultants with relatively limited tenure at our company. So they'll acquire more new mandates. Please move on to Page 12. On the balance sheet, total assets stood at 60.520 billion, which was an increase compared to 10x last year. And our net assets this time were 48.341 billion. This was an increase of 752 million compared to the end of the previous fiscal year. The ratio of the net assets this time was 79.9% which was an increase of 2.9% compared to the end of the previous fiscal year. I'll talk about headcount on the page after. In talking about headcount, we first would like to talk about the transition of our headcount in accordance with the new classification we've introduced from the first quarter of the current fiscal year. Then on the right-hand side, we have a table of the different categories of our personnel. The top row says M&A consultants. This is a category that includes our sales representatives at Nihon M&A Center, as well as the sales representatives at our overseas local subsidiaries or local entities. At the end of the second quarter, the number of M&A consultants that came into this category was 640, an increase of only 10 compared to the end of the previous fiscal year. To share with you the breakdown of the net increase in people, during the first half of the fiscal year, 97 people joined our company. However, there was a decrease of 87, which includes 73 people who left our company and 14 people who got classified into other areas because of department shuffling. And as a result, we had a net increase of 10 in M&A consultants. There are people who come into the cost of sales category of M&A support. Who comes to the category of M&A support cost of sales, this includes people at their promotion headquarters, these are people, for example, who are lawyers or CPA, the M&A Deal Dedicated Professionals. Other people who are included in the cost of sales of M&A support are Japan PMI consulting people, people at the TPM division, people at the Corporate Value Laboratory, and the Special People Association. After the reclassification, other people's sites to be classified as SG&A expenses of M&A support. And this page shows our transition of headcount in accordance with the previous classification method. So starting from the current fiscal year, or for the current fiscal year rather, we are releasing the headcount transition and the breakdown in accordance with the previous and the new reclassification or classification method. Before I wrap up my presentation, I will talk about shareholder return and shareholder structure. There is no change to the dividend forecast we have for the current fiscal year. We're still planning to pay JPY 29 per share for the current fiscal year, which is the same as the amount we paid in the previous fiscal year. And this is translated into our dividend payout ratio of 83.6%. Our policy of dividend payout ratio of 60% or more will be continued during the midterm management plan period. And our ROE this time is planned to be 22.9% and our ROE has been progressing over 20%. On the left-hand side of this page shows our share ownership structure. There was a bit of a change to the share ownership structure. The ratio of individuals or individual investors declined slightly, while the ratio of financial institutions and foreign institutions increased. This is the end of the summary of our performance this time. Operator: [Operator Instructions] [Interpreted] To translate the first question from the audience. This is about headcount. The number of consultants decreased in the first quarter. Is this because there are many people who left your company with a tenure of less than 1 year? And what about the transition of the ratio of consultants with tenure of 3 years or longer? And what about the turnover rate this time? Takamaro Naraki: Turnover rate in the second quarter was 18.7% and this 18.7% is a 2.5-point increase compared to the previous turnover rate of 16.2%. About the type of people who have decided to leave our company or who have actually left our company, the main people are the people with limited tenure at our company. As a result, relatively experienced consultants, the kind of consultants who have been with us for more than 3 years, are 45.3% of the total. The same ratio in the second quarter last fiscal year was 40.2%. So the ratio increased by 5.1%. About the fact that we are having more inexperienced people leaving our company, we've been taking action. The action is for our Miyake-san and Takeuchi-san to have periodical communication, bilateral communication with relatively new people at the points of 7 months after or 7 months after and 12 months after joining our company, through holding meetings such as one-on-one meetings and group meetings. When 12 months pass and after a new employee joins our company, we decide to do a review of what to do with the employee, especially for the employees who have not been able to generate good results at that moment. And the options include assigning them to a more appropriate department and assigning more appropriate pauses. Operator: Does anybody have additional question? Since this is a very good opportunity, we welcome and appreciate your questions. But if there are no more questions, then we can close this session early. We've one more question, so we continue. You have explained that the focus of the efforts up to the third quarter is on growing sales and not much on acquiring new mandates. But do you believe that by acquiring more orders from the fourth quarter, you'll be able to convert them into your sales by the end of the next fiscal year? Takamaro Naraki: When we started this fiscal year, we had to lower our budget, and that was the last thing that we could do. So we were desperate when we started out this fiscal year. Accordingly, our focus was on growing sales and on closing as many transactions as possible. As a result, we started to gain bigger confidence from around the middle of the second quarter that we'll be able to close the second quarter or the first half in a very good state. We are not waiting until the fourth quarter to start acquiring more mandates. We've already started to put a bigger focus on new mandates acquisition from August. And this is especially targeting the employees with tenure of no less than 3 years at our company, and targeting these people, we've launched a campaign to acquire at least 3 mandates starting from October, and we are making company-wide movements to acquire more mandates. Therefore, we are hoping to have a new mandate number recovery from the third quarter. Another factor that we should explain is that the way that we've been acquiring new mandates is completely different in nature compared to before, in the sense that, be it buy-side mandates or sell-side mandates, when we acquire new mandates, we decide which mandates to receive and which mandates to rather decline at our sales department and marketing department. And the threshold has become tighter or more careful, and we are being more selective than before in choosing which mandates to receive. At any rate, for the current fiscal year, we're going to strike an even better balance among creating good results for the current fiscal year in terms of sales and closing transactions, but also with creating pipelines, which will be converted into closures in the next fiscal year after. Operator: The next question is, what's the likelihood of achieving the continued double-digit growth going forward, and the likelihood of achieving the forecast you have going forward? Takamaro Naraki: We have an explanation of our midterm plan targets on Page 21 of the presentation material. Of course, we are trying to achieve double-digit growth, but we have minimum must targets that we have to achieve, and they are on this page. Our first focus is on making sure that we will be able to achieve at least 7% to even higher than 10% growth. And also, we will try to exceed these targets. Operator: The next question. Even in the case of recovery in your financial performance, is it safe to assume that the company plans to continue to pay commemorative dividends and other sorts of dividends? Takamaro Naraki: About this, we are going to consider this in our company going forward. It was in the previous fiscal year that we introduced dividends, and that was also at the time when we discontinued the policy of providing shareholder benefits. The reason why we are keeping this dividend guidance for the current fiscal year as well is because we believe that we have not been able to contribute to shareholders in terms of income gain. So, since we believe that we have not been able to sufficiently contribute to shareholders in terms of income gains, we are going to make a decision on whether or not we will continue to pay dividends or not. In making the decision, we're going to take into consideration TSR or total shareholder return. Operator: We welcome additional questions. [Operator Instructions] Since we are receiving no more questions, we're closing this session. And before we close this session, we have a comment from Mr. Naraki, and his comment is going to be on the timing delay that he mentioned at the end of the presentation briefing session yesterday. Takamaro Naraki: This is a topic that the company receives questions about in every presentation briefing, basically. And in the second quarter, the amount of the project that experienced a time lag was worth JPY 150 million. JPY 150 million is far less compared to JPY 560 million experienced in the second quarter last year. Although we have been making our deal progress more complex and complicated than before, including our screening process, we feel that in the second quarter, our sales representatives and consultants have become more mature. And we believe that that's part of the reason why we had limited the amount of the project that we didn't get to close this time. About the changes in the environment that the entire industry is facing, we believe that we have been taking the necessary and appropriate actions. So we would ask investors to count on us to deliver solid results in the second half as well. Thank you very much for being with us through the end today.
Nuno Vieira: Good morning, and welcome to CTT's 9 Months '25 Results Conference Call. This event is hosted by Mr. João Bento, CEO of CTT; by Mr. Guy Pacheco, CFO of CTT; and by Mr. João Sousa, CCO of CTT. Please note that this conference call is being recorded. [Operator Instructions] I'll now turn the call over to Mr. João Bento, CEO. João Bento: Good morning, everyone. Welcome to our third quarter results presentation. I would invite you to follow us through the presentation that has been distributed yesterday evening. So if we move to the first slide, Slide #4. We have a plot of the -- a bridge of the revenue and EBIT in the quarter, with our, we'd call resilient organic growth; revenues growing 6%; recurring EBIT doubling that, 12%, with positive contributions from all the business lines in terms of revenues. This 6.1% are, in fact, 17.2%, taking into account the contribution of Cacesa. And on EBIT, the pro forma growth of 12.3% is in fact -- corresponds in fact, to 38.1%, which illustrates how competitive the addition of Cacesa represented to our e-commerce solutions portfolio. Moving to Slide #2 and with additional -- with additional detail on the growth of parcels volumes. We see a comparison between second quarter and third quarter, with a slight sequential improvement in e-commerce volumes. But we have to take into account that there were a couple of events, very significant in the end of September, that somehow impacted volumes in the quarter. Indeed, we have this typhoon Ragasa in South Asia that kept significant amount of volumes, e-commerce volumes sourced in China in the ground, so they could not fly. Some of them were sent by land, but there were also impacts in the border between Poland and Belarus, and some of the volumes that came through roads were also halted there. There was also, well, I would say, meaningful delay in main volumes that we can discuss later on. The good news is that all these volumes were merely delayed and they showed up already in October. But on the right-hand side of the slide, we can see that we have, well, double-digit growth in July, in August and then in September, a flattish improvement basically for the reasons that we have mentioned. So because of that, we are -- we keep quite confident also because October is looking extremely positive, and we anticipate a strong growth outlook for volumes, around 15% year-on-year for the fourth quarter of this year. Moving to Slide #6 and moving from volumes to revenues and margin. What we see is an improvement of 36% in revenues, that without Cacesa would even still represent a double digit, around 11% growth, which is significantly amplified when we move to the EBIT margin in the sense that with the pro forma of Cacesa, the growth would be very slight, 4.5%, but indeed a 50% growth on EBIT. The good news that we'd like to highlight here is that although -- well, despite of these volumes delayed given the typhoon and the closing of the Polish border, we still see an improvement in margin from 8.7% to 9.5% that, as you know, is, well, the best EBIT margin for any parcel business in the market. So given the contribution of Cacesa, that differentiates our E&P offering. We -- with this integrated model, we continue to drive profitability in parcels. And in that sense, we think that we should signal that. Moving to Mail. I will pass the floor to my colleague, João Sousa. Joao Carlos Sousa: Thank you, João. Good morning, everyone. On Mail & Other services, as you can see, in the third quarter of 2025, we are already seeing a recovery in address mail, with volumes down only 4.3% compared to a decline of 8.5% over the first 9 months of the year. In fact, this improvement reflects a gradual stabilization of the activity after several quarters of more pronounced declines in traditional mail volumes. This recovery is mainly explained by the normalization of volumes and clearance of backlog from major clients, which had a negative impact in the previous quarters. And we are seeing also these positive trends already -- or continued in October that reinforce this recover momentum. I would like also to highlight the business solutions that is driving good performance. Business solutions continue to play a key role in supporting both revenues and margin in the Mail & Others business area, with recording growth of 10.9% year-on-year. As with this mix of revenues and services, as a result of this, we have total revenues reaching EUR 341.9 million, representing a limited decrease of 1.9% comparing with the previous year. On EBIT for the Mail & Other segments took on EUR 2.28 million for the first 9 months, maintaining a flat margin of 8.9%. This stable performance demonstrates that our operational discipline on cost control and continuous on to managing these ongoing structural change in the mail market. On Slide 8, now we are going to financial services and retail. We continue to see a sustainable performance across public debt and insurance offering. Financial sales continue to show a solid and consistent growth, supported by stronger results in public debt products and insurance. Public debt placements, up to 167% in Q3 compares with versus period in last year. Savings certificates maintain like a preference savings vehicle for the Portuguese citizens. And I would like also to highlight that the digital sale channels for these products continue to be performing strongly, and September was the record month for these channels. This has also allowed us to bring new citizens to this product. Also, we are -- with a robust growth in insurance and health plans, we are in this strategic to build recurring revenue streams continue to deliver. Health plans -- the stock of health plans, growth, 69% versus the end of last year and almost 33 -- sorry, 12.8% on quarter-on-quarter. Insurance products also, with a very good outlook, performing pretty well. And I would like also to highlight that in -- already in October, we launched a new health insurance that also allow us to have a new product in this area. And the first numbers give us also a very good highlight -- a very good outlook for the coming months. Seeing this on this business area, the revenue is up to 57%, reaching EUR 9.8 million, and EBIT up to 44.8% to EUR 5.2 million. This reflects the success of our diversification strategy for this business area. And now pass to Guy. Guy Patrick Guimarães de Pacheco: Thank you, João, and good morning to all. On Slide 9, we can see Banco CTT's numbers, where we witnessed a strong growth in business volumes, growing 11.4% year-on-year in the third quarter, with a strong performance on the loan book that grew 16.4%. And on the off-balance savings, that grew 25.7%, where we see Generali partnership already at cruise speed and gaining -- continuing to gaining traction on the market. That translated to banking revenues growing 3.7% in the period, although with some compression in net interest margins as interest rates seem to reach a bottom, which gives us positive trends going forward. We see net interest income going up EUR 0.9 million, and commissions led by insurance and card commissions growing EUR 0.6 million in the period. We -- in terms of profitability, a flattish performance as we continue to invest in our future growth, deploying additional commercial capabilities, be it digital or physical, and we invest in technology to support that growth. Our return on tangible equity stood at 13%, a slight increase vis-a-vis the 12.4% of last year. Moving on to the financial review. In Slide 11, we have our key financial indicators where we see resilient growth throughout most of the metrics. On revenues, 17.2% growth. And if we consider Cacesa last year with the 6.1% growth in the third quarter, recurring EBIT growing 38.1% or if we account for Cacesa, 12.3%. Specific items reached EUR 7.6 million as we concluded the restructuring project that we have ongoing on the Mail division for this year. We invested EUR 4.2 million in exits of people. M&A expenses and strategic projects account for the rest of the value. Net profit in the quarter reaching EUR 10.7 million, growing 35%, or reaching, in the 9 months, EUR 32.8 million, growing 18.4%. Our free cash flow stood at negative EUR 6.4 million, and this is due to strong working capital investment that I will detail towards the end. On Slide 12, we see our revenue reach, where we continue to see Express & Parcels as our main contributor to growth. Revenue is growing 6.1%, accounting with Cacesa, with Express & Parcels growing EUR 15.7 million or 10%, with softer parcel volumes due to a weak September, putting some pressure on growth. And this was caused by the extraordinary effects that João shared, the typhoon and the military movements on the Polish border. Cacesa continues to perform very well. In Mail, we witnessed a EUR 2.4 million decline or 2.3%. This is -- this shows 2 different performance, Mail declining EUR 3 million in the quarter or 3.4%, that were partially offset by the good performance of Business Solutions as we continue to diversify along the value chain of our customers in order to further increase the resilience of the revenues of these business units. In the bank, EUR 1.3 million increase or 3.7%, fully driven by net interest income and commissions growth as we continue to grow our business volumes. In Financial Services, an increase of EUR 3.5 million in the quarter, and fully due to the strong performance in public debt placements, that grew more than EUR 1.1 billion as debt certificates continue to be a very attractive product in the market vis-a-vis other low-risk alternatives and already with some positive contribution of the recurring revenues that we continue to bet on in order to find additional diversification on these business units. All in all, other key metric is the Express & Parcels in the quarter already are above 50% of our revenue, reaching 52% of our total revenues this quarter. On Slide 13, we see our costs. Our OpEx grew 5.6% in the quarter, driven by parcel, in line with activity, but softer volumes putting pressure on our unit costs. As you know, we start to scale for the peak season, where we keep prioritizing quality as we see that as paramount to further growth in the future. Mail & Others with a decline of EUR 3.3 million on OpEx or 3%. We continue to optimize our routes with a strong reduction on the number of routes and account reduction that mainly account for that OpEx savings. In Financial Services, we see a EUR 1.9 million increase, fully in line with higher activity. And in the Bank at 5.8% increase or EUR 1.5 million, and this is fully to the commercial and technology investments that I already shared. Cost of risk this quarter with a good performance, reaching 0.7% of cost of risk. So good dynamics there as well. In Slide 14, we see our recurring EBIT, where we posted a 12.3% growth with bank, flat and all the other business units with a positive contribution. In Express & Parcels, we see very resilient margins despite these lower-than-expected volumes in the quarter, with 9.5% margin and increasing EUR 0.7 million. In Mail, positive contribution of business solutions and cost reductions, leading to a EUR 0.9 million increase in the quarter. Financial Services, with good -- very good performance in placements, also contributing positively with EUR 1.6 million. And the Bank, with this flattish performance, with the investments in capabilities offsetting the growth in banking products. Going forward, we expect a very strong peak season that will underpin the EBIT growth in Express & Parcels. Mail seasonality will lead to a sequential margin improvement as fourth quarter continues to be, seasonality-wise, the strongest quarter of the year. Financial service will continue to grow, although with a tougher comparable in the fourth quarter. And the Bank will post a flat to single-digit growth due to the continuous investments in commercial activity. Slide 15, we see our consolidated cash flow. Operating cash flow reached EUR 42.9 million in the 9 months, with a strong growth year-on-year. Free cash flow also stood in 20 -- 12 -- sorry, 18.8%, also with a EUR 10 million growth. And our net debt now stands at EUR 61 million at consolidated level. In Slide 16, we see pretty much the same figures, but excluding the bank or having the bank under equity accounting, where we see, in the 9 months as the operating cash flow reached EUR 20 million and due to this high investment in working capital. In the third quarter, our working capital increase EUR 13 million. And this is due to seasonality or third quarter is normally very strong in working capital investments, and that is due EUR 5 million to the travel subsidy to the Portuguese Island, a service that we provide to the Portuguese government, and because of summer normally has this high growth and payment terms with Portuguese that are always pressured. And we have EUR 8 million increase in accounts receivables, both by increase in activity and some delays in payments of some key customers that we expect to fully offset in the fourth quarter as normally we do. Our net debt now stands at EUR 2.4 million due to this working capital investment, but we expect to -- that to be deleveraging towards the 2x in the end of the year. And with all that, I'll hand you over to João Bento for his final remarks. João Bento: Thank you. So moving to Slide #18. We have a plot of the evolution of EBIT and the corresponding contribution of E&P that we see that, well, after the drop between '19 and '20 associated with the COVID crisis, it's been very, very steady. And looking at the trailing last 12 months up to the third quarter of this year, we see that we are already at EUR 105 million of EBIT, which means that we would require fourth quarter, that would be roughly EUR 10 million or more above that number. The right-hand side chart, it illustrates the gap between where we are and what we need actually to do. So we see the fourth quarter EBIT of last year at EUR 30.5 million. If we would consider the contribution of Cacesa, that would take us to EUR 37.2 million, meaning that because we need EUR 41 million to achieve the guidance, we are at a 10.3% increase or 34.4% versus the actual number of last year. This 10.3% of growth quarter-on-quarter -- fourth quarter-on-fourth quarter is, I would say, significantly less than what we have exhibited throughout the year. So at the top hand side of the slide, you can see that in the first quarter, we grew 19.5%, 28% on the second, 12% on this quarter, with all the delays associated with the typhoons. And so I'm not saying it's easy, but it's quite feasible, and that's why we are strongly committed to keep our ambition of recurring EBIT equal or higher than EUR 115 million. And by completing a quarter along those lines, this will, in fact, represent the conclusion of, I would say, notable transformation cycle that we have been taking this company. I would still ask you to follow me on the last slide, just to remind you that we have our Capital Markets Day taking place next Monday and Tuesday. We have quite promising news for you. We're going to do the similar exercise that we did 3 years ago, discussing and illustrating the strategy for our business areas and committing with financial targets for 2028. So we are looking forward to meet you all there. And I believe that you'll be very pleased with the news that we have to bring. With that, we remain available for your questions. Nuno Vieira: [Operator Instructions] Our first question will come from João Safara. Joao Safara Silva: I'll start just with 2 questions. The first on -- to try to understand a little bit what is implicit in the fourth quarter margin for Express & Parcels. Obviously, and you've mentioned that you've been focusing a lot on quality ahead of the season. Nuno Vieira: João, sorry, we are having significant difficulties in listening to you. If you can speak louder, please. Joao Safara Silva: Yes. Is it better now? Nuno Vieira: It's better now. Joao Safara Silva: Okay. Sorry. Okay. Yes. So what I -- yes, so going back to my question, what I was wondering and trying to look implicitly to the fourth quarter. To meet your guidance, you obviously have to have some kind of improvement in Express & Parcel margins. So I think basically, I just wanted to have a confirmation there since we've been having in the last quarters, in first quarter, margins were flat, obviously, trying to exclude the impact of Cacesa, which I know it's difficult. And then in the second quarter, you've recovered. And now in the third quarter, it seems that margins, again, they've more or less been flat versus year-on-year. And for the fourth quarter, according to my numbers, it would still imply an improvement in margins. So if you could -- well, just give me some color there on what are you seeing for the fourth quarter in terms of margins? And then the other question is just on the extraordinary costs you had this quarter for the employment contract suspension. The question here is, I mean, basically, if this is something related to the plan you're going to present on Tuesday? Or is this something that was already contemplated and part of your ongoing cost savings? Guy Patrick Guimarães de Pacheco: Thank you, João. So on your first question, so we are expecting a strong peak season in Express & Parcels, that will once again be the main driver of our growth in the fourth quarter. Obviously, as you know, scale here plays a role and because we have this unforeseen lack of volumes on the third quarter, especially in September, that put some pressure on unit costs. And as such, our margin was stable-ish. And I would like to underline that, nevertheless, we were able to post a 9.5% EBIT margin that shows a lot of resilience of that business unit. But nevertheless, as you said, we expect both a volume increase and a slight margin increase during the fourth quarter. That was again Express & Parcel as a main driver. We also expect growth coming from Mail -- sorry, positive impacts for Mail and the growth coming from Financial Services as we continue to see resilience on the placements, although the comparable will be tougher as last quarter was already very strong in placements last year. On the specific items. So 2 main things. First, it's the restructuring project that we ended, and that we continue to explore opportunities to optimize Mail & Others as we continue to see that paramount to sustain margin going forward. And that project comes to an end in the third quarter. And now we also had some strategic projects that are, as you mentioned, linked with the next strategic cycle that we'll announce next week and some M&A expenses as we continue to have projects ongoing and what's ongoing, be it with the transactions already announced and other internal projects. Joao Safara Silva: Just a follow-up, would there be, on the fourth quarter, additional nonrecurring cost? Guy Patrick Guimarães de Pacheco: On people, no. We should expect some costs around M&A, but nothing as meaningful as this quarter. Nuno Vieira: Our next question comes from Filipe Leite. Filipe Leite: Yes. I have 3 questions, if I may. The first one is on Cacesa and the integration of Cacesa. Basically from the EUR 5 million synergy that you announced at the time of the acquisition. If you have an idea of how much do you have already achieved in terms of synergies, and when should you expect or should we expect the full achievement of this EUR 5 million synergies with the incorporation of Cacesa? Second question on Mail and CPI used this as reference for the upcoming year. Mail price increase, I believe, is up to June or July. And the question is if you have already an idea of the potential magnitude of the price increase for mail next year? And last one is a clarification on specific [indiscernible] because looking at the breakdown, you mentioned in 9 months, EUR 1.4 million positive impact from regulatory compensation. But in second quarter alone, this positive impact was EUR 3.5 million. If you can clarify what are those regulatory compensations and why the reversal in third quarter? João Bento: I'm afraid we didn't get exactly what you mean in the third question, but I will start with the previous 2 ones. So on Cacesa, things are going pretty well. What we can say is that we are more or less around midterm achieving the full synergies that have been announced, and they will be fully embedded across next year because there are several -- the nature of the synergies is diversified, but so we are probably halfway to be there. On CPI, actually, the formula is public. We know the volume decline, we know the inflation. The issue here is that the proposal has been put, but it's not been approved. In any case, you should expect something around 6.5% plus or -- more or less around that, just not to give you the exact figure because it's not been approved. But it's very easy to compute the numbers and it should be something around -- well, between 6.5%, 7%, some like that. Guy Patrick Guimarães de Pacheco: On the third question, because we didn't fully get it, I suggest that Nuno Vieira will follow up with you in the end of the call. Nuno Vieira: [Operator Instructions] As there are no further questions at this point, I would like to hand the call back over to Mr. João Bento, CEO, for any additional or closing remarks. João Bento: Thank you, Nuno. Well, as we've seen, it's been a mild quarter, fortunately, positioning us strongly in line to achieve the guidance this year. And I believe that the most promising news are to be shared with you on the forthcoming Capital Markets Day next week. So thank you again for coming. We remain available to your questions through the IRO team, and hope to meet you all next week. Thank you. Nuno Vieira: Thank you very much for your participation. This earnings call is now concluded.
