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Operator: Good day, everyone, and thank you for joining for today's First Capital REIT's Q3 2025 Results Webcast and Conference Call. [Operator Instructions] Also a reminder, today's session is being recorded. And it's my pleasure to turn the floor over for opening remarks and introductions to Mr. Neil Downey. Please go ahead, sir. Neil Downey: Thank you, Jim, and good afternoon, everyone. In discussing our financial and operating performance and in responding to your questions during today's call, we may make forward-looking statements. These statements are based on our current estimates and assumptions, many of which are beyond our control and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these statements. A summary of these underlying assumptions, risks and uncertainties is contained in our securities filings, including our Q3 MD&A, our MD&A for the year ended December 31, 2024, and our current AIF, which are available on SEDAR+ and our website. These forward-looking statements are made as of today's date, and except as required by securities law, we undertake no obligation to publicly update or revise any such statements. During today's call, we will also be referencing certain non-IFRS financial measures. These do not have standardized meanings prescribed by IFRS and should not be construed as alternatives to net income or cash flow from operating activities determined in accordance with IFRS. Management provides these as a complement to IFRS measures and to aid in assessing the REIT's performance. These non-IFRS measures are further defined and discussed in our MD&A, which should be read in conjunction with this conference call. And with that, I will now turn the call to Adam. Adam Paul: Okay. Thank you very much, Neil. Good afternoon, everyone, and thank you for joining us today for our Q3 conference call. We're very pleased to deliver another strong quarter of operating and financial results. It has been a great start thus far in 2025 for FCR. In the third quarter, same-property cash NOI grew by a healthy 6.4%. This excludes lease termination fees and bad debt expense. In round numbers, a little over 2% of the NOI growth was from increased occupancy and new tenants paying cash rent at One Bloor East. All other factors, which are primarily higher rents across the balance of the portfolio, contributed a little over 4% of same-property NOI growth. On a year-to-date basis, same property cash NOI, excluding lease termination fees and bad debt expense, has increased by 6%. This is a very healthy growth rate for our business. And as you've heard from Neil on prior calls, it has exceeded the expectation we had at the beginning of the year. The primary driver of this outperformance has been better-than-expected leasing. With demand continuing