Operator: " Nancy Fazioli: " Michael Weening: " Cory Sindelar: " Joe Cardoso: " JPMorgan Scott Searle: " Roth Capital Partners George Notter: " Wolfe Research Christian Schwab: " Craig Hallum Timothy Savageaux: " Northland Capital Markets Ryan Koontz: " Needham & Company Operator: Greetings, everyone, and welcome to the Calix Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Nancy Fazioli, Vice President of Investor Relations. Thank you, Nancy. Please go ahead. Nancy Fazioli: Thank you, Latanya, and good morning, everyone. Thank you for joining our third quarter 2025 earnings call. Today on the call, we have President and CEO, Michael Weening; and Chief Financial Officer, Cory Sindelar. As a reminder, yesterday after the market closed, Calix issued a news release, which was furnished on a Form 8-K, along with our stockholder letter and was also posted in the Investor Relations section of the Calix website. Today's conference call will be available for webcast replay in the Investor Relations section of our website. Before I turn the call over to Michael for his opening remarks, I want to remind everyone that on this call, we will refer to forward-looking statements, including all statements the company will make about its future financial and operating performance, growth strategy and market outlook, and that actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause our actual results and trends to differ materially are set forth in the third quarter 2025 letter to stockholders and in the annual and quarterly reports filed with the SEC. Calix assumes no obligation to update any forward-looking statements, which speak only as of their respective dates. Also on this conference call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in the third quarter 2025 letter to stockholders. Unless otherwise stated, all financial information referenced in this call will be non-GAAP. With that, Michael, please go ahead. Michael Weening: Thank you, Nancy, and good morning. I just returned from the incredible experience of Calix Connections, where we celebrated customer-driven innovation on our unique platform and the success that the platform drives for our customers by enabling their teams to win new subscribers, grow revenue per subscriber and reduce churn. To stand in front of that crowd and celebrate NPS scores as high as 94 is a testament to the partnership and trust we have built with our customers and they with their subscribers and the communities they serve. At Connections, we officially launched the Calix Agent Workforce, our end-to-end integration of Agentic AI into everything that we do via our third-generation platform that will launch in partnership with Google this quarter. This marks the next stage in our company's ongoing evolution to help our customers simplify operations and go to market and innovate with our platform, enabling them to grow for their members, investors and the communities they serve. The ability of our customers to dominate their markets when armed with our unique and highly differentiating platform and managed services model was on full display in our results. In the third quarter, the Calix team achieved record revenue in our fifth quarter of sequential growth while guiding higher in fourth quarter. We set another gross margin record, our seventh consecutive quarter of margin improvement. We also had 20 new customers choose the Calix platform to dominate the markets they serve and RPOs grew sequentially. At the same time, the team maintained a rigorous focus on operational performance and the balance sheet with OpEx investments returning to the target financial model while yielding our 10th consecutive quarter of 8-figure free cash flow, ending the quarter with record cash. It was another great quarter of performance by our customers and our teams who support them as we launched the culmination of our vision where those with the Calix platform, managed services and access to data are best placed to succeed through the power of Agentic AI. Corey, over to you to walk through the specifics of Q3. Cory Sindelar: Thank you, Michael. During the third quarter of 2025, we delivered record revenue of $265 million, reflecting sequential quarterly growth of 10%. Our overperformance relative to our guidance reflected continued robust broad-based deployments from our BXP customers as they added new subscribers and footprint expansion as they continue to choose Calix for network upgrades, new builds and competitive displacements. RPOs grew 2% sequentially to a record $355 million and increased 20% year-over-year. Our current RPOs were $141 million, up 5% sequentially and up 28% year-over-year. This metric is a strong indicator of the strength we are seeing from our platform cloud and managed services model. The combination of our BXP customers winning new subscribers and strength of Access Edge deployments led to another record of non-GAAP gross margin of 57.7%, representing a 90 basis point sequential quarterly increase. Our balance sheet metrics were strong. DSO was 30, inventory turns were 3.8 and free cash flow was $27 million. We have produced quarterly free cash flow for over 5 years, including 10 straight quarters with amounts in the 8 digits. We ended the third quarter with record cash and investments of $340 million, an increase of $41 million sequentially. Moving to guidance. Given the broad-based demand picture and the rates at which our customers are deploying products, we believe we can continue to grow revenue sequentially even with the significant overperformance achieved in the third quarter of 2025. Our revenue outlook for the fourth quarter is between $267 million and $273 million, which at the midpoint would represent a 2% sequential increase in revenue and reflect revenue growth of 20% for the fiscal year as compared to 2024. Our non-GAAP gross margin guidance for the fourth quarter at the midpoint would represent a slight increase from the third quarter and reflects our expectations regarding customer and product mix. This guidance for the fourth quarter means our gross margin improvement for fiscal '25 will exceed the higher end of our target financial model of 100 basis points to 200 basis points. And regarding non-GAAP operating expenses, we expect OpEx will increase sequentially primarily related to investments in Connections and to accelerate the development of AI agents and functionality to our platform into the first half of 2026. That said, we expect to be back within our target financial model by the end of 2026. Michael, back to you. Michael Weening: Thanks, Corey. This is an exciting time for Calix and our customers. The pace of change that AI is injecting into the market is like nothing we have ever seen in human history. As I shared at Connections on stage and with the 350 general managers and CEOs who attended our leadership track where Netflix took 10 years to get to 100 million subscribers, OpenAI took 2 months. The pace of change is mind-boggling and for many, it's overwhelming. For Calix, that pace of change is our advantage and an advantage for the customers who leverage our platform and managed services. We've invested 15 years and $2 billion to put in place the foundational building blocks in the form of Access Edge, Experience Edge and Calix Cloud to make the most of the Agentic AI opportunity that is ahead. Our migration to our third-generation platform in partnership with Google allows us to support the success of our existing customers while expanding internationally into new geographies with local sovereign data centers and support large Tier 1 customers with a dedicated instance of our entire platform. We are already well into the fourth quarter. And while Connections is complete, thousands of attendees will be educated on the AI-enabled opportunity ahead as Connections on Demand, our virtual program launched yesterday. This is in addition to the on-demand replays on calix.com. At the same time, our customer success team is revamping how they support customers with the Calix agent workforce to speed transformation and expand our impact on our customers' ability to add new subscribers, grow revenue and reduce churn. In addition, our internal enterprise teams are focused on improving how Calix operates and improves with artificial intelligence. With the insights that our product teams have gained through 2 years of learning as they build AI capabilities into Calix Cloud, our enterprise teams are uniquely advantaged to aggressively embrace AI in everything that we do internally to improve our operational performance and help us scale at the fastest pace possible. As I shared in the Fast Company article, the 4 AI questions that every CEO needs to ask to succeed. Over the last 6 months, we have seen employees create 725 exploratory agents with 40 of those agents being selected by our AI steering committee to be scaled across our internal enterprise to drive operational gains across Calix. The next step in Calix's journey is here, and I'm excited to lead the team as we speed our ability to transform the broadband industry and enable the success of our customers and partners. I'd like to close by thanking our team, customers, partners and shareholders whose passion, grit, trust and partnership have brought us to this exciting next stage in the Calix journey. Nancy, let's open the call for questions. Nancy Fazioli: Thank you, operator. We're ready to take questions. Operator: [Operator Instructions] Our first question comes from Samik Chatterjee with JPMorgan. Joe Cardoso: This is Joe Cardoso on for Samik. Maybe perhaps for my first one, very strong revenue performance this quarter. I believe this marks 3 in a row now with results tracking $10 million to $20 million ahead of the high end of your range. Just wondering if you can help contextualize what has been driving this outperformance relative to your expectations at the start of the quarter. And as we look ahead to next quarter, how are you thinking about the sustainability of those drivers and potentially implications to your outlook? And then I have a follow-up. Cory Sindelar: Thanks, Joe. Appreciate it. The overperformance is driven by a couple of things. One is just the broad-based demand that we're seeing across our customer base. But it's also a function of some of the competitive expansion of our footprint. We're seeing some of these customers, I guess, surprisingly, not only do cap and grow, but some rip and replace as well. And so when you combine that with the broad base from our existing customer base, that's driven the overperformance. Michael Weening: Yes. Let me contextualize a bit of that. So having just come off with connections, what's happening is that our customers are winning more. That's what's happening. And so when our customers win and they add subscribers, then we win because of the fact is that, for example, if they build out a network and then they win a subscriber, that's incremental revenue for us and opportunity to continue to expand. So because of the fact that we're uniquely positioned in the fact that we have almost 1,200 customers on our platform, and there's not one single driver, all of them are doing better. That means that our revenue goes up, which is also why we guided higher in fourth quarter because we feel very comfortable with the robust demand that we're seeing as Cory identified in the -- or as we identified in the letter. Joe Cardoso: Got it. I appreciate the color there. And then maybe for my next one, we obviously saw the announcement coming out of Connections last week, lots of innovations being unlocked there, particularly in the backdrop of AI. However, if we kind of take a step back here, just curious how you're thinking about the implications of this innovation cycle for Calix and maybe more specifically on the investment side of things, particularly, it just sounds anecdotally like there's greater appetite to scale more aggressively. I mean, even if I think about you guys mentioning like international regions, like it sounds a lot more aggressive than what you guys have talked about historically. So just curious how you're thinking about the implications to the business model as it relates to more on the investment side, just given kind of this innovation cycle where we're still in the very early innings of. Appreciate the question. Michael Weening: Yes. So from an investment point of view is that we have a target financial model. We continue to make the investments. But the broader one is that we've been investing for 15 years. So we're $2 billion into this platform. And if I think about those investments, as we articulated in the letter, those create the foundations upon which we can grow. So there are -- first of all, in the existing markets, there's significant growth opportunity ahead because of the fact that we're uniquely positioned. If you think about one of our existing customers, and I talked about this on stage, an existing customer who has the Access Edge in place, which is a consolidated network, which has incredible intelligence in it. Then you have everything that we do on Experience Edge, which includes 2 components: intelligence at the edge in every single WiFi system that exists on a customer premise, but then all of the solutions that sit on top of it, MDU, Smart Town, smart business for small businesses and smart home, all of those come together into the cloud, and we've now invested and put the AI layer on top of it, which means that those customers who have those 3 component foundational elements are best positioned to, first of all, take advantage of AI because it farms all the data, puts it into an AI engine and automates significant components of their business and allows them to scale at a significantly more rapid rate than in the past. And the best example that I can give of that is that in the past, our customer success teams would talk to a customer who has those things in place, make suggestions. But then in the end, it was the decision for the customer as to whether or not they had the capacity and capability to take that advice and turn it into action to grow their business. Now our customer success organization is going to sit down with the customer and say, we've looked across all your business. We have all the data. We know what the insights are. We know how well you can perform. By the way, here are the AI workflows that -- go press the button and it will do it. You don't have to add capacity. You don't have to hire a bunch of new people. This is going to augment your existing capabilities and provide you a massive jump in capacity. And so when I think about the growth opportunity in our existing markets, it is significant because of that capability to transition from advice giver and optionality to press the button and we'll do it for you. That's the first step. On the expansions into international and where we go into large customers, this has always been planned. It's been a timing opportunity, and those represent significant growth opportunities in revenue and margin. The reason why we're talking about those now is because of the fact that we've been very quiet on it because we have always been a very conservative leadership team who actually talks about what we can see very carefully. and what we see right there. And with the third generation of the platform turning on this quarter in a few weeks, we now actually see where that expansion goes. And if you took the time to watch the Connections event over Monday and Tuesday. On Tuesday, we had the Head of Google Telecom up on stage with me talking about how this partnership could flourish. And so it represents a significant opportunity because our platform would sit on top of a Google Cloud regardless of geography and regardless of size of customer, which provides us a significant scale opportunity, frankly, without having to make significant investment other than sales and marketing because it's a cloud. And if you have nothing running on the cloud, you don't pay for anything. So as it scales, we have a great opportunity not only for revenue but also margin. Cory Sindelar: And Joe, I'll add on to the model question to that when you look at the AI investments that we're doing from an OpEx perspective, in the quarter, you saw us hit record revenue and at that time, get ourselves back into the model. But we also see an opportunity here to accelerate some of the development work that we wanted to do from the latter part of '26 into the first half. So you saw in the OpEx guidance that we took up the level of OpEx. It's for those investments in R&D related to AI functionality, but we will be back in model by the time we exit 2026. Michael Weening: Yes. And to give you practically what Corey was talking about is that if you look at our cloud, again, I talked about this on stage, Calix Cloud, which is Operations Cloud, Service Cloud and Marketing -- or Engagement Cloud, which is the marketing capabilities and engaging with customers, all that Calix Cloud is, is a mapping of workflows on how to run a broadband business. This is why when it comes to artificial intelligence, we're so uniquely positioned because we are going to -- now that we have the infrastructure in place upon which to build AI, which is the data layer, the knowledge layer, trust and orchestration, which then leads to trusted action. We built all that out. That was a $100 million investment since November of 2023. Now that, that's in place, the easy part and the candy, the ROI is right there. So we're going to accelerate building out those agents. And if you talk to our CPO, he basically states, building an agent is easy. All the hard work was all the other work that we did. So we did all the hard work. Now we're going to do the easy work, and we're going to monetize this like crazy because of the fact that we can take a workflow in Operations Cloud, again, that I showed, I laid these out at Connections. We can take an operational workflow inside Operations Cloud and every single step is essentially an agentic agent because it's a task-based entity. We can build all those agents and pop them out and then say to our customers, here's your workflow for anomaly management. Here's your workflow. And while all the other industry people are going to be building out these complex custom workflows, we're actually going to take all the insights that we've built over the last 6 years in Calix Cloud and plow through all these Agentic workflows, which means that by -- as we come out to the latter half of 2026, the AI army that we're going to have turned up inside our platform is going to be unmatched because we know how to run broadband companies. We have all the workflows. We have all the data, we have all the insights, and we have the trust of our customers to partner on building all that out. So to not speed through this at an incredible pace, would be foolhardy. And in closing, I'll say the last part of it is everybody is talking about AI and around where to invest. One of the interesting things I've been hearing a lot about lately on investment platforms and other areas is all the tangentials affiliated with it. So you have the big guys who are building out their LLMs, which are, in essence, commodities. The ones who are actually going to provide the greatest value are the ones who understand the business. Well, that's what Calix Cloud is, a complete map of how to run a broadband company, and we are going to AI the whole thing top to bottom over the coming months. Operator: The next question comes from Scott Searle with Roth Capital Partners. Scott Searle: Great job on the quarter and outlook. Mike, maybe just to dive in on the small customer front, it was broad-based. It was strong. I'm wondering if you could provide some other commentary in terms of if there were any pull-ins, the sustainability of that going into 2026 and kind of how you're thinking about that visibility building at this point into 2026 and the sustainability of double-digit growth. Michael Weening: Thank you, Scott. That's a great question. And I want to actually kill this right from the get-go for everybody who has said that we are -- we have a broad-based demand. There is not a single customer that had significantly more influence on anything that we generated in this quarter or in next quarter. It is broad-based demand. The strength of our business model is that while things can go up by segment and down by segment, it is actually up to 1,200 customers that allow us to actually drive demand. So with regards to visibility, and I'll turn it over to Cory to go through some specifics. But because we're so closely partnered with our customers, we see -- and the reason why we guided higher into Q4 and see the strength in the business is because of the fact that our customers are winning. It can't be affiliated with, and if anyone writes that, I'm going to be going to kind of go mental on it, is it cannot be written around a single customer because it's around our customers winning more. And as they win more, we win more and our investors win more. It's that simple broad demand across the base. Cory Sindelar: Yes, Scott. So I think the visibility we have into the demand profile, as Michael outlined, gives us that confidence that the sequential growth is durable. Now we had a large step up here in the third quarter. So I think the sequential increases will may be more muted as we move into 2026. So in terms of our target financial model of 10% to 15%, I think we'll be at the lower end of that range ex BEAD, right? And I'm sure I'll get a BEAD question. So I'll Preempt that. I'll let that question be erased. Scott Searle: Okay. I'll pass on the BEAD question, Cory. But just to clarify, the sequential growth, so we'll see sequential growth from the fourth quarter into the March quarter. And then as my follow-up, Gen 3, right, we talked a lot about AI and Agentic opportunities there. If we look at the current quarter, international was down due to one customer, I think, in the European theater. But the Gen 3 platform is supposed to deliver private cloud capabilities, sovereign data center capabilities. When do we start to see that accelerate? And Mike, to follow up on your commentary on Agentic AI in general, as you start to think about that driving the flywheel within your customer base, does this poise you guys for actual acceleration of RPO growth as we get into late 2026 and the ability to really drive that recurring revenue? Cory Sindelar: Yes, Scott, great question. The way we think about the monetization of the AI agent is not so much a separate charge for it, but an acceleration of our business model, right? So our customers will acquire subs faster. They'll roll out more services more quickly. So that's how we'll monetize it. So yes, it will increase RPOs because as they go faster and adopt more of the platforms and the solutions, that will ultimately translate into a contract value that will get reflected into RPO. So ultimately, yes, that's how that will happen. Michael Weening: So -- and the key word that you used was actually flywheel. In fact, we talked about that from a good to great point of view on a regular basis is that you have this -- that is exactly what Calix is. When I go back to what I -- answering the previous question, the flywheel that we have is that is 15 years of investment that's been getting -- that has been going into our platform, allowing us to actually become stronger and better and stronger and better because we enable our customers to be stronger and better and stronger and better, which is why I go back to the -- is it broad-based demand? Absolutely because we are the enabler for our customers to actually go at a faster and faster pace to do the 3 things that drive growth, which is, one, how do you actually add subscribers; two, how do you increase revenue per subscriber; and three, how do you eliminate churn? And if you eliminate churn, then obviously, your gross adds go up faster. And so that is the power that we see in our platform. And those core components, access Edge. And so if you've actually done the work, and I said this on stage, where if you consolidated your network with everything that we've done, which is collapsing the B&G access aggregation onto a single system, you have the most powerful network that exists with all the data and the insights to run it autonomously. Same with on the Experience Edge and then you bring it all into the cloud, throw an AI engine on it, and we can help our customers optimize their business. And as they optimize their businesses, they add those subscribers and become more profitable, we become more profitable. With regards to international, to your question on the one, again, we keep getting these questions every single quarter. It's just lumpy up and down, right? It's lumpy up and down, but we have broad-based demand across all those customers. In no way, shape or form does it signify the strength or weakness of that customer. It's just -- it's a timing thing. And so we go through this every single quarter is that is there any change? There is not. We have strong demand across small, medium and large customers. And then with the international markets, that's really a later 2026 is where we see that we start to expand into the right markets. But we're going to get our existing base over because, frankly, our existing base is all primed because they have those foundations in place and a huge opportunity for us to make them wildly successful at a very fast pace. So your statement of flywheel is 100% accurate. Operator: The next question comes from George Notter with Wolfe Research. George Notter: Can you guys hear me? I was curious about your monetization strategy on the Agentic AI workforce. And is there -- did you guys consider like charging customers a la carte for this capability and maybe being a bit more aggressive on monetizing rather than just sort of giving it away, I guess, and kind of working towards hoping these guys are going to generate more success in the marketplace. I guess I'm just curious why you guys didn't take a more direct approach on monetizing it. Michael Weening: We are taking a direct approach on monetizing it. It's actually a matter of perspective. So there will be some elements that we charge for and then there's others that we will monetize through the -- by helping them drive gross adds -- so we have a very clear monetization strategy, and we're very comfortable as a leadership team that it's going to yield significant revenue and upside, massive amount of upside in revenue. George Notter: Got it. So if I look forward and just think about the growth in the company, I think you guys -- Cory, I think you said 10% to 15% or maybe at the lower end of that range. But [indiscernible] sorry. Michael Weening: Without BEAD. George Notter: Right. Okay. And then -- so of that growth, like is most of that coming from same-store sales in a sense, like existing customers growing faster or growing more with you? Or is it new customer wins that drive a big percentage of that 10% to 15%? How do you kind of parse out where the growth comes from? Michael Weening: Was, again, broad-based demand across all the different segments. So if you -- first of all, is that existing customers have a bunch of unmonetized footprint. So for example, if I only have -- we have some customers who are at the right market share levels, who are at 65%, 70% market share. That's kind of your, I would say, almost a theoretical maximum when you're in a competitive market. But we have some customers who have only 20% market share. So that represents a significant uplift in those scenarios. At the same time, we've launched our MDU products. So those customers all have an MDU problem. that's -- and they've driven it pretty aggressively on stage. We actually had an MDU company who has something like 900 apartment buildings under management, and they did their first 2, and we're ecstatic about transitioning to Calix for those scenarios. So that's a -- there's a great example of a significant unmonetized footprint, both in our existing base because all of our customers, about 1/3 of all tenants in the United States are in MDUs. So there's a massive untapped market that we haven't even started selling into that allows our sales teams to expand significantly. We're very bullish on where MDU goes. As you noted in the quarter, George, we added 20 new customers. So those are essentially starting customers. I don't know where we are year-to-date, but it's got to be around probably 60-ish, I guess, I don't remember. So we have -- we're winning new customers and expanding there. So those growth numbers file into, and that's what we're specifically looking at with regards to where Cory is talking about. And then we have new market expansion, which we haven't -- we have not incorporated into the 10% to 15% because it's too early. But we have all the international markets and everything we're going to do there, and we have the Tier 1s through dedicated platform implementations, which are not in those numbers. And then the last part is we don't have the BEAD things, but we got our first BEAD orders this quarter, and that's not in the number either. George Notter: Got it. Okay. And then just on BEAD, since you guys brought it up, I mean, how much -- I guess, how incremental could that be in 2026 and 2027? I mean, do you have any sense for magnitude or opportunity or timing there? That would be great. Cory Sindelar: Yes. So Yes, I'll just give you my thoughts on the BEAD. We are more constructive on BEAD than we were 91 days ago. The turnaround from the states on their preliminary awards was faster than we had expected. As such, a certain percentage of those customers have the ability to plan for a certain amount of the jobs next year. And so while we did receive our first order during the quarter, it's still too early to determine the demand dynamics for next year other than there will be some amount versus last quarter, I thought there would be like none. But to provide a little bit more color, here's what we know. Of the 49 of the 50 states reporting, California still hasn't submitted their awards yet. The total amount of dollars have shrunk by about 50%, right? So the original program being $42 billion, it's now going to be something like $20 billion. And when you include the matching funds, now we're talking about a $30 billion program. Fiber is still the dominant technology at 65% of locations and 85% of the dollars. Fixed wireless was 12% of locations and 8% of the dollars. Meanwhile, LEO was 21% of locations and 5% of the dollars. So as we have said, historically, we've done really well with government programs and that we expect to do the same with BEAD. Operator: The next question comes from Christian Schwab with Craig Hallum. Christian Schwab: It was kind of crystal clear, the sustainability of double-digit growth that you're seeing. But as we look into next year, should we assume we -- given the outperformance this year, Cory, that we should be at the low end of gross margin expansion year-over-year of 100% to 200% or is that not correct? Cory Sindelar: You've got that right. Thank you. We haven't talked about that yet. But yes, given the overperformance on gross margin this year, I think the increase next year will be more muted. It will be at the lower end of that 100 basis points to 200 basis points. So we'll continue to expand it? Yes, our software content grows every single day. Michael Weening: We're going to continue to guide the 100 basis point to 200 basis point, and we're going to grind at it, right? Cory Sindelar: That's right. But it will likely be at the lower end of that 100 basis point to 200 basis points next year. Christian Schwab: Great. And then now that we found this new found enthusiasm for BEAD, if you think about aggregate dollars that could come to you over a multiyear time frame, when do you think that peak spending would be? Cory Sindelar: Well, we still think it will likely be more of a lens shape deployment curve. And so it will start ramp up to some level in '26, then probably level off for a few years before it tails off. Like we said with all these government programs, they take a lot longer to get started than anybody thinks. The dollars that they pull through tend to be much larger than the program and that these programs then go on for a longer period of time. So we do think it's still a lens shape. It's still too early on the awards to understand the buying dynamics of how much they buy, how much they buy ahead, what mix of products that they're buying and how much they're actually going to actually start building next year because, again, it's very late in the cycle. But -- so that's all we can say at this point is that there will be some BEAD revenue next year. just don't have a good sizing of what that might be. [indiscernible] Christian Schwab: Yes, we'll give you another 90 days. Michael Weening: Well, the other part, I will say -- so again, I had a lot of these conversations with that connections. To Corey's point around this is going to be significantly larger than anticipated, which we have the exact same narrative that we've had where other people 3 years ago were saying BEAD money is around the corner. We have been very clear. So one of the things you should take away from it is the fact that we're actually proactively talking about it now means that the money is about to flow, right? So in 2026, the money will flow. But the bigger part of that, that everyone needs -- and you kind of touched on it, right, is that the BEAD money -- so for example, when they go and they build out a BEAD network and they drive it to what was funded, while they're doing that, and in fact, we had this very specific conversation with a customer, where while they're actually building to the ones that they got funded for, they're actually, in essence, passing a whole bunch of other ones that didn't get funded, and they're going to go drop those customers in. And so all of the TAM affiliated with those is pretty significant. So for example, if they got funded to do 10,000, in many cases, there could be another 5,000 to 15,000 that they pass that they're going to build as they go. And so that's not really built into the BEAD TAM. That's the first thing. The second thing is that once they get the networks in, that's really just to go and build the connection to the subscriber. And going back to George's questions with regards to how do we actually monetize and where are we going? The most important thing for us is to add subscribers because if we were just back to old Calix where we were just a network company, then we wouldn't be so fixated on how do you win the subscriber. But as we talk about in our model, the monetization of $1 to $10 a month in software margins, which are massive, is where we're focused because that's the long-term growth and what actually allows us to continue significant margin expansion. And so as we -- they go and they build that network, BEAD gets them there. And then we go help them actually how do I convert and get to 65% or 70% market share on the BEAD money that I put into it to actually build the network while at the same time, expanding with the customers who are not funded on BEAD, but I'm passing them anyways, I'm going to drop a fiber in. So in those scenarios, we're talking about it now because in 2026, it's finally there. We don't talk about things -- it goes back to the other question is why it's bullish on AI now because it's right there, and we don't talk about things that we can't actually touch and see. So that's why we're talking about BEAD now, we can touch and see it. Operator: The next question comes from Tim Savageaux with Northland Capital Markets. Timothy Savageaux: Congrats on the results. Just a couple of quick ones here. On the BEAD front, I think historically, we used to use maybe 10% of the award value or network cost to kind of get a sense of what the access infrastructure opportunity might be. I wonder if that's still a good number or given your [indiscernible] Michael Weening: We're using more we're using more 5% to 10% depending on the -- it's more 5% to 10% is where the number is. But then what you have to also do is extrapolate the incremental opportunity when you win subscribers, which is not part of that, to your point on it being the access network. Cory Sindelar: You got to think that these locations are harder to get to. There will be put more money into. [indiscernible] More construction dollars, Tim. So 10 is too high. You're going to have to go less than that. Michael Weening: Yes. Timothy Savageaux: Fair enough. Speaking of the $1 to $10 per month, any update on the timing for a more detailed breakout of the appliance business versus the software and platform business? I know you were end of next year was what you were discussing. Cory Sindelar: Yes. I mean that's still the stated goal by the end of '26. Timothy Savageaux: Got it. So no change there. And if we look at the guidance for Q4 for sequential growth, the various quarters this year, you've had maybe small customers driving things in Q2, large and medium. Anything to call out in terms of customer segment movement into Q4 in terms of driving that sequential growth? Michael Weening: Yes. Broad-based demand across all segments. Cory Sindelar: Yes, nothing to call out, Tim. Michael Weening: Yes. But no -- well, no, I'm going to call that out. That is something to call out, right? Broad-based demand across all segments. the value in our business model and the fact that we have almost 1,200 customers is the fact that we -- and we don't have a 10% customer, correct? Right? And we have no 10% customers, which means that from an investment point of view, because of the fact that you see the segments going up and down, that's the value of our business because we have a diversified revenue stream. And so one might be up one quarter and down the next and up the next quarter, it's actually allowing us to even out the whole thing broadly. And when you have broad-based demand, which we do, that allows us also to plan the business very well. Operator: We will take our last question from Ryan Koontz with Needham & Company. Ryan Koontz: Maybe a couple of topics, if I could. Maybe philosophically, relative to your 10% to 15% growth model and thinking about your SAM and your current customer relationships and how do you think about growth limiters in the industry that can allow you to outperform that, whether it's relative to the BEAD process, supply of fiber, supply of labor, supply of components, which doesn't seem to be that big a deal anymore. Like how do you philosophically think about risks and upside relative to things that are out of your control? Michael Weening: So from a risk point of view, at this point in time, we've actually been talking a lot about that as to where do we see the risks. we really don't see them with regards to limiters. So there's BEAD, the BEAD stuff, the reason why we're actually saying, hey, now we see it coming out is because of the fact that, obviously, because it's a governmental process, and as we said right from the get-go is that these things are a bit complex and takes longer to get here. But when it does get here, it starts flowing and it flows for longer. So there's some timing components affiliated with that, right? So that's the first one. And then from a systems and components point of view, we don't see any issues other than there's some memory prices going up, but we balance that out with some other areas, right? So but these things all balance out because of the fact that we have a broad-based business. There's nothing specifically from a leadership point of view that we're looking at as a risk. I will talk to upside, but are there any other risks that you see, Cory? Cory Sindelar: No, I think as it relates to the practical limiters on the business as you go and build new networks, it's permitting and labor. So that puts a natural governor on just how fast they can go. Michael Weening: Well, but by the way, in Washington, that's probably one of the biggest topics that everybody is talking about, which is how do you actually speed permitting and access and those different components. So there's so much focus on driving that, right? I would also think that the midterm is coming up next November that people want to get things done as they go into an election cycle. So that's definitely -- I would say that's going to speed the process to some extent. And so I would say that there's nothing out of the ordinary that Cory and I are talking about and the leadership team is talking about that is a significant risk. In fact, the exact opposite, we feel very confident with regards to the broad-based demand, the running of the business, the talent that we have inside the company and our relationship with customers. So we see that as everything is green. Now with regards to upside, I'll go back to what I said around artificial intelligence. So this is where we're uniquely positioned because of the fact that we have deep insights on how to run a broadband company. We've mapped it all into our cloud. We have intelligence at the -- in the network, and we have significant intelligence on the prem. And we bring all that together in the brain, which is the cloud, which is now AI capable, and we're uniquely positioned to help our customers do more. So -- and I go back to the question I got asked about the monetization of AI, we are absolutely going to monetize AI in a significant way by helping our customers monetize their business at a significantly faster pace. And you have to understand how sales cycles work, which is my background, spent 30 years running enterprise sales organizations. And so would you rather go and pursue a customer and get, I don't know, 5% or 10% price uplift on a single cloud? Or would you actually help that customer add 25% more subscribers, which is -- takes your revenue per subscriber from 0 to significantly higher in the $1 to $10 range per month. My view is I want the $1 to $10 as high as I can as fast as I can instead of grabbing a 5% or 10% kicker. -- makes no sense. And so -- and plus, this will also help us drive -- if you look at our clouds, we have roughly 1,000 people on our clouds or customers on the clouds. And then it drops off. We have 3 clouds, it drops off. And therefore, how do we get all of our customers to every single customer having 3 clouds. That's what AI can help us drive to, and that increases monetization. And so much rather have 1,000 customers on 3 clouds than a large – a 1,000 of them at x clouds in that way. So we think there's huge opportunity. And frankly, I've been here 9.5 years. This is what we work towards. We tested neural networks for the first time back in 2017. We saw the opportunity, but we couldn't actually meet the privacy and security requirements that our customers needed to use artificial intelligence in a trusted way. In the last 2 years building all of that. And now we're literally going to have our success teams go into a customer and say, "Hey, Cory, remember how I was telling you that you really should do this and you said, I don't have the team members or the capacity to do it because I'm busy doing other things”. Now with AI, we're going they say, "Hey, Cory, here's what you should do, press the button and the AI engine will do it”. And that -- when we talk about crossing the chasm, that is going to allow us to cross the chasm at a rapidly faster rate, which is why we are so bullish on AI. Ryan Koontz: That's great stuff. One more quick follow-up, if I could. Nice to see the rebound in the small customer cohort best in like 10 quarters. But you're looking upmarket, the medium and large cohorts have grown over 50% year-to-date, clearly, a great indicator there. How much of that gain upmarket is competitive displacement versus your customers investing more and being more successful with your help? Michael Weening: Do you mean in small or in large? Ryan Koontz: Medium and large, medium and large. Michael Weening: And those are competitive displacements. large percentage of that is us actually becoming the go-to-market engine for these customers, right? So where they were with someone else and that's who they were using just for what I would call dumb WiFi, and now they're looking at what we do across our clouds and everything we're doing on the Experience Edge and saying, I want to radically improve my go-to-market strategy, and Calix is the best one to do that. So absolutely, we're displacing in the Fed because they had a previous partner, and we're now helping them drive their business. And one could argue that from a competitive displacement point of view, if we're with a service provider and they're competing with someone else who's not using our product and they crush them as they do, that's us actually displacing a competitor in a different way with helping our customers win and crush their competition who's not using us, is actually us helping us -- that competitive displacement in a different way. And that's absolutely 100% how I think about it every single day. Operator: We have reached the end of the question-and-answer session. And now I'd like to turn the call over to Nancy Fazioli for closing remarks. Nancy Fazioli: Thank you, Latanya. Calix will participate in several investor events during the fourth quarter. Information about these events, including dates and times and publicly available webcast will be posted on the Events and Presentations page of the Investor Relations section of calix.com. Once again, thank you to everyone on this call and webcast for your interest in Calix and for joining us. This concludes our conference call. Have a good day. Operator: Thank you. You may disconnect your lines at this time, and have a great day.
Operator: Good day, and thank you for standing by. Welcome to the third quarter Tenaris S.A. Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Giovanni Sardagna, Investor Relations Officer. Please go ahead. Giovanni Sardagna: Thank you, Gigi, and welcome to Tenaris 2025 Third Quarter Conference Call. Before we start, I would like to remind you that we will be discussing forward-looking information during the call and that our actual results may vary from those expressed or implied during the call. With me on the call today are Paolo Rocca, our Chairman and CEO; Carlos Gomez Alzaga, our Chief Financial Officer; Gabriel Podskubka, our Chief Operating Officer; and Guillermo Moreno, President of our U.S. operations. Before passing over the call to Paolo for his opening remarks, I would like to briefly comment on our quarterly results. Our third quarter sales reached $3 billion, up 2% year-on-year, but down 3% sequentially, mainly reflecting lower sales to the North Sea and lower shipments for offshore line pipe projects in the Middle East, partially offset by a resilient level of sales to our rig direct customers in the U.S. and Canada. Average selling prices in our Tubes operating segment decreased 1% compared to the corresponding quarter of last year and 1% sequentially. Our EBITDA for the quarter was up 3% sequentially to $753 million with our EBITDA margin for the quarter at 25%. Our EBITDA for the quarter included $34 million gain recorded for the return of U.S. antidumping deposits paid on OCTG imports from Argentina for which the duty rate has been revised downward. Without this one-off gain, our EBITDA would have been $719 million or 24% of sales. With operating cash flow of $318 million and capital expenditure of $185 million, our free cash flow for the quarter was $133 million. After share buybacks for $351 million, our net cash position declined to $3.5 billion at the end of the quarter. Our Board of Directors approved the payment of an interim dividend of $0.29 per share or $0.58 per ADR to be paid on the 26th of November. The interim dividend per share is up 7% compared to the interim dividend per share we paid last year. Now I will ask Paolo to say a few words before we open the call to questions. Paolo Rocca: Thank you, Giovanni, and good morning to all of you. Our results in third quarter once again highlight the unique industrial and commercial position. We have built around the world with competitive differentiation in key markets as well as an efficient industrial performance. In the United States and Canada, where overall drill rig activity has slowed, we maintain our level of sales. Thanks to the relative strength of our customer portfolio that due to the efficient operation, could maintain the level of activity even as oil prices soften. They have chosen to work with us for the long term and appreciate the reliable quality and performance of our product and the benefit that our differential Rig Direct services provide in maintaining the efficiency of their operations. Considering the high level of tariff rate and trade restrictions, we have been increasing production in the United States and Canada to ensure a reliable supply of high-quality products to our customers. Our mill in Bay City, in Hickman and Sault Ste. Marie operated at record levels of production and high levels of operational efficiency through the quarter. Around 90% of our U.S. sales of OCTG are produced in the United States, with the remaining 10% being mainly imported for special application that nobody produced in the United States. In a dynamic and changing world, one of the key strengths of Tenaris is our uniquely flexible global industrial system, where we can produce locally in many regions of the world, maintaining the same high level of quality through our fully integrated quality and HSE management system. Two weeks ago, I was in a Sault Ste. Marie to celebrate 25 years of operations in Canada with our employees and the local mayor and the MP. This mill, which is the core of our industrial presence in Canada was idle when we arrived in 2000. Today, following many years of investment, it is a leading supplier of seamless and welded pipe with accessories and coatings for the Canadian oil and gas industry. Now the industry is expanding through the development of the Montney shale and export to LNG to Asia. To extend the scope of our Rig Direct service in the region, we opened a new service yard in British Columbia, while the mill in Sault Ste. Marie is further ramping up production to supply this operation. Offshore projects, especially complex deepwater development, which can provide significant new sources of oil and gas to meet the world's growing demand for energy, continue to move forward. Last quarter, we mentioned the contribution we will be making to the GranMorgu development in Suriname. Now we are also gearing up for the supply of coated seamless risers and flow lines and welded line export line and casing for TPAO Sakarya deepwater development in the Black Sea. With this project, we are building a strong offshore order backlog for deliveries from the middle of next year as we look forward to the confirmation of other major offshore process FID. In Argentina, the results of the Congressional midterm election are improving the condition for the financing of the development of the Vaca Muerta shale play. Additional rigs are being put into operation, local companies are raising fresh dollar financing for their operations, while NEI has confirmed its interest in participating in the development of new LNG export facility. Tenaris has also increased its energy production in Argentina. In September, we started operation at a new 95-megawatt wind farm, which in addition to our previously installed 100-megawatt wind farm is now powering our steel shop and pipe facility in Campana. In October, the 2 wind farms plus a small complement from our thermal electric plant provided all the power we require for our operation in Campana, with no power purchased from the local network. The new wind farm is a further step to our goal of reducing carbon emission and improving the sustainability of our operations. Around the world, demand for electric energy is accelerating. Our production line for boiler and heat exchanger pipes in Europe is operating at full capacity. As China continues to increase its overwhelming level of steel exports, Europe is also taking action to contain steel import with the strengthening of its steel safeguard measure which should benefit our operations in the region. In this volatile environment, Tenaris continues to demonstrate the resilience of its operation and financial performance, which is allowing us to distribute a cash return of around 11% to shareholders for the ACV. We can now take any questions you may have. Operator: [Operator Instructions] Our first question comes from the line of Arun Jayaram from JPMorgan Securities, LLC. Arun Jayaram: Arun Jayaram from JPMorgan. Paolo, I was wondering if you could maybe elaborate a little bit more on the implications to Tenaris from the Argentinian elections. And perhaps narrowing in and the fact that you did mention in third quarter, you saw lower activity levels, some softness in frac and coiled tubing services. What is your outlook for the fourth quarter in 2026 in Argentina, particularly as you deploy an incremental new build frac fleet? Paolo Rocca: Well, thank you, Arun. Well, I would say that the Argentina election is marking an important turning point. The expectation of the market were for a substantial -- let's say, for a balanced results, but the real results has been a clear victory of the party of President Milei with more than 40%. This has changed, let's say, the perception by the investor about the future sustainability and the ability to continue the transformation plan in Argentina by the present administration, even if this was a midterm election still is changing the proportion and the presence in the Congress, in the two chambers. So it will allow and give more leeway for the administration for pushing ahead with this transformation plan. This has been combined with a very strong support from the American administration and a substantial financial support by the American administration. This has changed the perception and the view of the financial community. There has been a very important increase in the level of stock exchange in the range of 30%. There has been a substantial reduction in the country risk, almost 400 basis points down, which was not expected or anticipated by the market. This is important because it has changed also the willingness of financial operators to support initiative and business in Argentina. The oil company, in particular, will have enhanced access to foreign financing for their development project. Just in this week, yesterday, there has been a first issuance of bonds, Tecpetrol with EUR 750 million. In this week, also YPF will do something similar. So the access to finance by the oil company, in our view, will be stimulating the level of investment. In the moment or at least in the last 6 months, the constraint on the finance operation has been a factor in the decision-making for new investment and for big project that could be developed in the coming 2, 3, 4 years. So we expect that gradually, there will be increase in the investment in development of the asset in Vaca Muerta and also a stimulus to long-term project. One example could be the NEI project for LNG. If you refer to the first quarter, I would anticipate some increase in the number of rigs operating in the country. And gradually, we will see possibly something more during 2026 and 2027 when more substantial program will proceed. So we are positive on Argentina, and the election has been a turning point, in my view, in stimulating the level of activity in the energy sector and not only in the energy sector. Arun Jayaram: Great. That's super helpful. Paolo, I was wondering if you can maybe provide your thoughts on how margins could trend in the fourth quarter. As you know, in the U.S., the last couple of pipe logic index readings have been fractionally down 1.3%. The prior month, 0.5% this during October, thoughts around margins in the fourth quarter because I do think the guidance implies relatively flat sales on a sequential basis. Paolo Rocca: Well, you are right in describing the evolution of one index -- relevant index, that is pipe logic. As we mentioned in the last conference call, in a market that is -- in which the important material represent share in the range of 40%. When -- like what has been done in June this year was raising the level of tariffs to 50%, sooner or later, as we anticipated in last conference call, we'll have some impact on the price. The point is that the accumulation of stocks before the set of the tariff in the market and a slight decline in the number of rigs are keeping pressure on prices. But as I say in the last quarter, I think that gradually sooner or later, we will see, let's say, the impact of this situation and the level of price will start to recover. On this more specifically level of stock, I would ask Guillermo to have his point of view from inside concerning, let's say, the potential evolution of this in the future. Guillermo Moreno: Thank you, Paolo and Arun. Yes, I mean during the first 3 -- so far this year, we have seen a high level of imports, very high during the first semester. We started to see some decrease in the third quarter. But still, we have not seen the full impact of the 50% tariff in those imports. So we are expecting further deductions during the current quarter, and particularly in the first semester of 2026 that should allow the market to be much more balanced. Today, the level of inventories on the ground are at around 7 months, so above normal levels. And as soon as this happens, prices will have some more power to increase. Operator: Our next question comes from the line of Matt Smith from Bank of America. Matthew Smith: I wanted to start off with a very strong sales print in the quarter, some surprises on the mix as well, especially welded sales up in the quarter. You also referenced a bit of a pull forward in Middle East orders. So just hoping you could reflect on those trends within the quarter and how you expect those mix effects to potentially change or not to change as we head into the fourth quarter, please? Paolo Rocca: Thank you, Matt. As you see, the -- we think we had a good level of sales and we also expect for the next quarter to have a level of sales close or in line with the third quarter. Now there has been strong sales of welded mainly due to 2 factors. One is OCTG, oil country tubular goods in the United States. Areas in which also to respond to the pressure of tariff, we are substituting some of the intermediate and surface casing with welded product instead of seamless product. This had an impact. The other point is the delivery of the big pipeline, VMOS as it's called, there is the big oil pipeline that is enhancing the evacuation of Vaca Muerta in the first stage, the 350,000 barrel a day and subsequently 550,000. So it's very big pipeline. We are finishing the delivery of the pipe for it just in the third quarter. This has been one of the reasons. Looking ahead is likely that in the fourth quarter, this ratio get back to the previous levels. I mean we do not have similar strong delivery for the pipeline. While in the case of OCTG, we will continue to maintain the share of weld. So you can expect that this could be slightly lower. Matthew Smith: Okay. Perfect. Then I wanted to change tack on to shareholder distributions, if I could, a 7% increase in the interim DPS level today. I mean, given the extent of the cash power, you still sat on the strong performance you reported and the recent sort of announcement was referenced to the controlling shareholder family. I just wondered how sustainable the market should view the current buyback level by which I'm really referring to the $1.2 billion announcement made last year. I mean that looks like something that's very affordable for 2026 too from my perspective. I know you still have the $600 million to complete first of that original announcement, but I was hoping you could already talk to next year's decision and your early thought process there, please? Paolo Rocca: Well, what we have in front of us, we will execute the second tranche of the buyback. And as you saw, the Board approved a level of dividend more or less in line in absolute term with the previous year but higher per share due to the buyback impact. This is what we have in front of us. And then it will be up to the Board to decide what to do once we completed this second buyback. As we mentioned in the opening remarks, by the way, the 11% return for shareholder is, let's say, good -- showing a good performance of the company. I mean, in this moment, Tenaris has shown resilience in a very volatile environment and delivering to the shareholder, I mean, a very substantial return in our view. Operator: Our next question comes from the line of Marc Bianchi from TD Cowen. Marc Bianchi: The press release commented on some additional tariff cost headwind in 4Q related to this, I guess, second to 30% to 25%. We previously talked about that, I think, being the 25% being equivalent to about $70 million of quarterly EBITDA or quarterly cost. Is that the right way to think about the progression from 3Q to 4Q on an EBITDA basis? It sounds like maybe there could be some offsets. You mentioned the mix of more OCTG that should be a favorable benefit to margins. Maybe you could help us understand a little bit better the EBITDA progression from 3Q to 4Q. Paolo Rocca: Thank you, Marc. Well, in the next quarter, we will see, as I mentioned, maybe some lower volume but potential sales in line or close to what we have seen in the 3Q but we expect the EBITDA to be lower in the range of single digit because of the impact of the tariff in our cost of sales. We are paying tariff on the bars of steel that we are bringing into the states for supporting our rolling mill. We pay the 50% tariff on this. But this tariff is getting in our inventory and is released gradually while we proceeded in the cost of goods sold. So in the third quarter, we pay a higher number, a higher amount compared to what is included in our cost of sales. But in the fourth quarter, we expect an additional, let's say, that this tariff included in our inventory will get into our cost of sales. So we will have higher cost of sale for this region. We expect this in the range of $40 million that will, let's say, affect our EBITDA in absolute terms. Then there are other factors that could contribute to this, but this is our estimate today. In terms of the margin, as we anticipated, also in the last conference we continue to expect margin in the range between 20% and 25%, not far slightly lower than the one we had in the third quarter. Marc Bianchi: Okay. That's very helpful. And just to clarify on the starting point for the EBITDA comment, was that the $753 million that included the $34 million gain? Or are you excluding that when you talk about being down single digits? Paolo Rocca: No, no. I'm talking about the adjusted EBITDA because I'm considering EBITDA without, let's say, the recovery we had on the antidumping. We think that considering this, there is a normalized EBITDA. In the coming quarter, we will have a lower EBITDA for the reason that I mentioned. Marc Bianchi: Very clear. The other question I had was on the -- I think last quarter, we talked about some pipe that had been shipped from Asia before the second round of 232, and that was still in transit and that needed to get landed and integrated into the market before things stabilized, I guess. I mean, I understand that you mentioned the inventory on the ground is still a bit of a problem, but how do we see this pipe in transit issue playing out? Paolo Rocca: Guillermo, maybe you can say if this is -- how this situation evolves? Guillermo Moreno: Yes. Yes. This is correct, Marc, what you said. I mean the impact of the additional 25% that were implemented in June, we said that we were going to start the full effect of this during the fourth quarter of the year. And this is what we expect. Now due to the shutdown of the government of the -- in the U.S., we don't have import statistics, but our understanding is that they are going down, and we will see further reductions in the following quarters. Operator: Our next question comes from the line of Alessandro Pozzi from Mediobanca. Alessandro Pozzi: First one is on the outlook. You provided a description of what you think is going to happen in Q4, any chance you can venture a little bit further out in Q1 and see what could be the main moving parts as we go into 2026. And also while we are on the topic maybe any color on the level of tender that you expect Middle East and the deepwater for 2026. And the second question is on Q3, strong sales, especially in North America, it feels like you are gaining some market share. But if you can maybe elaborate a bit more on the reason for the increase in sales in Q3 despite lower rig count in the U.S., of course, all U.S., would be appreciated. Paolo Rocca: Thank you, Alessandro. Just on the first point, which is the forecast. Let me -- I mean, it will be very relevant what's happened with the tariff because just to summarize, today, we are paying every quarter an amount in the range of $150 million this tariff. And as I said before, in the third quarter, only a part, a substantial part of this enter into our cost of sales. But looking ahead in the coming quarter, we will have increasing cost getting into our cost of sales. But on the other side, we are doing -- taking action to reduce the tariff by increasing production into the states for steel, for pipe. We expect production in our copper plant -- steel plant to increase from now on, continuously and contribute to a reduction in our import of this. And also, we are expanding our production in pipe. So also the sum of the import that is complementing our sale will be reduced. So we have our own plan for reducing this. But there is also the negotiation underway. All the country from which we are shipping steel into the States, Argentina, Mexico, Europe, from Italy and Romania have a negotiating table with the United States and there could be some reduction or negotiation that may affect the 232 for steel -- in this case, for still semi-labor product, not for finished product probably. So this is not predictable today. But I expect that over time, with Argentina due to the extraordinary relation -- special relation that has been established between treat Trump, President Milei and the administration, there's going to be a discussion on this. With Europe also maybe there could be an agreement in line with the U.K. agreement and with Mexico also, there could be negotiating table. So this will be relevant and will affect our performance also in the coming quarter in the medium term. Probably, we won't see any change here in the fourth quarter apart from what I mentioned, but looking in 2026, we need to consider also a potential change in the level of tariff for our steel bars on top of what we can do ourselves. As far as the Middle East and the situation in this, I will ask Gabriel to comment on this. Gabriel Podskubka: Thank you, Paolo. Alessandro, the Middle East business, I would say, is overall stable at good levels. If we break down the important components. Saudi, as you know, has been decreasing activity in the first half of the year, but we see this drop in rates stabilize. We believe that Saudi has bottomed in its drilling activity. And even there are some early indications that there might be a rebound of rigs into 2026, but this is something a bit too early for us to factor in our forecast. Another component of our business in Saudi is our pipeline business. And last month, in September, we started deliveries of the large CCS pipeline. So this is something that we accompany us well into 2026. So line pipe offsetting some of the lower OCTG in Saudi. When we look outside Saudi, the key producers in the GCC, UAE, Kuwait, Iraq, they're all pressing ahead, increasing capacity and offsetting depletion in line with the core of increasing crude production. So we see those plans steadily going ahead. Qatar, which is more of an LNG story, we see Qatargas preparing for the new campaign of the North Field West, 50 wells that would probably supply towards the end of '26 and '27. So overall, a lot of moving pieces, but I would say, the Middle East, stable and resilient into next year. There was also a comment on offshore, Alessandro. We commented that the shipment for offshore in the second half was a bit lower in the first half, where we had a lot of offshore pipelines in Brazil, in South Subsaharan Africa that were not repeating in the second half. But as Paolo mentioned in the opening remarks, we are building a strong backlog into 2026. The Sakarya Phase 3 is a good example. And we are seeing some other projects moving ahead with likely FID in the first part of the year. So overall, we are pretty much positive and constructive on the contribution of offshore into 2026. Paolo Rocca: Thank you, Gabriel. On the last point, that is the market share, I think we are gaining some market share. But let me tell you I think the reality is that our clients are gaining market share for different reasons into the space of North America. I will let Guillermo to comment on this, even if this is in your view sustainable. Guillermo Moreno: Yes, I think that it is sustainable. Our clients are mainly the large operators that have shown much more resilience and the smallest one, and we expect this to continue. Now regarding the correlation of demand of OCTG with rig count there, we need to be very careful because as we have explained in other conference calls, most of the tractors, particular hours are increasing productivity and efficiency. And therefore, the impact on the demand of OCTG is on the downward trend is lower than if you just take into account the rig count. So you need to take both into account. But indeed, our market shares have slightly increased due to the resilience of our clients. Paolo Rocca: Yes. I would add just one comment. The large operator are more resilient in front of a perception of a reduction of the price of oil. They have more productive plays. They operate in more productive plays. They have better efficiencies. So the operator we are serving tends to be more stable and resilient even when the perception of price of oil over time may be subdued consider, let's say, maybe months ago. Alessandro Pozzi: Okay. And sorry, on the -- you mentioned intensity. Can you give us maybe an update on where we are in terms of intensity now versus the, let's say, a year ago? And how much improvement there was? Paolo Rocca: Yes. You mean OCTG consumption? Alessandro Pozzi: Yes. Paolo Rocca: I would say that it's around 2% to 3% higher. So if you see a rig count reduction of 5%, you need to consider that half of this has been compensated by an increase of productivity, right, the days that it takes them to drill a well, but also because they are extending the lateral length. Operator: Our next question comes from the line of Sebastian Erskine from Rothschild & Company Redburn. Sebastian Erskine: The first one, just on Mexico. So you secured some work from Woodside for the Trion project. And I think recent news flow more broadly has been positive for Mexico as kind of PEMEX' strategic plan is being flushed out and the mixed contracts are being signed. In your view, how much of a factor is Mexico going to be on a volume perspective in 2026 versus this year? What was the potential upside from that region? Paolo Rocca: Sorry for the region you were mentioning which region, can you repeat? Sebastian Erskine: Yes, sure. Just in Mexico, just obviously ... Paolo Rocca: First of all, on the question of Trion and other private companies, that are, let's say, operating, what we see is that this is starting to move on in different direction, also some of the contract -- new contract that PEMEX is giving for drilling are moving on. The first one has been assigned this will imply additional drilling in Mexico, this is one point, including the project like Trion and outside that are going on. Second point is the financial situation of PEMEX. After the refinancing operation for $12 billion, PEMEX is more -- I mean, is recovering ability to consider, let's say, payment to the supplier during the 3Q, we didn't receive, but now we are receiving payment, and we expect during the fourth quarter to receive a substantial payment on our receivable, you'll notice the receivable has been going up. One of the reasons has been the delay in payments, but we expect this to improve and we expect, let's say, the recovery in the financial reason of PEMEX to have an impact some moment. In our -- for the visibility that we have in the coming quarter, we do not see a major change. But we consider the refinancing signal that over time, during 2026, there will be additional activity by the private company and maybe hopefully by PEMEX also. Sebastian Erskine: Really appreciate that. And just a quick one on kind of unit raw material costs. It looks like you benefited from some kind of meaningful deflation in the third quarter, particularly in hot rolled coil. Can you give an update what you're expecting on the input cost into the fourth quarter and for the moving parts kind of ex tariffs? Paolo Rocca: We do not expect a major change because the situation of high inventory, there basically containing the impact of tariff is also something that is to some extent, affecting the hot rolled coil. I mean the price of other coil is higher, but it's not higher as much as one could have expected for the size of the increase in the import of this. I think that maybe, Carlos, looking at our -- the impact of hot rolled coils on our cost of sales, you can add something. I don't see major change in... Carlos Gomez Alzaga: No. There is small increase for next quarter, then flat and going down. The effect that we're going to see in our costs next quarter is the effect of tariffs, as you mentioned already. The impact of tariffs in our cost of goods sold will increase during this quarter to achieve almost the full effect of the tariffs. Operator: Our next question comes from the line of David Anderson from Barclays. John Anderson: Just want to get back to the Middle East, if we could, please. Specifically on the emerging unconventional resource plays in Saudi and UAE. So Aramco just signed contracts in the third phase of Jafurah is now planning to drill something in the order of 400 or 500 wells next year. And the UAE, ADNOC has recently talked about 300 wells annually starting drilling in 2027. Presumably, all that's going to be seamless as it is in the U.S. I was wondering if you could talk about this opportunity for Tenaris. I mean if we just kind of run the rough numbers here, this seems like a pretty substantial uptick if we kind of use the same numbers that we see in the U.S. shale and applied over there. Can you just talk about how important this is for your Middle East business over the next couple of years, please? Paolo Rocca: Thank you, David. And Gabriel, if you can comment. Gabriel Podskubka: Yes, David, indeed, we are excited about the unconventional opportunity in the Middle East. As you mentioned, this is something that is not new. Jafurah has been there and increasing rigs steadily over the last 3 years since the development started. And this is an area that we are participating. As of today, we have an important share in the seamless and conventional space in Saudi and that also demand pipelines for connectivity and transportation of gas in the Kingdom. So this is exciting and is the part that has been more resilient the decrease of rigs for Saudi that I was referring before. Clearly, the gas development in Saudi is the most resilient that they are targeting to replace oil for internal consumption. Going to UAE. There is also an opportunity of unconventional is a bit smaller, but ADNOC is accelerating in their own operations and with partners they are bringing and they have some partnerships of some concessions. And there, we are also leading in terms of market share and position all the unconventional plays. So within the broad scope of supply that we have with ADNOC unconventional is an area that we are participating and leading. So it's an area that we expect growth as well going forward. John Anderson: And just a quick follow-up. Where do you source that pipe? I don't think you manufacture any seamless in the Middle East? I know you've got a welded facility, I think you have a JV with Aramco in Saudi, but I don't think you have any seamless production over there. Where do you source that from a project like this? That's a lot of pipe. Gabriel Podskubka: Yes. For the -- in Saudi Arabia for pipelines, we saw domestically for our SAW large OD pipeline mill in Jubail. When you go to the OCTG side, there is a mix string of welded and seamless. The welded we produce ERW welded for surface casing, domestically sort on coils of Saudi and our production of pipes in the kingdom. And for the similar component, we source linen from the local mills in Saudi and then we finished to our connection. When we go to UAE, all our material is brought from our main mills in Argentina and Mexico and to a large extent, also credit in our finishing facility that we have in Abu Dhabi. So it's a mix of combination of pieces with a heavy component of domestic product. Operator: Our next question comes from the line of Kevin Roger from Kepler Cheuvreux. Kevin Roger: Yes, two, if I may. The first one is on the profitability of the business based on the region, the different region. And I was wondering if you can give a bit of color on where do you stand U.S. versus international right now in terms of profitability? Is there any big difference or the things that are normalizing close to the same level? That would be the first question, please. And the second one is related on the working capital and maybe you have, in a way, given the answer with PEMEX, but just trying to understand the EUR 300 million negative movement in working cap in Q3 when you say that it's an increase in receivables. Is it something in where a one-off that you expect to recover in Q4? Or there is something else beyond this movement, please? Paolo Rocca: Thank you, Kevin. Well, on the first line, Tenaris is selling in the different region, a very diversified portfolio of products. So it's pretty difficult to say profitability for the market. For instance, when we're talking about offshore, depending if it is in Africa, in the Gulf or in the Southeast Asia or in the Mediterranean, we have a range of products, including line pipe with coating that following an acquisition of Shawcor. In some cases, represent an invoicing even superior or higher than the invoicing on pipes. So it's difficult to do differentiation region. We have differentiation due by product. Some of the most competitive products are the onshore welded line pipe. There are examples in Argentina or in Saudi Arabia. These are, let's say, the tail of our profitability, while the most profitable area could be the line pipe coated with insulation for complex offshore product. In the U.S., there is an average, but still in the U.S., there are also there differentiation between production casing and surface casing or tubing. So I wouldn't say that it is a regionally driven profitability. In fact, I would say, is more delivered by the mix of different projects and sales. When you talk about working capital, we are seeing the increase in the working capital, this is driven by the delay in payment of PEMEX, and this is something that we expect we will be going in the opposite direction in the fourth quarter. The other component of the increase in stock is due to the incorporation of tariffs into our stock will probably stay at the same level. So the inventory has a higher cost, inventory or bars because of the impact of the tariffs. As we mentioned, the tariff had an impact in the third quarter in the range of $80 million and will increase something in the range of $40 million, incorporating in our inventory in the fourth -- this is the reason for some lower EBITDA. It is also something that will remain relatively high. Then that is all what we can do in speeding up the receivable of some other areas like Middle East that may contribute to improvement of the -- let's say, to reduction of the need of working capital during the 4Q. In this sense, 3Q has been a kind of extraordinary, I would say, in terms of absorption. Operator: Our next question comes from the line of Paul Redman from BNP Paribas Exane. Paul Redman: I just had a quick question on inventory levels in the U.S. and where you expect imports to fade quicker. Would that be more on the seamless or the welded from and where are inventories for heater product? And then secondly, for our press release earlier this month, earlier this month, I think it was talking about some [indiscernible] now being included in the buyback process. I just wanted to confirm whether there's any change here or anything else we should know about on that change in positioning? Paolo Rocca: Sorry, can you repeat the second question? Just to be sure I understand you well. Paul Redman: Yes, your largest shareholder is now wanting to be included in the buyback process. I believe this is a change from its previous positioning. I just want to understand whether you're aware of any change in positioning here? Paolo Rocca: Yes. Okay. Understood. Now the first one is on inventory. Here, Guillermo, if you can. Guillermo Moreno: Yes. When we look at the imports it's more on welded pipes on seamless. And regarding the increase of inventories on the ground that we have seen lately has also been higher on the ERW than in seamless. Now, looking forward, the expectation is that both ERW and seamless inventories on the ground will go down. Paolo Rocca: Yes. On the second one, the controlling shareholder has informed that it may start selling shares but will not go below a certain threshold. And then we'll see this in the public information because the shareholder is also by the rule is indicating when the movements are above the 1%. This is what we can say about this. Operator: Our next question comes from the line of Rodrigo Almeida from Santander. Rodrigo Reis de Almeida: So just a couple of questions here from my side. The first one, I'm not sure if we talked about this during the call, but regarding Argentina, right, regarding the oilfield services business in Argentina. If you could give us an update on how things are evolving there? Are we talking a little bit about the Argentina macro environment, but how could this business, say, help results maybe over the next few quarters. I think this will be nice to hear from you. And then I have another question here. When you look into South America, we saw a nice contracts recently signed with Petrobras, which I suppose could somewhat offset the Raia project that just ended. So if you could give us some color on how we pick about the South American operations going forward. Paolo Rocca: Thank you, Rodrigo. Well, about Argentina, as I comment, I think, the oil company, including YPF and all the other will have more access to financing and willingness of the investors to support this has been clearly reacting to the results of the election in a very positive way. What does this mean for us? Well, it means additional rigs there are coming into operation gradually because this, you cannot bring it. The number of rigs idle in the country is almost 0 now. So will increase only slightly. But there will be action to bring into the country additional rigs for operations during 2026. It means that fracking operation will increase, and this is important for our division that is doing fracking in Argentina. We can expect increase in invoicing by fracking operations and all by our sales of pipe and services over time will not be immediate, but will have an impact in the coming quarter. So more sales. Now in the line pipe, the project of LNG, the CS project promoted by Pan America and together with partners like YPF and so is going on and will -- in the present situation, we will see the tender and the FID has been done in June and we expect in 2026 that the process of construction of pipeline will start and also the assignment of the contract for the pipes. These kind of movements are important from our point of view and will enhance the market for us. In the case of Petrobras, I will ask Gabriel comment on the contract. Gabriel Podskubka: Yes. Thank you, Paolo. Rodrigo, in terms of drilling activity in Brazil, we see steadily increasing by Petrobras and the other majors that are being in the -- especially in the deepwater play in Brazil. And there are many moving parts of the supply of Tenaris, both in OCTG and line pipe. In the OCTG, we have a long-term agreement with Petrobras and the other majors for the large OD connectors, which we produce locally in our facility in [indiscernible]. We are also suppliers in certain fields of the seamless casing as well with Petrobras. And we also have an important contract for completions of 13 chrome and CRA given the -- our service conditions of completions in Petrobras. So we believe that this, together with the pipeline, the seamless pipeline bookings that are also carrying insulation coating. I mentioned, I believe in the last few calls, Búzios 9 and Búzios 11. The contribution of these different segments will contribute to offset the conclusion of the big Raia SAW pipeline that we had and we enjoyed until the first half of this year. So a lot of moving parts and it's very interesting, the breadth of the portfolio and the position that Tenaris has in Brazil. Operator: At this time, I would now like to turn the conference back over to Giovanni Sardagna for closing remarks. Giovanni Sardagna: Thank you, Gigi, and thank you all for joining us, and I hope to see you soon around and thank you. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. My name is [ Christa ], and I will be your conference operator today. At this time, I would like to welcome you to the DXC Technology [ Services ] Second Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Roger Sachs, Head of Investor Relations. Roger, you may begin. Roger Sachs: Thank you, operator. Good afternoon, everybody, and welcome to DXC Technology's Second Quarter Fiscal 2026 Earnings Conference Call. We hope you've had a chance to review our earnings release posted to the IR section of DXC's website. Speaking on today's call are Raul Fernandez, our President and CEO; and Rob Del Bene, our Chief Financial Officer. Here's today's agenda. First, Raul will update you on our strategic initiatives. Rob will then cover our quarterly financial performance as well as provide thoughts on our third quarter and fiscal full year guidance. Raul and Rob will then take your questions. Please note, certain comments on today's call are forward-looking and subject to risks and uncertainties that could cause actual results to differ materially from those expressed on the call. Details of these risks and uncertainties are in our annual report on Form 10-K and other SEC filings. We do not commit to updating any forward-looking statements during today's call. Additionally, during the call, we will be discussing non-GAAP financial measures that we believe provide useful information to our investors. Reconciliations of the most comparable GAAP measures are included in the tables included in today's earnings release. And with that, let me turn the call over to Raul. Raul Fernandez: Thank you, Roger. Our financial performance in the quarter was mixed. We were above our guidance in adjusted EBIT margin and non-GAAP diluted EPS and generated very strong second quarter free cash flow. However, I am disappointed in our performance in revenue and bookings, and we are laser-focused on building a predictable and growing company with better execution and pipeline conversion in the quarters ahead. I believe the strategic and tactical game plan we have in place will position us to create value in the rapidly evolving AI global economy. We have a strong balance sheet and consistent free cash flow and have the flexibility to continue to make the necessary investments to execute on our AI strategy. In the quarter, we formalized a 2-track approach to running our business, core track and fast track. Our core track represents our existing business where we are working to bring our portfolio of offerings to their full potential in the market. For an example on how we plan to energize our core business, let's take SAP. We have a 15,000-person strong SAP practice and ranked #3 among all system integrators for certified SAP business AI consultants. Our business needs to convert this strong capability into strong revenue growth. We now have a structured plan to scale our SAP business over the coming quarters. We expect this will double our SAP revenue over the next 3 years. Fast track represents our new AI native or highly AI-infused solutions that we have been building and piloting with a combination of our existing team and the new group of experienced leaders we have brought into the company in the last 20 months. Fast track solutions have a goal to be 10% of our business within 36 months. These AI-based SaaS solutions are highly replicable and built on proprietary methodologies, models and frameworks that create defensible competitive moats. And the best part is that clients can expect to see measurable results in weeks and months rather than quarters and years. Each product has a growth target and a net margin goal higher than our existing core portfolio baseline. We are targeting our first set of products for large and growing markets. Let me give you a few examples of our fast-track products. Within financial services, we are leveraging our strong legacy. Decades ago, one of DXC's predecessor companies developed Hogan, the preeminent core banking platform used by some of the largest financial institutions in the world, supporting $5 trillion of deposits and facilitating $2.5-plus trillion in daily transactions. To enhance and modernize this essential banking platform, we are developing a new offering, DXC CoreIgnite. We are redefining how banks unlock value from their core infrastructure by turning existing deposits and payment systems into cloud-native API-driven services that power new revenue streams. DXC CoreIgnite converts cost centers into growth engines, empowering banks to launch innovative, monetizable services at speed and scale without ever disrupting the core. Recognizing the untapped potential of Hogan, we identified the opportunity to transform it from a legacy core into a growth platform solving for challenges of interoperability. We recruited a new entrepreneurial team and are standing up a dedicated group to bring this vision to life. Our recently announced partnership with Splitit builds on that same fast track strategy. With this partnership, we would enable banks to unlock their most valuable asset, their existing customer relationships into a powerful competitive advantage. By offering Buy Now, Pay Later directly from customers' existing accounts, banks can meet the growing demand for flexible payments without introducing new friction. This approach strengthens trust, deepens engagement and keeps consumers within the bank's ecosystem. At the same time, it unlocks entirely new streams of transaction and interchange revenue, turning a defensive necessity into a strategic growth opportunity. Now turning to another product in development called [ OASIS ], which is part of our GIS managed services transformation. OASIS is a unified AI-powered orchestration platform that enhances our clients' current technology ecosystems. It embodies our human plus AI approach, combining advanced automation with expert oversight to deliver complete IT estate visibility and better outcomes for customers. This positions GIS competitively as enterprises increasingly seek proven AI capabilities in their managed services partnerships while creating new revenue opportunities for us. Lastly, since we paused our strategic option process for our insurance business about a year ago, we continue to create a more valuable business by growing our SaaS portfolio from 30 to 45 products. We have execution plans in place to double our SaaS revenue in each of the next 2 years. These are 3 of our many fast-track pilots that are in the works. Fast track is a prime example of bringing exponential outcomes to our clients and we are bringing this to life in our newly launched Xponential branding and framework. Xponential is a new AI framework that helps DXC clients move from pilots to real business impacts with confidence. It blends governance, automation and human expertise to deliver measurable results fast. Early client successes show how Xponential is helping organizations, not just operate faster, but unlock new capacity, reduce manual effort and improve decision-making. As we integrate this framework across DXC, we're strengthening our position as a trusted AI transformation partner, helping customers turn AI potential into tangible productivity and growth. We are also showing up differently in the market, and it's getting noticed. Our engagement with the analyst and adviser community continues to deepen, and we are seeing a shift in how our capabilities and impact are being recognized. As a result, we were recently named as a leader in ISG's Provider Lens ServiceNow Ecosystem Partner study; IDC's MarketScape in Industrial IoT End-to-End Engineering; and in Everest Group's Custom Application Development Services PEAK Matrix. These recognitions matter as they validate the discipline and focus behind our strategy and help fuel confidence with our clients. With our rebuilt foundation and full stack expertise, we are reorienting ourselves around innovation and proactive solutioning. This signals to the market that we're more than steady operators of tech estates. We are better positioning ourselves as an enterprise technology and innovation partner that helps clients run more efficiently, modernizes their systems and harnesses the power of AI to drive outcomes through services, software and solutions. We're encouraged by our expanding pipeline, which includes several large deals with clear line of sight to close in the coming months. As a result, we're confident our book-to-bill will move back above 1 in the second half of the fiscal year. With that momentum, we have an incredible opportunity to work across our offerings, markets and teams to solve customer problems and show up as one DXC. And finally, as client zero, we are using existing and emerging AI across all corporate functions. In our legal department, we are using tools such as GC AI, Harvey and Legora for legal research, drafting and document comparison. This enables our attorneys to automate first pass reviews, rapidly assess risks against our playbooks and generate high-quality drafts. Our sales and marketing teams deploy AI across the full content life cycle. Agentforce automates CRM workflows and enriches e-mail marketing with real-time firmographic data. Loopio accelerates proposal generation. Midjourney generates presentation-ready graphics. Video generation platforms, Veo 3, Runway and XLT help us to create compelling video content. And voice and video synthesis tools, ElevenLabs and NotebookLM produce training materials and distill complex messaging. This integrated AI toolkit accelerates content production by 10x while elevating quality and enabling sales professionals to focus on high-value customer relationships. Our finance teams are using agentic AI, such as AI Foundry, UiPath Robot and Copilot to transform our back-office activities by automating manual and repetitive processes. And as an example of how AI will impact every job, including the CEO, this script was written by Raul Fernandez, but delivered by my custom AI-generated voice model. Now let me turn the call over to Rob. Robert Del Bene: Thank you, Raul, and good afternoon, everyone. Today, I'll go over our second quarter results and provide guidance for the third quarter and our updated full fiscal year 2026 outlook. Now starting with the second quarter results. Total revenue was $3.2 billion, declining 4.2% year-to-year on an organic basis within our guidance range and consistent with the past several quarters. Bookings grew approximately 2% year-to-year for a book-to-bill ratio of 0.85, which brings our trailing 12-month book-to-bill ratio to 1.08, a modest improvement from last quarter. This marks the third consecutive quarter with our trailing 12-month book-to-bill ratio above 1, positioning us for improved revenue performance entering fiscal '27. While we didn't get to the booking levels we anticipated for the second quarter, we continue to have a strong pipeline and anticipate a third quarter book-to-bill ratio greater than 1. Our confidence is grounded by the most robust list of new large opportunities in recent history. This is a reflection of the building of our go-to-market capabilities and newly developed AI-based solutions across all of our segments. Adjusted EBIT margin was 8%, coming in above the high end of our guidance range, reflecting disciplined cost management across the company particularly within our GIS segment and corporate functions. On a year-to-year basis, adjusted EBIT margin declined 60 basis points, primarily reflect continued productivity savings to offset top line pressure, higher investment levels to support future revenue growth and lastly, a onetime legal settlement that benefited the prior year second quarter results. The impact of the increased investment levels is visible in our insurance and CES segment margins. In our insurance business, we have been investing in our cloud-based software platform, building AI-based smart applications to deliver enhanced value and productivity to our clients. In CES, we are strengthening our advisory capabilities in developing asset-based AI solutions, which are included in the fast-track initiatives that Raul described earlier. Non-GAAP EPS was $0.84, above the guidance range, consistent with our adjusted EBIT results, down from $0.93 in the second quarter of last year, largely driven by lower adjusted EBIT and higher taxes, partially offset by lower net interest expense and our share count. Now turning to our segment results. CES, which represents 40% of total revenue, declined 3.4% year-over-year on an organic basis. This reflects ongoing pressure in discretionary custom application projects, which continues to impact the industry. Bookings for CES declined modestly year-to-year with a book-to-bill of 0.92. While bookings moderated from the prior 3 quarters of strong performance, the trailing 12-month book-to-bill is 1.15, which we expect to lead to improved revenue performance in the latter part of this year and into fiscal 2027. GIS, which represents 50% of total revenue, declined 6.3% year-to-year organically, which is in line with our full year expectation. Bookings for GIS grew modestly year-to-year with a book-to-bill of 0.82, reflecting longer closing cycles on several large deals we expect to close in the coming quarters. The trailing 12-month book-to-bill remained at approximately 1.1. To help drive our long-term performance, we are building our AI-powered orchestration platform and plan to begin pilot deployments with select customers over the next few months. We expect to introduce the OASIS platform to the broader marketplace in the first half of calendar 2026. We are also enhancing our GIS offering portfolio with AI-enabled solutions targeting growth segments of the IT services market, and we're beginning to see the project pipeline build around these new solutions that we expect to convert and expand over time. Insurance, which represents 10% of total revenue, grew 3.6% year-to-year organically, largely due to growth in software and volume-based increases in existing accounts. We continue to expect this business to grow at mid-single-digit rates for the year. Now turning to our cash flow and balance sheet. During the quarter, we generated $240 million of free cash flow, up from $48 million last year. This increase in the quarter was largely driven by improved working capital and lower cash taxes. This brings our first half free cash flow to $337 million, an increase of $244 million year-to-year. The second quarter results include an increase in software payments, which we had anticipated. As a result of those payments, capital expenditures as a percentage of revenue returned to more recent levels at 5.3%. We also continue to minimize new capital lease originations, recording $6 million this quarter. Over the last 6 quarters, we paid down more than $400 million of capital leases while limiting new capital lease originations to just $31 million. These efforts, partially offset by currency movements on our euro-denominated bonds have brought our total debt down $107 million to approximately $4 billion. Over the same time period, our ability to consistently generate strong free cash flow enabled us to increase our cash balance by more than $660 million since the start of fiscal 2025, bringing it to $1.9 billion. As a result, we have reduced our net debt by approximately $770 million and in doing so, created additional financial flexibility. With this solid foundation, we will continue to execute with focus and discipline against our capital allocation priorities for the year that include continuing to invest in our business to accomplish our top priority, driving sustained profitable revenue growth, further strengthening our balance sheet by minimizing new financial lease originations and maintaining our investment-grade debt levels by retiring a portion of our senior notes maturing in the next 12 months and returning capital to shareholders. With our strong free cash flow through the end of the second quarter, we've repurchased $125 million of shares, $50 million in Q1 and $75 million in Q2. In the third quarter, we intend to maintain the same quarterly pace of buyback as the first half of the year. As a reference point, at the end of the second quarter, $467 million remained under our Board-authorized share repurchase program. Now let me provide you with our full year 2026 guidance. We now expect total revenue of $12.67 billion to $12.81 billion, with the organic revenue year-to-year decline narrowed to [ 3.5% to 4.5% ] from the prior decline of [ 3.0% to 5.0% ]. At the segment level, we expect CES to decline in the low single digits organically with third quarter performance roughly in line with last quarter and an anticipated improvement in the fourth quarter as larger longer duration deals ramp. GIS is anticipated to decline at a mid-single digit rate organically and insurance is expected to grow organically at a mid-single-digit rate, in line with recent performance. We continue to expect adjusted EBIT margin to be between 7% and 8%, and we continue to expect non-GAAP diluted EPS to be between $2.85 and $3.35. We are increasing our full year free cash flow from approximately $600 million to approximately $650 million, driven by our updated view of working capital and help from the new tax law legislation. With strong first half working capital performance, we anticipate a more balanced cash flow cadence over the course of the year relative to prior years that was more heavily weighted toward the second half. Now for the third quarter of fiscal 2026, we expect total organic revenue to decline 4% to 5%. We anticipate adjusted EBIT margin in the range of 7% to 8%. And finally, non-GAAP diluted EPS of $0.75 to $0.85. With that, let me turn the call back over to Roger. Roger Sachs: Thank you, Rob. We'd now like to open the call for your questions. Operator, can you please provide the instructions? Operator: [Operator Instructions] Your first question comes from the line of Bryan Bergin with TD Cowen. Bryan Bergin: I wanted to start on CES. So you've got, I guess, a quarter or so under the belt of your new lead there. Can you talk about just how that business is kind of faring under the covers, talk about any early areas to improve, particularly on the go-to-market to restart momentum in bookings? Any natural disruption that's occurring here just in the early stages? And then, Rob, you just mentioned CES picking up, I think, in 4Q. Is that in hand? Or is that go get type of revenue still? Raul Fernandez: All right. Let me just start. So we look at everything in terms of each of these offerings as core track and fast track. So let me start on the core track. There are many elements of that business and that operation that Ramnath has really dug into and has a very targeted goal and go-to-market plan to improve. Our SAP share in the marketplace is high from an engineering standpoint, but it's not commensurate with the revenues that we get from that practice. So that's a really good example of a core part of the business that we just have to operate at a much better functional level. So there's 2 or 3 other major areas that have revenue implications, that have pipeline implications, both longer-term projects, bigger projects as well as smaller, shorter cycle projects. On the fast track, as I mentioned in the call, that's an area that we're super excited. We are using our legacy as leverage, and we are building on top of some incredible technical connections and footprints that we've got with Hogan software to very quickly on a fast-track basis develop and deploy agentic solutions that will unlock many new services for our existing banking customers and new ones. And you saw a little bit of that in the release with Splitit as well. So coming in very quickly and having a huge impact since the end of July, joining the team. And so I'm very happy with the progress there. Let me turn it over to Rob. Robert Del Bene: Yes, Bryan, on your question on fourth quarter, is it in hand or go get. The -- you know the dynamics of the business require bookings and revenue generation in quarter and especially 2 quarters out. However, we do see, based on the bookings we've had over the last several quarters... Can you guys hear me? Unknown Executive: I'm still here. Robert Del Bene: Okay. Good. Sorry about that. So based on the strength of the bookings over the last several quarters, which reflected in the trailing-12 months being 1.15 for CES, we have a solid base entering the fourth quarter and beyond into fiscal '27. So I'd describe it as we have the base, we could see the improvement coming, but there's always more to go get. And we're looking to really strengthen the hand we have now with the third quarter for CES. The -- we have a robust pipeline. So we expect to do well in the quarter -- to continue the momentum, let me say it that way. Bryan Bergin: Okay. Okay. On the free cash flow, it was good to see that move higher within the guide. You mentioned a couple of primary sources, I think. As you consider those, are those lasting as you think about kind of free cash flow conversion or somewhat transitory? Robert Del Bene: So the dynamic in the first half of the year was different than the dynamics for the last couple of years. In that last couple of years, working capital was a drain in the first half of the year and snapped back in the second half of the year, which generated most of our cash flow in the back half of the year. This year, we did a really good job, effective job on receivables in the second quarter. So we've -- if you will, we've managed to pull in some of the benefits we used to get later in the year. So we expect that to be maintained for the rest of the year. We do expect good performance in working capital, but we will not get the commensurate bump that we've got in the last few years. So that I'd describe as -- it's sustainable. We're going to keep that benefit. And then on cash taxes, similar. We expect full year cash taxes to be better. So that's -- that will also be sustained. And those were the 2 primary drivers. The third driver was capital expense. And so there, again, we expect to maintain a rate and pace that's similar to the first half of the year. However, I will say if opportunities come around that are worth deploying more capital, we will do that, and we won't hesitate. Operator: Your next question comes from the line of James Faucette with Morgan Stanley. Unknown Analyst: It's Antonio on for James. I wanted to ask about the GIS business. If maybe like you could walk through any trends in that business. And then specifically within Hogan, like how that fits into GIS and any trends you're seeing there would be helpful. Raul Fernandez: So Hogan is part of the CES offering and the new product development and the team is all under Ramnath. On GIS, we've got a great upward tick on all kind of customer-related elements. So our scores are higher, our churn is lower. From an operating statistical standpoint, we're finishing like probably the best 2 quarters of uninterrupted service across the board around the world. So super solid from a foundation standpoint, from an operating standpoint. Again, new products are the key, not just for generating more revenue opportunities for us and more pipeline, but for us to change the narrative, frankly, from a safe pair of hands of legacy to a safe pair of hands for legacy and innovators for today's AI economy. So I feel good across all the offerings, all 3 offerings that we've laid the right foundation. Rob? Robert Del Bene: Yes. And Antonio, I would just add a little to what Raul described. Year-to-date, we have had -- the project-based services marketplace has experienced difficulty across the board. So it impacts us not only in CES, but also in GIS. So that's been prevalent through the first half of the year. I will say, though, that the momentum building in GIS from a pipeline perspective. And our large deal -- I mentioned it in the prepared remarks, the large deal pipeline has been building. We've got a robust list of opportunities. Those are longer term in nature, longer closing cycles, but we're seeing really good demand both from a resale -- new content and resale perspective and new customer perspective. And the pipeline for the new offerings that the GIS team is bringing to market are also starting to gain traction. So we're seeing an uptick in that pipeline as well. So I think the future is looking brighter. We now have to convert the pipeline, obviously, and bring that home. Unknown Analyst: Yes. That's helpful. And then as a follow-up, I wanted to ask about your investments within AI. Like what is the runway for that? And how far are you guys there? Raul Fernandez: I think one of the most interesting things about this kind of technological wave that we're living through is that the total cost of ownership of creating ideas has dropped almost down to 0. And that's due to a bunch of factors. One, all of these tools. But two, we're living in an era today of incredible cross subsidies. So the compute power I use to generate my AI script, what I paid for versus what it cost is way off, right? If you use [ Sora ], if you use any of these platforms, you're getting an unbelievable level of compute and rendering and creation at a fraction of what the real cost is. So we are very happy to be corporate consumers of many of these tools and to infuse them into our solutions. And so it's a very achievable and maintainable level of investment to keep us at the forefront. Rob? Robert Del Bene: Yes. And I'd just add that we have the capacity with the balance sheet that we've built over the last 18 months to make the necessary investments and take advantage of opportunities when we see them. Operator: Your next question comes from the line of Jonathan Lee with Guggenheim Partners. Yu Lee: First from me, can you help calibrate what's contemplated across your revenue and margin outlook range from a macro perspective and a project ramp perspective, particularly as it seems there's some variability contemplated quarter-to-quarter in the back half from a margin perspective? Robert Del Bene: Yes, Jonathan, we -- in the back half of the year from a margin perspective, if you took the midpoint of the range, it's pretty consistent. And I would describe it this way that, in that guide, we don't anticipate any significant changes to the macro environment. So we're not dependent on any uptick in the economy or anything, any other -- up or down, any big changes economically that would drive increased demand or decrease demand. So it's pretty stable in terms of our assumptions. We're basing our forecast strictly on backlog -- our own data backlog, pipelines, conversion rates and all the metrics you'd expect us to be utilizing. Yu Lee: That's good color. And just a follow-up. What in your customer conversations gives you confidence in your ability to close these large deals that are in your pipeline, especially given the competitive pricing environment that some of your peers are highlighting? And are there any concessions that you may have to provide to close these deals? Raul Fernandez: I've been personally active selling a lot of our new offerings on previewing them to CEOs, CTOs, COOs, et cetera. And I am just really energized by the interest, the sincere interest, the fact that we are showing up with brand new ways of doing things with tools at an enterprise and global level. And so I think the narrative of the conversation changes as we have more of these proof points out as we deploy more customers with these new tool sets, and it will build upon itself. But I think the great work we've done for the last 20 months to get this stuff together as a really solid foundation for new growth with new products is terrific as well as solidifying all of the legacy work that we continue to do and frankly, we'll continue to do because these systems will evolve, they will change. But as all of us have been in technology, it always appears like it's going to change faster than it actually does. Robert Del Bene: And just add one final point on that in terms of concession. Our pricing has been stable. We -- look at the first -- last several quarters, there's been stability in pricing. Operator: Your next question comes from the line of Tien-Tsin Huang with JPMorgan. Tien-Tsin Huang: Just thinking about the CoreIgnite product there. Is that going to be -- are you going to go after the back book of Hogan? Or is this really a new opportunity? I'm just asking if you're converting existing Hogan account, thinking about the revenue change there if you flip to a SaaS or a subscription model under CoreIgnite, what's the delta between that and the existing Hogan account? Raul Fernandez: Yes. Everything that we are building with CoreIgnite is accretive and additive. It is not cutting into any existing terms. What's really cool is because we've got the legacy relationship, we/we've built the thing, and we know the code in a way that nobody else does and frankly, have some data rights that are pretty interesting. We are uniquely positioned to do this in a way that no one else can do as quickly as well and with a high level of technical confidence in being able to deploy an enterprise-grade solution. Tien-Tsin Huang: And you've been at this for a while. So thinking about this ability to break the linearity and go after more of the subscription type with this kind of new model. Do you feel like with AI in this product push you're discussing, this is really a turning point for that? Raul Fernandez: Absolutely. Look, when I started, AI was still in experimenting. A lot of what was machine learning was being used as AI. And now we really have revolutionary products that are literally leapfrogging existing players on a week-over-week basis. It's also going to create a new discussion with customers about how we charge and how we get paid. And it will be much more value-based over time. It will not happen overnight, but we are very well positioned to be aggressive players in that value-based discussion, which is around, as you know, replicable solutions, whether it's full SaaS, ARR or some replicable combination of software and services. Tien-Tsin Huang: Okay. Rob, if you don't mind, just one quick question. Forgive me for the third one. Just thinking about the segment profit, I just want to make sure I caught that. Any callouts as we model out the rest of the year across the 3 segments here and what to consider on the profit side? Robert Del Bene: From a segment perspective, no real callouts in terms of different trajectories for what we have in 2Q. Operator: Your next question comes from the line of Jamie Friedman with Susquehanna. James Friedman: Raul, I'm not sure if that was you or your digital twin, but the creativity is noticed. I don't want to be tone-deaf to that, and it sounds different. So I'm just wondering, first of all, in terms of how you're going to operate, manage and disclose fast track? How should we be thinking about the kind of -- is it a champion/challenger? Is that going to be a laboratory? How are you going to incubate the fast track opportunity? Raul Fernandez: Yes. Well, thank you. We -- I used the tool over the last -- literally the last few days, and it's just getting better and better. And so I thought I'd try it. So yes, the script was written by me but delivered by my AI twin. But this is really me. So the answer to that is in the beginning of the new fiscal year, we're going to have more clarity and more information to share on how these -- what are currently pilots and products in production and early stages of client use and give you a much better road map for the ramp-up of those. And look, we are going after -- we talked about a handful today. We're going after more than the ones that we talked about. Not all of them will be successful, but only a few of them need to be successful to help change the revenue trajectory of this company. And I'm super excited again about the creativity, the product focus we have. And really, the biggest thing for me is the replicability. These are not one-off solutions that have to get built or rescoped over and over again. These are built to be replicable, and they are then built also to have a higher gross and net margin contribution. James Friedman: Interesting. And then, yes, I mean, it makes a lot of sense to me to refresh the Hogan platform. Obviously, it was a real landmark platform of the industry. Is there any sizing that you can share? I think the last disclosure on Hogan, I remember were a little dated. Yes, anything that you could share? How big is it today? Do a lot of financial institutions still run it? How meaningful is it as any dimension of the business? Anything you could share about Hogan would be helpful. Raul Fernandez: Yes. Yes. And again, like I said, we're going to -- as we enter the new fiscal year, we'll have some existing customers to talk about that are already using it. But I think the way to think about it is that it's not a revival, it's an extension of Hogan in a very lightweight manner in an AI API-centric manner that's going to allow the banks, the customer here, to offer new services at a fraction of the cost and speed. And because you have this legacy, meaning know the code, have access to the code, have maintained the code, we're in a unique ability to leverage it. So it's a core banking platform and system. Some of our customers have used derivative versions. So we're not going to be in the business of trying to rebuild that. We're in the business of trying to expand and extend it using AI and create value for our customers, the banks and create obviously value for ourselves. Operator: Your next question comes from the line of Brad Clark with Bank of Montreal. Bradley Clark: You mentioned in the quarter, cost discipline driving some margin upside versus the guide. As you think longer term, DXC has been taking cost out of the business for a while. How sustainable do you think these sort of cost -- management cost takeout measures are in terms of growing -- aspiration to grow EBIT margin longer term? Robert Del Bene: Yes, Brad, this is Rob. So we've demonstrated that over a sustained period of time, we could manage costs to maintain margin levels. And I'm confident we could continue to do so. And when revenue stabilizes and beyond, it will provide a great platform for us, and we will maintain the spending discipline. It will then provide the platform for growing margins. So I feel, especially now with enablement of AI tools internally, we will continue to tightly manage spending, drive productivity from a margin perspective. Raul Fernandez: Brad, as client zero, I've mentioned many of the internal products that we're using across every business function. One that I mentioned in the first call was our agentic SOC solution that we're now taking to market our partner 7AI. That has been running in place and clearly, that's going to have, from an operating standpoint, from an operator standpoint, a positive cost structure in terms of how we operate in the coming years. Again, that's not fully baked into next year's guidance, which we're still working on, and we're still working on the rollout of the product in terms of not just using it internally, they're reselling it externally. Operator: [Operator Instructions] Your next question comes from the line of Darrin Peller with Wolfe Research. Paul Obrecht: This is Paul Obrecht on for Darrin. Can you provide a bit more detail on how you're thinking about headcount strategy going forward, especially as we think about AI being increasingly embedded across really every facet of the business, it sounds like. Raul Fernandez: Yes. Sure. I'll give you a little bit of color commentary and then Rob will kick in. Look, I think the traditional labor pyramid and the traditional way of thinking about labor in terms of onshore, nearshore, offshore will be obsolete. Will it be obsolete in 3 years, 6 years, 5 years? I don't know. But the pyramid will start looking more like a diamond and at the bottom of it are going to be AI agents. And part of what we're doing is making sure that our workforce is skilled to continue to move up the value chain as we deploy these forms of agents to do work that was done by Level 1 and Level 2 engineers. So it is an ongoing human capital discussion that we've got. It's a human capital investment that we're doing, but it's also one that's going to impact every company in this space. Robert Del Bene: Yes. So Paul, as that new model evolves, along the way, we'll continue to balance resources with our demand profile and delivery requirements while we continue to drive productivity throughout the overhead functions in the company. So we will maintain our normal management approach while the new model is evolving. Paul Obrecht: Got it. That's helpful color. And then last quarter, you noted seeing your win rates increase. I think it was low to mid-single digits during the quarter across CES and GIS. Just curious any updates there if you observed a similar trend this quarter. Robert Del Bene: Yes. I'd say quarter-to-quarter, they were stable. So no real change in the trajectory. Operator: Your next question comes from the line of Rod Bourgeois with DeepDive Equity Research. Rod Bourgeois: I have a general question about your fast track solution plans. I like the sound of these new plans. It sounds like you're moving past some of the blocking and tackling turnaround work and you're now moving to improve positions in some key is there. So on that note, I'd just like to ask if there's a certain milestone that you've reached that's now enabling you to better pursue these kind of fast track opportunities, whereas before those kind of new market approaches were seemingly somewhat on hold. So is the milestone that you have more room to invest or more of a readiness with execution? Or is it an AI opening the door factor? Can you just elaborate on the -- what the pivot point is here? Raul Fernandez: The absolute number #1 pivot point is new talent that has come in with the skill sets to do this. And that talent has gotten here, and we've been able to bring others that we've all worked with in the past in different companies, and that is the absolute key to this transformation. That new talent came up with the opportunity. That new talent came up with the product framework. That new talent is building and deploying that as we speak. So that's the absolute key. And finding the right people, getting them onboarded. As you said earlier, it's a playing offense and playing defense. The defense is stabilizing our kind of our core business and operating in a more efficient and effective way as a professional services firm. And then the offense is going to market with these fast-track products. Rod Bourgeois: Okay. All right. And then just a follow-up to focus on the free cash flow from a different angle. If you produce $650 million in free cash flow this year, can you give us a sense of whether that creates a baseline for next year to grow on top of? Or given that you have some free cash flow benefit that you're reaping this year, is the $650 million more of a stable level to consider on a go-forward basis? Just -- I know you can't give guidance that far out, but a general idea on the trajectory and how this year's benefits will apply to next year. Robert Del Bene: Yes. Sure, Rod. The way I'd describe it is this will be our third year in a row of producing free cash flow in that range. And I fully expect that to continue at this point, right? Without any major disruptions, I fully expect it to continue. Operator: And that concludes our question-and-answer session. I am now going to turn it back over to Raul for closing comments. Raul Fernandez: Thank you so much. Before we sign off, we'd like to share a short video showcasing the AI capabilities I discussed earlier. It was created using AI tools at a fraction of the typical production cost. The video is available in the IR section of DXC's website, along with our other earnings material. Thanks, everyone, for joining us on the call today, and we look forward to speaking with you again next quarter.
Operator: Good morning. My name is David, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Hercules Capital Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions] I will now turn the call over to Michael Hara, Managing Director of Investor Relations. Please go ahead. Michael Hara: Thank you, David. Good afternoon, everyone, and welcome to Hercules conference call for the third quarter of 2025. With us on the call today from Hercules are Scott Bluestein, CEO and Chief Investment Officer; and Seth Meyer, CFO. Hercules financial results were released just after today's market close and can be accessed from Hercules Investor Relations section at investor.htgc.com. An archived webcast replay will be available on the Investor Relations web page following the conference call. During this call, we may make forward-looking statements based on our own assumptions and current expectations. These forward-looking statements are not guarantees of future performance and should not be relied upon in making any investment decision. Actual financial results may differ from the forward-looking statements made during this call for a number of reasons, including, but not limited to, the risks identified in our annual report on Form 10-K and other filings that are publicly available on the SEC's website. Any forward-looking statements made during this call are made only as of today's date and Hercules assumes no obligation to update any such statements in the future. And with that, I'll turn the call over to Scott. Scott Bluestein: Thank you, Michael, and thank you all for joining the Hercules Capital Q3 2025 Earnings Call. Hercules wrapped up the first 3 quarters of 2025 by delivering another strong quarter of record fundings and record operating performance while maintaining our balance sheet strength and robust liquidity, allowing us to remain focused on high-quality originations and disciplined underwriting. Our platform momentum continued in Q3 with originations of over $846 million (sic) [ $846.2 million ] which led to record originations of $2.87 billion for the first 3 quarters of 2025, putting us on pace to exceed our previous full year record of $3.12 billion. Our record fundings for Q3 of $504.6 million led to $95.9 million of net debt portfolio growth and a new record with over $557.8 million of net debt portfolio growth in the first 3 quarters of 2025. The strong new business that we generated during the third quarter led to continued solid net debt portfolio growth, and that helped drive -- sorry, and that helped Hercules generate record total investment income of $138.1 million and net investment income of $88.6 million or $0.49 per share during Q3. Despite operating in a declining rate environment, we were able to achieve 122% coverage of our quarterly base distribution of [ $0.40 ] per share in the third quarter and maintain $0.80 per share of spillover income. Our strong Q3 performance was highlighted by new records, including record total gross fundings for a third quarter of $504.6 million, an increase of 85.5% year-over-year, record total investment income of $138.1 million, an increase of 10.3% year-over-year, record period ending assets under management of approximately $5.5 billion, an increase of 20.7% year-over-year. Our first 3 quarters performance was highlighted by several new records, including record total investment income of $395.1 million, record net investment income of $254.7 million, record total gross new debt and equity commitments of $2.87 billion, record total gross fundings of $1.75 billion. and record net debt investment portfolio growth of over $557.8 million. Our performance results continue to be driven by our leadership position within the venture and growth stage lending market, the longevity, consistency and scale of the Hercules platform and our unwavering commitment to always doing what we believe is in the best interest of our shareholders and stakeholders. Our approach to the current market is centered around 3 core themes: disciplined credit underwriting, managed and controlled portfolio growth and maintaining balance sheet strength and flexibility. We believe that this will best position the company to continue to deliver strong relative operating results, irrespective of the market environment. We noted in our Q2 2025 earnings call, that we continue to see a more favorable new business landscape broadly and that we were expecting the business to be able to take advantage of that. Our expectation was that we would deliver strong new business over the second half of the year, but that Q3 would be slower as it typically is for our ecosystem. After a slow start to Q3, our investment teams were able to take advantage of several opportunities, which helped us deliver record Q3 funding performance. We are maintaining our expectation that origination activity will remain strong through year-end, and we have already delivered record new commitments and record new fundings for the year. As we noted earlier this week, Hercules recently achieved another meaningful milestone by reaching the $25 billion mark in total cumulative debt commitments since our first origination in October 2004. This is a tremendous achievement that reflects the enduring strength and impact of the Hercules platform and validates our approach of building a company focused on what is best for our shareholders and stakeholders, treating our employees the right way and providing certainty and consistency in the market to our borrowers, prospects and their investors. While the new business environment remains constructive, we are continuing to see pockets of frothiness across certain parts of the venture and growth stage lending markets, as we noted on our last earnings call. Having operated in this asset class for over 21 consecutive years and through several different credit cycles. We know the importance of being disciplined and true to the underwriting rigor that has made Hercules the market leader, and that is exactly what we intend to continue to do. We maintained a conservative and defensive balance sheet while still delivering strong originations and record funding performance for Q3. In Q3, we maintained our high first lien exposure which remained above 90% and continues to be towards the high end of our BDC peers. As we guided, GAAP leverage increased modestly to 99.5% in Q3, up from 97.4% in Q2, and we did not utilize our ATM during the quarter. Our Q3 GAAP leverage remained at the low end of our typical historical range of 100% to 115% and below the average of our BDC peers. We ended Q3 with over $1 billion of liquidity across our platform and no material near-term debt maturities, which we believe continues to position us very well. Let me now recap some of the key highlights of our performance for Q3. In Q3, we originated total gross debt and equity commitments of over $846 million (sic) [ $846.2 million ] and record gross fundings of over $504 million (sic) [ $504.6 million ]. We generated record total investment income of $138.1 million and net investment income of $88.6 million or $0.49 per share. We achieved 122% coverage of our quarterly base distribution of [ $0.40 ] per share. We continue to be very well positioned with regards to dividend coverage in a declining rate environment. With the record growth in our debt investment portfolio through the first 3 quarters of 2025, and given that nearly 75% of our prime-based loans, which comprise approximately 82% of the portfolio, are now at their floors. We believe that we are generating a level of core income that amply covers our base distribution of $0.40 per share. We generated a return on equity in Q3 of 17.4% and our portfolio generated a GAAP effective yield of 13.5% in Q3 and a core yield of 12.5%, which was consistent with Q2. Our balance sheet with moderate leverage and low cost of leverage remains very well positioned to support our continued growth objectives and provides us with the ability to continue to focus on high-quality originations versus chasing higher-yielding assets with more risk or loosening deal structure to drive short-term portfolio growth. The focus of our origination efforts in Q3 was on maintaining a disciplined approach to capital deployment while being selectively aggressive on certain opportunities where we felt that we had a specific competitive advantage. Our Q3 originations activity was well balanced between life sciences companies and technology companies. In Q3, approximately 54% of our commitments and 50% of our fundings were to life sciences companies, while approximately 46% of our commitments and 50% of our fundings were to tech companies. We funded debt capital to 24 different companies in Q3, of which 7 were new borrower relationships. Year-to-date, through the end of Q3, we have added 27 new borrowers to the Hercules portfolio. We also increased our capital commitments to several portfolio companies during the quarter. Our available unfunded commitments were approximately $437.5 million, down from $471.5 million in Q2. Over 50% of our gross fundings for Q3 occurred in the last month of the quarter, and that momentum continued into early Q4. Since the close of Q3 and as of October 28, 2025, our investment team has closed $554.4 million of new commitments and funded $237.4 million. We have pending commitments of an additional $425.5 million in signed nonbinding term sheets, and we expect this number to continue to grow as we progress in Q4. Our active pipeline remains robust, with our closed quarter-to-date activity as of October 28, 2025, we have already exceeded our previous annual records for gross new commitments, and new fundings, demonstrating the continued growth and scaling of our platform. While Q4 is typically a very strong originations quarter for the venture and growth stage markets, we remain focused on maintaining our high bar for new originations, given some of our recent market observations. We are continuing to see a lot of companies in our ecosystem, looking to access the credit markets that lack scale and what we believe to be solid equity support. The volume of deals that we are screening and passing on continues to be near record levels, and we are continuing to see deals get done without strong structure and well outside of what we believe are prudent underwriting metrics for our asset class. We do not expect many of these deals to age well. As we have always done, we intend to remain disciplined and focused on the long term, and we remain bullish on our pipeline and expectations for funding activity over the coming quarters. Lending to cash flow-negative growth-stage companies requires patience, prudence and experience. We continue to be pleased with the exit activity that we saw in our portfolio during the quarter. In Q3 and quarter-to-date Q4, we've had 4 M&A events in our portfolio, which included 2 life sciences portfolio companies and 2 technology portfolio companies announcing acquisitions. That brings us to 10 M&A events plus 1 IPO in our portfolio year-to-date through October 30, 2025. Based on current market conditions and improving corporate sentiment, we continue to expect exit activity to accelerate towards year-end. Early loan repayments came in slightly higher than expected in Q3 at approximately $262 million (sic) [ $262.3 million ]. Even with the higher level of early loan prepayments, we still achieved strong net debt portfolio growth given the strong funding levels in the quarter, which continues to position us well for strong core earnings growth in the remainder of 2025 and into 2026. For Q4 2025, we expect prepayments to be lower and in the range of $150 million to $200 million, although this could change as we progress in the quarter. Credit quality of the debt investment portfolio remained strong and relatively the same quarter-over-quarter. Our weighted average internal credit rating of 2.27 increased just slightly from the 2.26 rating in Q2 and remains well within our normal historical range. Our grade 1 and 2 credits increased to 64.5% compared to 62.9% in Q2. Grade 3 credits decreased slightly to 32.7% in Q3 versus 34.7% in Q2. Our grade 4 credits increased to 2.8% from 2.4% in Q2. And we, again, did not have any grade 5 credits. In Q3, the number of companies with loans on nonaccrual increased by 1. We had debt investments in 2 portfolio companies on nonaccrual with an investment cost and fair value of approximately $52.2 million and $47.2 million, respectively, or 1.2% and 1.1% as a percentage of our total investment portfolio at cost and value, respectively. Subsequent to quarter end, we successfully worked through and resolved the 1 new loan that was added to nonaccrual during the third quarter. The result of that effort was that we received net proceeds on that debt position that were approximately 56% higher or nearly $14 million higher that our Q2 fair value mark. Despite a small realized loss on that particular loan, our realized IRR on that debt position was approximately 13.2%. With respect to our broader credit book and outlook, we generally remain pleased by what we are seeing on a portfolio level, and our portfolio monitoring still remains enhanced given the volatility in the markets broadly and the ongoing government shutdown, which has now extended into the fifth week. We believe that our conservative underwriting and ensuring appropriate structural alignment on the deals that we will do will continue to serve us well. As of the end of Q3, the weighted average loan-to-value across our entire debt portfolio was approximately 16% and we have not noted any meaningful deterioration in credit since our last earnings call. Our net asset value per share in Q3 was $12.05, an increase of 1.8% from Q2 2025. This is the highest net asset value per share that we have reported since 2008. We ended Q3 with strong liquidity of $655 million in the BDC and over $1 billion of liquidity across our platform. With healthy liquidity, a low cost of debt relative to our peers and 4 investment-grade corporate credit ratings, including an investment rating upgrade to Baa2 from Moody's, we remain well positioned to compete aggressively on quality transactions, which we believe is the prudent approach in the current environment. Given the enhanced focus on PIK, across the private credit markets, we wanted to provide some additional disclosure on PIK income for Hercules. For Q3, PIK was approximately 10.5% of total revenue which was flat from where it was during the first half of 2025. Approximately 85% of our PIK income in Q3 was attributable to PIK that was part of the original underwriting and not a result of any credit or performance-related amendment. Nearly 90% of our PIK income in Q3 came from loans that we have rated as 1, 2 or 3. While there was only a single loan that was rated 4 that was generating PIK income during the third quarter. Further, excluding 100% of our PIK income during Q3, the business still generated cash net investment income that provided 111% coverage of our base dividend. Philosophically, we will selectively use PIK at underwriting to enhance income for certain credits that we believe are stronger and more stable, and we expect this to continue to be the case going forward. Venture capital investment activity in Q3 mirrored the strength that we experienced in our deal flow and originations. 2025 continues to demonstrate a healthy pace with $80.9 billion in Q3 and $250.2 billion invested for the first 3 quarters of 2025, according to data gathered by PitchBook-NVCA. The $250.2 billion of investment activity already represents the second highest year in history, exceeding the $236.1 billion invested in 2022. While the aggregate data remains strong, it is highly concentrated with over 67% of all year-to-date VC equity investment going into AI and cybersecurity companies. M&A exit activity in Q3 for U.S. venture capital-backed companies was $20 billion. Both the number of IPOs and dollars raised increased in Q3 and continues to improve. Consistent with the aggregate data for the ecosystem, during Q3, capital raising across our portfolio remains strong with 18 companies raising over $1.3 billion in new capital. For the first 3 quarters of 2025, we've now had 64 companies raise over $5 billion in new capital. Year-to-date, our portfolio companies have raised over $6 billion of new capital. Given our strong sustained operating performance, we exited Q3 with undistributed earnings spillover of $146.2 million or $0.80 per ending share outstanding. For Q3, we are maintaining our quarterly base distribution of $0.40 and our supplemental distribution of $0.07 per share for a total of $0.47 of shareholder distributions. Our Q3 net income -- net investment income covered our base distribution by 122% and our full distribution, including our $0.07 supplemental distribution by over 104%. Based on our recent and anticipated near-term operating performance, we continue to be very comfortable with our quarterly base distribution and our ability to continue to provide our shareholders with supplemental distributions next year. This is now our 21st consecutive quarter of being able to provide our shareholders with a supplemental distribution in addition to our regular quarterly base distribution. In closing, our scale, institutionalized lending platform and our ability to capitalize on a rapidly changing competitive and macro environment continues to drive our business forward and our operating performance to record levels. In Q3, Hercules delivered its 10th consecutive quarter of over $100 million of quarterly core income, which excludes the benefit of prepayment fees or fee accelerations from early repayments. Despite the declining rate environment that we are now operating in, we were able to achieve 122% coverage of our quarterly base distribution in Q3. Our continued success as a company is attributable to the tremendous dedication, efforts and capabilities of our 115-plus employees and the trust that our venture capital and private equity partners place with us every day. We are thankful to the many companies, management teams and investors that continue to make Hercules their partner of choice. I will now turn the call over to Seth. Seth Meyer: Thank you, Scott, and good afternoon, ladies and gentlemen. Our strong momentum reported in the first half of the year continued throughout the third quarter. As Scott shared, the business activity during the quarter and year-to-date has been exceptional and the record-breaking for our platform. Fundraising and investment deployment in our RIA managed funds also has been very strong, expanding the platform and scaling the business to be even more efficient. We continue to maintain strong available liquidity of $655 million as of the end of the quarter in the BDC and more than $1 billion across the platform, including the adviser managed funds by our wholly owned subsidiary, Hercules Adviser LLC. Based on the performance of the quarter, Hercules Adviser delivered a third quarter dividend of $2.1 million, which when combined with the expense reimbursement of approximately $4.1 million resulted in approximately $6.2 million in NII contribution to the BDC in Q3. With those points in mind, let's review the regular areas of income statement performance and highlights, NAV, unrealized and realized activity, leverage and liquidity, and then finally, the financial outlook. Total investment income in Q3 was another record at $138.1 million, supported by our year-to-date debt portfolio growth. Core income, a non-GAAP measure, increased as well to another record at $127.9 million. Core investment income excludes the benefit of income recognized because of loan prepayments. Net investment income was $88.6 million or $0.49 per share in Q3. Our effective and core yields were 13.5% and 12.5%, respectively, compared to 13.9% and 12.5% in the prior quarter. As of quarter end, almost 60% of our prime-based loans were at the contractual floor and thus the impact of any future rate reductions will be muted. Third quarter gross operating expenses were $53.6 million, compared to $52.2 million in the prior quarter. Net of costs recharged to the RIA, our operating expenses were $49.5 million. Interest expense and fees increased to $27.2 million due to the growth of the business and corresponding increase of leverage. SG&A decreased slightly to $26.4 million, above my guidance on the growth of the business. Net of costs recharged to the RIA, the SG&A expenses decreased to $22.3 million. Our weighted average cost of debt increased slightly to 5.1%. Our ROAE or NII over average equity increased to 17.4% for the third quarter and our ROAA or NII over average total assets increased to 8.7%. Switching to NAV, unrealized and realized activity. During the quarter, our NAV per share increased by $0.21 to $12.05 per share. This represents an NAV per share increase of 1.8% quarter-over-quarter. The main driver was appreciation of the debt portfolio as we did not utilize the ATM during the quarter and funded our portfolio growth with leverage. Our $33 million net unrealized depreciation was primarily attributable to $28.6 million of net unrealized appreciation on debt investments, $11.3 million of net unrealized appreciation attributable to valuation movements on publicly traded equity and warrant investments and $0.8 million net unrealized appreciation attributable to escrow and other investment-related receivables. This was partially offset by $5.1 million reversal of previous quarter appreciation upon a realization event and $2.6 million of net unrealized depreciation attributable to valuation movements in the privately held equity, warrant and investment funds. Hercules also experienced a small net realized loss of $1.8 million, primarily due to losses on equity investments. On leverage and liquidity, our GAAP and regulatory leverage increased to 99.5% and 83.6%, respectively, compared to the prior quarter due to the growth in the balance sheet being financed by leverage. Netting out leverage with our cash on the balance sheet, our net GAAP and regulatory leverage was 98.2% and 82.3%, respectively. We ended the quarter with $655 million of available liquidity. As a reminder, this excludes capital raised by the funds managed by our wholly owned RIA subsidiary. Inclusive of these amounts, the Hercules platform had more than $1 billion of availability -- available liquidity. The strong liquidity positions us well to support our existing portfolio companies as well as source new opportunities. Finally, on the outlook points. For the fourth quarter, we expect our core yield to remain in the range of 12% to 12.5%. As a reminder, 98% of our portfolio -- our debt portfolio is floating with a floor. And as of today, almost 75% of our prime-based portfolio is at the contractual floor. Although very difficult to predict, as stated by Scott, we expect $150 million to $200 million in prepayment activity in the fourth quarter. We expect our fourth quarter interest expense to increase compared to the prior quarter based on the year-to-date debt portfolio growth. For the fourth quarter, we expect SG&A expenses of $25 million to $26 million, and an RIA expense allocation of approximately $4 million. Finally, we expect a quarterly dividend from the RIA of approximately $2 million to $2.5 million per quarter. In closing, the steps that we took in the first half of the year to strengthen our balance sheet, continue to help us grow and scale our platform. I will now turn the call over to the operator to begin the Q&A part of our call. Brian, over to you. Operator: [Operator Instructions] We'll take our first question from Brian McKenna with Citizens. Brian Mckenna: Great. I appreciate all the detail on the business and the underlying trends and all the momentum. And I also heard your comments around the expectation to continue paying supplemental dividends moving forward. So if I look at the supplemental dividend as a percent of excess earnings above the base dividend, this has totaled about 75% to 80% for the last 2 years. So I don't want to make too many assumptions, but say you hold the line on earnings for next year, $2 of NII, you assume a similar ratio. That implies about $0.30 of supplemental dividends for the full year. So I just wanted to run that math by you and even just some bigger picture thoughts on kind of where the supplemental dividend can go into next year. Scott Bluestein: Sure. Thanks for the question, Brian. So a little bit premature for us to provide any specificity with respect to the supplemental distribution for next year. That's something that we will announce on the Q4 call in the middle of February. What I can say is, I think your math is pretty accurate and that's sort of how we think about the supplemental distribution, and that's part of the discussion that we'll have with the Board as we approach those year-end conversations. We are very optimistic based on the trajectory of the business and our expected operating performance near term, that we will be very comfortably able to maintain the base distribution and continue to provide a supplemental distribution. What that ultimate supplemental distribution is will be determined by the Board at the end of the year. But again, I don't think your math is too far off. Brian Mckenna: Okay. That's helpful. And then maybe just switching gears a little bit to credit quality. I mean if you just look at all the trends across the portfolio, I mean, they're really strong across the board. And I appreciate the detail on the 1 nonaccrual that was added during the quarter and then that obviously got resolved here post quarter end. But when you look at the portfolio, you look at your business, I mean, does anything stand out in terms of what the biggest driver of this strong credit quality is? It seems like as your platform continues to reach new levels of scale here, the underlying quality of the portfolio has gotten that much better as well. So any thoughts here would just be appreciated. Scott Bluestein: Yes. Again, appreciate the recognition, Brian, and the question. And I think the answer that I'll give today is the same answer that I would give at any point in our 21-year history, and it's attributable to our investment team and our credit team. I think we have the best team in the business on the investment side. The team is incredibly experienced. The team has been together for a long time. That team knows how to pick the right companies. We're not perfect. We've made mistakes before. We will likely continue to make mistakes, but the credit for our performance is attributable to the quality of our investment team. Operator: We'll take our next question from Finian O'Shea with Wells Fargo Securities.. Finian O'Shea: Question on the adviser. Was there a change in expense allocation that line looked a bit stronger than normal this quarter? And I guess, if not, am I right? Was there some one-off that drove a higher number? Seth Meyer: Yes. No. Thanks, Fin. There's no change in the allocation per se, but it does change as the level of originations occur. And as the AUM continues to go up in the funds, it will continue to increase, but no fundamental change at all in the allocation. Finian O'Shea: Okay. So is it safe to say it drifts. I know in the past, we framed it as a percent of other G&A. I think it really ties to origination. Is it the growth of the RIA -- and you have similar guidance for next quarter as well, it sounds like on the allocation. Is it growing? Seth Meyer: I would say this, Fin. So it is 2 parts. It is the base of the amount of AUM compared to the entire platform. That is part of the allocation. And then the amount of originations will create a little bit of volatility to that calculation every single quarter. Finian O'Shea: Okay. That's helpful. Can you talk about, I guess, Scott, high level, there was a lot of incumbency this quarter, less on the new portfolio company, borrower front. Any -- I think you maybe tie in with you're kind of projecting continued strength there. Any sort of change in the portfolio mix incumbency versus new going forward? Scott Bluestein: Sure. Thanks, Fin. No real change. I would sort of note 3 specific things. Number one, we are continuing to see pretty broad-based strength across our existing portfolio with respect to performance milestones and the achievement of specific things that we underwrite to. As those companies perform, they unlock additional capital availability and that's why you saw higher than typical funding for the portfolio in Q3. Second thing that I would note is that, frankly, we saw some better opportunities to deploy capital into the existing portfolio in Q3? And then the third thing that I would note is we still had very strong pure new business origination. We added 7 new companies, which is on the low end of what we typically do, but it was still strong for Q3. We focused on the new business, new borrower side on quality scaled originations. And my comments on sort of the pipeline activity and what we saw in terms of frothiness in the market, I think, speaks to the fact that with respect to some of the new deals we saw during the quarter, we were just passing or bidding very conservatively on the vast majority of those transactions. Operator: We'll take our next question from Crispin Love with Piper Sandler. Crispin Love: I have a credit question as well, but just asked a little bit differently. In recent weeks, definitely been a pickup in credit anxiety just given some loans at banks, some being fraud related and then it seems that private credit and BDCs have been swept up in the media surrounding all this. So first, can you just share your views on this and kind of what you've been seeing, your outlook and then just how competitors have been behaving? Scott Bluestein: Sure. So pretty broad question, but I'll respond to it with the following. I think what has made Hercules unique and what has allowed us to outperform virtually every competitor in the BDC market for the last several years is the fact that we have been incredibly consistent and conservative with respect to underwriting credit. We don't loosen our standards or get more aggressive in very strong markets. We don't change our stripes if others are doing things that we don't think are prudent. And I think that consistency, that cautious approach has served us well and will continue to serve us well. Second thing that I would note is that we have not seen any material deterioration in the credit performance of our portfolio over the last quarter, and that would include quarter-to-date post quarter end. We are continuing to see relative strength in terms of the numbers and the metrics that we monitor on a pretty continuous basis. And our outlook with respect to credit remains positive. Crispin Love: Great. I appreciate the color there. And then just given recent rate cuts and the forward curve, can you just share how you expect net investment income to be impacted over the intermediate term? It's held up well so far and just what that could mean for NII per share and where you might see a leveling off and stabilization. Seth Meyer: Yes. I think -- so Crispin, this somewhat subtle guidance or statements that we made, the difference between at quarter end, approximately 60% of our prime-based portfolio at its contractual floor. And then both Scott and I mentioned that as of today, meaning after the rate cut this week, approximately 75% or almost 75% of our prime-based floor. So further decreases will be muted. We do provide the table in the presentation and the Q as far as what we expect further rate cuts are, for instance, a 50 basis point rate cut, we guide to about $0.05 of NII per share annually impacting, and that reflects the fact that the majority of our portfolio is at its contractual floor. So we can't be more specific than trying to model out the existing portfolio. But at the moment, it's pretty muted. Scott Bluestein: And I would just add to that, Crispin, we did reiterate, and this is guidance that is inclusive of the Fed activity this week. We did reiterate our core yield guidance for Q4 of 12% to 12.5%. So I think that speaks to our comfort level with respect to what we can continue to originate on, on the front-end side of the business. Operator: We'll take our next question from Doug Harter with UBS. Douglas Harter: Scott, just hoping to drill down a little bit more on your comment about some of what you're seeing in the pipeline of -- or not the pipeline in the market on kind of frothiness. Is that on structure of deals? Is that on valuation? If you could just kind of drill into that, what you're seeing that kind of caused you to pull back a little bit from those things? Scott Bluestein: Sure. I think it's 2 things. It's mainly structure and funding amounts and not necessarily tied to yield. What we've seen over the last several quarters is that a handful of market participants have been incredibly aggressive with respect to underwriting deals that from a leverage perspective or from a commitment to value perspective, exceed what we think are prudent underwriting parameters. The second thing that we've seen recently, and this would probably be over the last quarter or 2, there continue to be a handful of deals getting done in the market where there's just not a lot of structure in terms of how those deals are being put together. We think structural integrity is critical to success long term in this business. We, as a firm, have 0 interest in driving short-term portfolio growth by booking credits that will not age well. And so we're just operating the way we've historically tried to operate with a conservative approach to credit, being aggressive where we see spots of opportunity, and we think that's going to serve our shareholders and stakeholders incredibly well going forward. Operator: We'll take our next question from John Hecht with Jefferies. John Hecht: Another good quarter. Congrats. First one, I mean, I guess these are sort of both kind of industry level kind of questions. Number one is, there's just increasing concern on legacy software companies because if they weren't developed with AI in mind, then they could get disrupted very quickly. I'm wondering your perspectives on that. And if you could talk about your portfolio of that type and how it is kind of positioned for the AI revolution? Scott Bluestein: Sure. Thanks for the question, John. One of the more interesting aspects of our business and depending on how you look at this, it's either a positive or a negative is the fact that our duration on the portfolio side is really short. Over the last 21 years, our duration on the loan book has been somewhere between 15 and 24 months. Right now, the duration is right around 18 months. So for us, when we talk about legacy companies, these are not companies that are generally very old in terms of borrowers for Hercules. And when we think about the question that you just asked, we think that's a significant positive because our portfolio is turning every, generally speaking, 1.5 years. We do not have a lot of legacy companies that really haven't been able to benefit from the AI revolution that we've seen over the last year or 2. We built in AI analysis into our underwriting, the deals that we have booked over the last 12 to 24 months, how these companies are using AI, how these companies can be impacted positively or negatively from AI has been a part of our underwriting thesis. So I think it's certainly something that we're watching closely, and our credit teams are doing a great job at monitoring that. But we feel pretty good about how our portfolio is positioned with respect to what we're seeing across the AI landscape right now. John Hecht: Okay. And then another kind of industry-level question. I mean you guys have seen several quarters of very strong commitment and deployment activity. Is this just a function of a growing TAM where I mean, just the venture business is growing and you're just capturing your share? Or is it that you are increasing your share? Or is it a greater propensity for the borrowers to seek debt as a solution as opposed to equity? Or is it some combination? Just interested in your thoughts about the changing marketplace. Scott Bluestein: Yes. I think it's 2 things, John. First and foremost, it is our view that we are absolutely taking market share. There's been some changes in the venture and growth stage ecosystem over the last handful of years. And I think we believe that we have on a controlled managed basis, been able to take some significant market share, which is probably the single biggest driver of the increase in commitments. I think the second element is if you look at where our platform is today in terms of scale, in terms of liquidity, in terms of diversification with respect to funding sources, all of those things have helped position us to be able to take advantage of a larger TAM with respect to potential opportunities. And then the third thing is, I think we've done a really nice job at selectively hiring new employees onto the platform that have opened up some new markets, some new geographies, some new focus areas for us, and those things have all been very accretive, which have helped drive those numbers. Operator: We'll take our next question from Christopher Nolan with Ladenburg Thalmann. Christopher Nolan: Following up on John Hecht's question, but in a different way. The Wall Street Journal today had a very interesting article talking about how JPMorgan is tokenizing which is a digital representation of asset ownership in a blockchain ledger for its private equity funds. And I know John was talking about AI, but turning that around to blockchain and how you're able to track ownership of assets and so forth. What does that represent in terms of a change in how you guys might do business, barriers to entry that venture BDCs typically had over other BDCs and so forth. Any comments would be interested to hear. Scott Bluestein: Yes. I can't comment specifically on the JPMorgan announcement because we obviously haven't dug into that yet. I can tell you that philosophically, our approach to blockchain and crypto and all sort of related esoteric assets has not changed. We do not intend to invest on the lending side directly in those types of businesses. We think there are opportunities for us, and we've done a handful of them alongside more of the infrastructure side of things and companies that are using technology to sort of facilitate the growth of those industries and currencies, et cetera. But in terms of investing directly in those areas, it's not something that we're going to do. Christopher Nolan: Yes. Actually, my question is more about your own infrastructure, whether you're using blockchain to track investments and your lean against specific assets versus others. Scott Bluestein: We are not, Chris. Operator: We'll take our next question from Paul Johnson with KBW. Paul Johnson: I was just wondering if you could talk maybe just about the unrealized gains this quarter. It looked like $29 million or so came from the debt portfolio. How much of that is just, I guess, kind of credit-specific events, things were written up. I mean it sounds like there was a positive outcome on nonaccrual. I'm not sure if that was included in there. Just how much is kind of credit specific versus kind of mark-to-market, I guess, within the portfolio? Scott Bluestein: Thanks, Paul. So $33 million approximately of unrealized depreciation during the quarter, $28.6 million of that appreciation came from the debt side. That was a combination of credit and yield related. I did make the comment about that 1 specific credit that went on nonaccrual in Q3 and was very quickly resolved shortly after the quarter. Just to give you some context of the magnitude of that change, that was a position that had a cost basis of approximately $41.5 million. In Q2, that had a fair value of $24.6 million and we wrote that up to a fair value in Q3 of $38.4 million, which reflects the actual proceeds received and ties into that $14 million outperformance relative to the fair value mark in Q2 and that I mentioned in the prepared remarks. Paul Johnson: Got it. So roughly half of the kind of debt depreciation this quarter was due to that nonaccrual? Scott Bluestein: Correct. Paul Johnson: Okay. And then just one kind of maybe more of a technical question on how PIK works within venture loans in your portfolio. When a borrower is on PIK, is it typically a PIK toggle structure? And what is kind of like the general rule in terms of the limit, like how much of the spread, I guess, are they generally able to defer under those arrangements? Scott Bluestein: Sure. Thanks for the question. So first, I would just reiterate a couple of the key points that I mentioned in the prepared remarks. I think it's critical in terms of how we evaluate PIK. About 85% of our PIK income during the third quarter was attributable to PIK that was part of the original underwriting, not the result of a credit or performance-related amendment or issue. With respect to when we utilize PIK in a new underwriting, it is generally going to be a small part of the company's overall interest, and it will generally be struggled with -- structured as a toggle future, where the company will have the option subject occasionally to certain specific milestones or performance achievements to maybe turn 1% of cash interest into 1.15% or 1.25% of PIK. There are very few deals where we have PIK that exceeds 1% or 2%. Operator: And I am showing no further questions on the line at this time. I would now like to turn the call back to Scott Bluestein, for any closing remarks. Scott Bluestein: Thank you, David, and thanks to everyone for joining our call today. We will also be attending the Citizens Financial Services Conference in New York on November 18. If you would like to meet with us at the conference, please contact Citizens or Michael Hara. We look forward to reporting our progress on our Q4 and full year 2025 earnings call. Thanks, and I hope everyone has a great rest of the day. Operator: This does conclude today's Hercules Capital Third Quarter 2025 Financial Results Conference Call. You may now disconnect your lines, and have a wonderful day.
Operator: Greetings, and welcome to the Federal Signal Corporation Third Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Felix Boeschen, Vice President of Corporate Strategy and Investor Relations. Thank you. You may begin. Felix Boeschen: Good morning, and welcome to Federal Signal's Third Quarter 2025 Conference Call. I'm Felix Boeschen, the company's Vice President of Corporate Strategy and Investor Relations. Also with me on the call today is Jennifer Sherman, our President and Chief Executive Officer; and Ian Hudson, our Chief Financial Officer. We will refer to some presentation slides today as well as to the earnings release, which we issued this morning. The slides can be followed online by going to our website, federalsignal.com, clicking on the Investor Call icon and signing into the webcast. We have also posted the slide presentation and the earnings release under the Investor tab on our website. Before we begin, I'd like to remind you that some of our comments made today may contain forward-looking statements that are subject to the safe harbor language found in today's news release and in Federal Signal's filings with the Securities and Exchange Commission. These documents are available on our website. Our presentation also contains some measures that are not in accordance with U.S. generally accepted accounting principles. In our earnings release and filings, we reconcile these non-GAAP measures to GAAP measures. In addition, we will file our Form 10-Q later today. Ian will start today by providing details on our third quarter financial results. Jennifer will then provide her perspective on our performance, provide an update on our multiyear growth initiatives and update our guidance for 2025. After our prepared comments, we will open the line for any questions. With that, I would now like to turn the call over to Ian. Ian Hudson: Thank you, Felix. Our consolidated third quarter financial results are provided in today's earnings release. In summary, we delivered strong financial results for the quarter with 17% year-over-year net sales growth, double-digit operating income improvement, a 130 basis point increase in adjusted EBITDA margin and a record third quarter order intake. Consolidated net sales for the quarter were $555 million, an increase of $81 million or 17% compared to last year. Organic net sales growth for the quarter was $51 million or 11%. Consolidated operating income for the quarter was $94 million, up $18.1 million or 24% compared to last year. Consolidated adjusted EBITDA for the quarter was $116.2 million, up $23.2 million or 25% compared to last year. That translates to a margin of 20.9% in Q3 this year, up 130 basis points compared to last year. GAAP diluted EPS for the quarter was $1.11 per share, up $0.24 per share or 28% from last year. On an adjusted basis, EPS for the quarter was $1.14 per share, up $0.26 per share or 30% from last year. Order intake was again strong in the quarter at $467 million, an increase of $41 million or 10% compared to last year. Backlog at the end of the quarter stood at $992 million, down 4% compared to Q3 last year. In terms of our group results, ESG's net sales for the quarter were $466 million, an increase of $67 million or 17% compared to last year. ESG's operating income for the quarter was $85.3 million, up $13.8 million or 19% compared to last year. ESG's adjusted EBITDA for the quarter was $104.9 million, up $17.7 million or 20% compared to last year. That translates to a margin of 22.5% in Q3 this year, up 60 basis points compared to last year. ESG reported total orders of $371 million in Q3 this year, an increase of $18 million or 5% compared to last year. SSG's net sales for the quarter were $90 million this year, up $14 million or 18% compared to last year. SSG's operating income for the quarter was $21.9 million, up $5.1 million or 30% from last year. SSG's adjusted EBITDA for the quarter was $22.9 million, up $5.1 million or 29% from last year. That translates to a margin for the quarter of 25.6%, an increase of 220 basis points compared to last year. SSG's orders for the quarter were $96 million, up $23 million or 31% in comparison to order intake in Q3 last year. Corporate operating expenses for the quarter were $13.2 million compared to $12.4 million last year, with the increase primarily due to higher acquisition and integration-related expenses. Turning now to the consolidated income statement, where the increase in sales contributed to a $21.1 million improvement in gross profit. Consolidated gross margin for the quarter was 29.1% compared to 29.6% in Q3 last year. As a percentage of net sales, our selling, engineering, general and administrative expenses for the quarter were down 160 basis points from Q3 last year. Other items affecting the quarterly results included a $1 million increase in acquisition and integration-related costs, a $700,000 increase in amortization expense, a $400,000 increase in other expenses and a $200,000 reduction in interest expense. Tax expense for the quarter was $22.4 million, up $3.7 million from the prior year, with the increase primarily due to higher pretax income levels. Our effective tax rate for the quarter was 24.8% compared to 25.8% last year. At this time, we expect our fourth quarter effective tax rate to be between 25% and 26%, excluding any discrete items. On an overall GAAP basis, we therefore earned $1.11 per share in Q3 this year compared with $0.87 per share in Q3 last year. To facilitate earnings comparisons, we typically adjust our GAAP earnings per share for unusual items recorded in the current or prior year quarters. In the current year quarter, we made adjustments to GAAP earnings per share to exclude acquisition-related expenses and purchase accounting expense effects. On this basis, our adjusted earnings for the quarter were $1.14 per share compared with $0.88 per share last year. Looking now at cash flow. We generated $61 million of cash from operations during the quarter, bringing our year-to-date operating cash generation to $158 million, an increase of $17 million or 12% compared to the first 9 months of last year. With the improved cash flow, we paid down approximately $55 million of debt during the quarter, ending the quarter with $159 million of net debt and availability under our previous credit facility of $570 million. Our current net debt leverage ratio remains low. Yesterday, we executed a new 5-year $1.5 billion credit facility, replacing the $800 million credit facility that was previously in place. The new credit facility increases our revolver to $1.1 billion and also includes a $400 million term loan facility, which is expected to be drawn down upon completion of the New Way acquisition. The new credit facility provides greater financial flexibility to invest in internal growth initiatives and pursue additional strategic acquisitions across our ESG and SSG groups. The terms of our new facility are more favorable to the company, reflecting our strong cash flow and balance sheet. This marks another important milestone for the company as we continue to execute on our strategic long-term growth objectives. We also remain committed to investing in organic growth initiatives and returning cash to stockholders through dividends and opportunistic share repurchases. On that note, we paid dividends of $8.5 million during the quarter, reflecting a dividend of $0.14 per share, and we recently announced a similar dividend for the fourth quarter. That concludes my comments, and I would now like to turn the call over to Jennifer. Jennifer Sherman: Thank you, Ian. We reported another strong quarter of results, which included third quarter records across consolidated net sales, adjusted EPS and adjusted EBITDA margin, thanks to outstanding contributions from both of our groups. Within our Environmental Solutions Group, we delivered 17% year-over-year net sales growth and a 20% increase in adjusted EBITDA with higher production levels, strong demand for our aftermarket offerings, proactive management of price/cost dynamics and contributions from recent acquisitions representing meaningful year-over-year contributors. In what is typically a seasonally strong quarter, ESG's adjusted EBITDA margin expanded by 60 basis points year-over-year to 22.5%, a new third quarter record and performance in the upper half of our recently raised ESG margin target range of 18% to 24%. Driven by continued strong order levels and an extensive pipeline of internal market share expansion initiatives, we remain focused on building more trucks across our family of specialty vehicle businesses. These efforts to improve our throughput at our 2 largest ESG facilities contributed to double-digit percentage increases in revenue across our safe digging trucks sewer cleaners and street sweeper product lines. From a capacity perspective, our access to labor remains good, supply chains are largely stable and our large-scale capacity expansions that we completed between 2019 and 2022 position us well to profitably absorb incremental volumes into our existing footprint. Additionally, within our CapEx outlook this year, we are investing in several productivity-enhancing projects, including planned automation initiatives at select facilities, including our dump truck body plant in Rugby, North Dakota and the additional incremental warehouse space at our SSG facility in University Park, Illinois. These growth initiatives will further improve our throughput efficiency within our existing facility footprint and set the foundation for future organic growth. For perspective, approximately 50% of our annual CapEx is focused on various growth initiatives with the other half focused on maintenance CapEx. Within our product lines, we saw strong organic revenue growth across our metal extraction support equipment, dump truck bodies and industrial vacuum trucks as our teams continue to execute on various strategic growth initiatives within our industrial end markets, including geographic expansion and sales channel optimization. Shifting to aftermarkets, where demand remains strong. For the quarter, aftermarket revenue were up 14% year-over-year, primarily driven by higher demand for aftermarket parts, increased service activity and rental income growth. Our teams are working to accelerate the growth of our parts businesses on numerous fronts, including the further integration of recent acquisitions such as Hog and Trackless across our aftermarket facility footprint and increasing parts capture within our existing population base. Lastly, our most recent acquisitions also contributed positively to top line results in the quarter with Hog contributing approximately $20 million of net sales and Standard adding approximately $10 million of incremental net sales. Shifting to our Safety and Security Systems Group. The team delivered another impressive quarter with 18% top line growth, a 29% increase in adjusted EBITDA and a 220 basis point improvement in adjusted EBITDA margin. This improvement was primarily driven by volume growth within our public safety and warning system businesses, proactive price/cost management and realization of certain cost savings. On that note, we successfully installed a fourth printed circuit board manufacturing line at our University Park facility in Illinois in this quarter. This addition marks the fourth PCB line installation since 2022, which allows our teams to in-source certain componentry previously sourced from Asia while providing financial and operational benefits in the form of cost savings, product quality improvements and expanded available capacity. We expect to realize incremental benefits from this fourth addition in 2026 and beyond as we scale production. Lastly, we are pleased with our cash conversion in the quarter, having generated $61 million of cash from operations, representing 90% of net income. On an annual basis, we continue to target 100% cash conversion levels, providing dry powder for organic and inorganic capital deployment opportunities. Shifting now to current market conditions. Demand for our products and service offerings remains healthy with our third quarter order intake of $467 million, representing a 10% year-over-year increase and the highest ever third quarter order intake on record for Federal Signal. As Ian indicated, our backlog declined by 4% on a year-over-year basis. As expected, approximately 85% of this decline was driven by lower orders for third-party refuse trucks, mostly in Canada. As we move forward and transition our refuse truck offerings from the third-party supplier to New Way over time, we expect our existing third-party refuse backlog to decline in coming quarters as we deliver these third-party trucks in backlog, but stop taking new orders for these third-party trucks. Additionally, we are pleased that our various throughput initiatives have improved lead times and slightly reduced backlog for a certain extended product lines. Looking ahead, consistent with our typical seasonal patterns, we are expecting orders within our Environmental Solutions Group to increase both on a year-over-year basis and on a sequential basis in the fourth quarter. To provide more detail on the composition of orders in the quarter, we are seeing particularly strong demand for our publicly funded safety and security products, both in North America and in Europe, including a major police contract win in Spain. In total, SSG orders increased 31% year-over-year, driven by strength in demand for public safety equipment and warning systems. Within SSG, we continue to target surgical opportunities to gain market share across several U.S. law enforcement agencies and are seeing success with this particular strategy. While SSG is typically not a backlog-driven business, SSG's backlog at the end of September includes approximately $20 million earmarked for delivery in 2026. Within industrial end markets, orders were led by improved demand for our safe digging trucks compared to last year. Long term, we continue to see secular tailwinds from increased adoption of hydro excavation within the United States, and we believe we are well positioned to capitalize on that secular trend. In summary, demand for our products remains strong, and our backlog for certain products provides excellent visibility well into 2026. Our teams are focused on executing on our growth initiatives, maintaining a healthy order intake and increasing production. I now want to provide an update on a number of multiyear strategic initiatives that support our through-the-cycle target of double-digit top line growth. Recall, over the long term, we expect a fairly balanced contribution between organic and inorganic growth as part of those targets. First, we are pleased with the initial performance of the Hog Technologies acquisition, which we closed in February of this year. The team has been an excellent cultural addition to the Federal Signal family, and we are excited to more fully integrate Hog next year. Financially, both Hoag's year-to-date revenue and margin contribution have exceeded our initial estimates, primarily driven by operational throughput improvements, strong demand within Hoag's airport vertical and strong aftermarket parts growth. Consequently, we now expect Hog to contribute between $60 million and $65 million of net sales in 2025, up from our previous estimate of $50 million to $55 million. As we head into next year, we've identified incremental synergy opportunities that we plan to execute in 2026, spanning operational efficiencies, including procurement, go-to-market strategy optimization across our various road marking and line removal brands, more efficiently utilizing our North American aftermarket footprint and the usage of Hog’s unique customer education technology across other Federal Signal products. As such, we see Hog well positioned to further expand its margins next year as we capitalize on more synergies. Second, we continue to invest in scaling our internal centers of excellence, which combined with our scale within the niche specialty vehicle verticals we play and help form what we internally refer to as the power of the platform. These centers of excellence span several categories such as sourcing, supply chain optimization, our Federal Signal operational system, sales channel alignment, dealer development, aftermarket support, data analytics and new product development, and we are aimed at elevating our customer experience across our family of specialty vehicle brands. The power of this platform and execution on our strategic initiatives are important components of our long-term growth algorithm as we look to drive organic growth in excess of end market growth rates. As we look ahead to 2026, we see particular opportunities to further accelerate growth through sales channel optimization and our dealer development efforts with particular geographic white space opportunities across our Trackless, Switch & Go and Ox Bodies brands. We have also identified opportunities to optimize our presence in previously underserved territories for our safe digging trucks. Third, we are highly energized to accelerate our existing build more parts initiative in coming years, whereby we are vertically integrating certain parts production in order to drive increased recurring revenue streams, higher aftermarket share and margin expansion over time. While still in early stages with less than $10 million in annual net sales, we are expecting another double-digit percentage increase in net sales resulting from this initiative this year, predominantly comprised of certain street sweepers, vacuum truck and dump truck body parts. Going forward, we see additional opportunities to expand this initiative across our other specialty vehicle categories and believe our entrance into the refuse space will present an additional untapped parts market opportunity. Importantly, given the essential nature of our products, associated high utilization levels through business cycles and stable aftermarket parts and service needs of our customers, the continued growth in the aftermarket business remains an important strategic pillar in our efforts to meet cyclicality. Lastly, we continue to expect the acquisition of New Way to close in the fourth quarter of this year, pending regulatory approval. As we indicated at the time of the announcement, we expect our pro forma leverage to be less than 1.5x at the time of closing, leaving sufficient flexibility for additional capital deployment toward M&A. Consistent with our long-term growth framework and stated M&A criteria, we are actively reviewing potential opportunities, both in our ESG and SSG groups. Turning now to our outlook for the rest of the year. Demand for our products and our aftermarket offerings remains high with our order intake this quarter contributing to a backlog, which provides us with excellent visibility for further net sales and profit growth in 2026. With our third quarter performance, our current backlog and continued execution against our strategic initiatives, we are raising our full year adjusted EPS outlook to a new range of $4.09 to $4.17 from the prior range of $3.92 to $4.10. We are also increasing our full year net sales outlook to a new range of $2.1 billion to $2.14 billion from the previous range between $2.07 billion to $2.13 billion. This outlook reflects our view of continued healthy demand for our new equipment, parts and aftermarket services. For clarification, this outlook does not include any contribution from the pending acquisition of New Way. Lastly, we are maintaining our CapEx outlook of $40 million to $50 million for the year. In closing, given that this is our last earnings call of this year, as I sit here today, I believe we are well positioned to achieve another record year in 2026 with the traction of our strategic initiatives, new product development pipeline, throughput improvements we have achieved this year and M&A opportunities. At this time, I think we're ready for questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Ross Sparenblek with William Blair. Ross Sparenblek: Just to level set on the orders really quick. What was the M&A contribution from Hog and Standard at ESG in the quarter? Ian Hudson: Yes. So Hog added, I think it's about $20 million in the quarter and Standard was about $10 million. Ross Sparenblek: Okay. And then the SSG, any FX to call out there? Is that just all organic? It's all organic, right? Ian Hudson: It was very -- FX was very nominal there. Ross Sparenblek: Okay. All right. And then maybe just dig in a little bit on the refuse trucks. I didn't fully appreciate that you guys are going to stop taking orders for the third party within your network. Can you just help us kind of frame the backlog contribution from that and then kind of expectations for margin lift going forward as those kind of step away and hopefully, New Way fill it in? Jennifer Sherman: So we're transitioning from a third-party refuse manufacturer to New Way. We've stopped taking orders. I guess I'll reiterate that 85% of the year-over-year backlog reduction was driven by the decline of third-party refuse backlog, which we expect this dynamic to kind of continue in subsequent quarters as we work through the transition from the third-party refuse OEM to New Way. The other thing I would add is it could take well into 2026 for us to do this, and this should be margin accretive over time. Ross Sparenblek: Yes. This is what I'm trying to get at, I guess, is just we should expect somewhere in the range of that 85% number over the next 3 quarters impacting orders as well. Jennifer Sherman: It will vary quarter-to-quarter, but we would expect that it would take the next 12 months to deliver the trucks that are currently in backlog. Operator: Our next question comes from the line of Chris Moore with CJS Securities. Christopher Moore: So maybe just stay with New Way for a second. I know that you guys and New Way share a number of exclusive dealers. Now that you've made the announcement, just wondering kind of what you're hearing from the dealer channel. Is there any potential negative from the combination? Or just kind of big picture, what you're hearing at this stage? Jennifer Sherman: Yes. The feedback has been overwhelmingly positive. As you stated, Federal Signal does share some dealers with New Way, but there's also a group of dealers that we don't share, and we're really excited to welcome those dealers to the Federal Signal family. And we think collectively, this gives us a lot of opportunity going forward. So really overwhelmingly positive reaction from the existing dealer channel and the new dealer channel. Christopher Moore: Got it. Perfect. And maybe just one follow-up on New Way. So we're talking about $0.40 to $0.45 accretive to EPS in fiscal '28. '26 is roughly flat. Just trying to get a sense, is that -- will it be backloaded as the integration happens? Or is reasonable to expect that '27 will share a reasonable portion of that $0.40 to $0.45 accretion. Ian Hudson: Yes. I think, Chris, we'll probably give more color on that when we close the acquisition. But I think, generally speaking, we have a synergy target number out there that we're going to be working with the teams on. And I think those will kind of be more gradual as opposed to straight out the gate. I think it's going to be more gradual with them being fully realized really by the end of that 2028. Jennifer Sherman: What I'm really encouraged by is the teams are working together with respect to post-closing initiatives. And there's a lot of energy and commitment to the plan. And as soon as we get regulatory approval and close, I think that we'll be in a position to hit the ground running. Operator: Our next question comes from the line of Mike Schulky with D.A. Davidson. Michael Shlisky: Can you maybe give us a little more commentary on the current federal government shutdown? I know that a lot of what you sell to local state agencies, but there is some support, obviously, that the federal government supply to those agencies. I'm curious whether you've seen any changes to funding or any delays with any orders or just any kind of issues that local players have been mentioning given what's been going on over in Washington, D.C. Jennifer Sherman: Yes. So as we previously discussed, last year, we did about $10 million of direct business with the federal government. That was really a military comprised of 2 things, a military contract for one of our dump body businesses and then some military installations for one of our SSG businesses. So we don't expect any kind of meaningful disruption from the federal government shutdown. And our SSG orders were strong in Q3, and we haven't heard anything that we believe would change that. Michael Shlisky: So as far as federal government supporting state and local budgets that you haven't seen any kind of disruption or changes in the funding and the actual flow of cash? -- so far? Jennifer Sherman: Yes. As you know, kind of the biggest single source of funding for us is water taxes. And then with respect to -- on the local level, there is some certain funding in terms of municipal sales tax for our street sweeper, for example, and certain trackless products. Canada is an important end market. Europe is an important end market for our publicly funded side of the business. So given that diversification and our lack of direct sales and the funding sources that we rely upon, we wouldn't expect any meaningful impact. Michael Shlisky: Okay. Great. Secondly, I wanted to ask a little bit about the broader environment for New Way. I'm a little out of breath this morning is because another large waste truck company just announced they also announced the merger. Curious whether -- I don't know if you had a chance to look at it yet. I just saw it myself for the first time a couple of hours ago. But curious whether you think one of the other players having some more cost synergies being taken out kind of makes the pricing environment a little sharper going forward maybe after that merger has been integrated over the next 12 months or so. Jennifer Sherman: Yes. So the only area that we would compete with respect to the Terex Rev merger, as you noted, would be garbage trucks. We continue to believe that New Way is extremely well positioned with its ASL product line and the Canadian opportunity through our JJE team and frankly, the strength of its municipal channel. So we believe our view hasn't changed at all since we announced the acquisition. And we continue to be excited and energized by the New Way team and the opportunities ahead. Operator: [Operator Instructions] Our next question comes from the line of Steve Barger with KeyBanc Capital Markets. Steve Barger: I know it's early for 2026 comments, but I do get a lot of questions about ESG going forward. If we just take New Way out of the conversation, do you think existing backlog and end market strength should allow you to keep the growth momentum going in core ESG, meaning everything in the portfolio right now, can you continue to drive solid top line growth? Jennifer Sherman: Yes. I mean, I believe we're extremely well positioned to achieve another record year in 2026, and it's going to be a combination of execution on the strategic initiatives, continued throughput improvements, our new product development pipeline. And we've got good visibility through our backlog for about half of our businesses. I'm encouraged by the throughput improvements that our sewer cleaning team and our street sweeping team have achieved. And our road marking business, as I talked about in my prepared comments, has a number of opportunities that we're going to be executing on in 2026. Our mineral extraction business, as I talked about in my prepared remarks, had a strong quarter. and we expect that to continue. So when I look at both the combination of the organic growth initiatives and the M&A opportunities, I feel like we're set up to achieve another record year in 2026. Steve Barger: Yes, I get it. I mean a record year seems like a lot even excluding NewWay. But I guess the question is, do you feel like some of the mid- to high single-digit organic growth momentum that you've had is still achievable just given the conditions, the backlog, the initiatives that you have? Jennifer Sherman: We remain committed to our long-term growth algorithm in terms of low double-digit revenue growth split equally between M&A and our organic growth initiatives, and we'll update this in February. Steve Barger: Got it. Yes. That's fair. And you do also have a really nice track record of margin expansion in ESG over the past few years. You've talked about '26 being an investment year for New Way specifically when that closes. Can you just talk about how you think about the pace of margin expansion going forward? Or maybe what -- does it change the algorithm for incremental margin when you think about factoring New Way in, whether it's to ESG or on a consolidated basis? Ian Hudson: Yes. I think, Steve, obviously, we have ESG margin targets that are really kind of long-term through-the-cycle margin targets. And I think when we talked about the New Way opportunity a couple of weeks back, we talked about the need to make some investments in the business. So I think I still think there's a lot of opportunity in the other areas, particularly if you think about the leverage we can get from increasing production at some of our main facilities, our larger facilities, I should say, where we have capacity, the growth in the aftermarket business, which is slightly more attractive from a margin profile. So there can be some various puts and takes as we -- in '26. But I think long term, we're still committed to that 18% to 24% margin target for the business. Jennifer Sherman: Yes. And you know us well, and you can imagine that we have extremely detailed plans. And so as we look -- we've got a '26, '27 and '28 year plans for each of those years. We would expect, as you implied, that New Way would be margin dilutive in 2026. But we feel very confident in our ability, given the synergy opportunities that exist, both on the cost and the revenue side that this business long term will run within the EBITDA target margin ranges that we've given. And we've spent a lot of time studying this. And if anything, I'm more encouraged by the planning and work that the teams are doing now for post closing. Operator: Our next question comes from the line of Greg Burns with Sidoti & Company. Gregory Burns: On the -- now the build more parts initiative you mentioned, what percent of your parts are currently in-sourced or I guess, reflecting that kind of $10 million of sales that you called out? Jennifer Sherman: Very small. There's a lot of untapped opportunity here, particularly with the addition of the refuse business. You're only group that doesn't have to go get orders. You got enough internal orders to last your lifetime. Gregory Burns: Is there like a goal in terms of kind of what percent of your parts business you'd like to kind of vertically integrate? And what kind of margin uplift is there relative to outsourcing it? Jennifer Sherman: Yes. We're still in early stages. I'm encouraged by the progress that the teams have made. We believe that as we move forward, build more parts can be multiples bigger over time. and particularly with the refuse opportunity. And I guess I'll say in kind of typical federal signal fashion, we pilot something, we get good at it, and then we start to accelerate. I think we're closing -- finishing our pilot phase. And again, a credit to that team. And we're really looking as we moved into '26 and '27 for opportunities to accelerate that initiative. Gregory Burns: Okay. And could you just give us maybe a little bit more color on where the lead times stand relative to maybe some of your larger product lines, what your expectations are for next year, given some of the initiatives you have in place? And do you expect to be able to bring your backlog down next year? Jennifer Sherman: Yes. So we talked about just reminding you the impact of the transition from the third-party refuse manufacturer will have during 2026. With respect to lead times, right now, sewer cleaners are running around 11 months. Our 3-wheel sweepers, we've made great progress and credit to the team are running in that 5- to 6-month range, which is where we'd like. And then our 4-wheel sweepers, we still have some work to do. They're running 12 to 18 months. And it really varies. Road marking equipment, we'd want again in that 5 to 6 months with some stock available. So it depends on the particular product line. But my expectation is that we would continue to reduce lead times for sewer cleaners and for our 4-wheel sweepers. Gregory Burns: Okay. And then I guess, excluding the impact of the third-party refuse trucks, do you think you could -- do you think production rates will increase next year to where you will start to bring down the core backlog? Or I know it's going to depend on order input rates and all that. But just based on what you're seeing now and what you have planned in terms of maybe capacity or production expansion initiatives, do you think that's the case? Ian Hudson: I think, Greg, we -- obviously, we've talked for a number of quarters now about wanting to increase production to leverage the capacity that's available to us. So I think that's -- the goal is to keep working those lead times down. Specifically as it relates to '26, I think we'll come back in February with the guide for '26. Jennifer Sherman: We have reached the end of our question-and-answer session. I'd like to turn the call back over to Jennifer Sherman for any closing remarks. In closing, as we enter this Thanksgiving season, I want to take a moment to thank our dedicated employees and loyal customers and dealers and distributors. Thank you for joining us today, and we will talk to you soon. Operator: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.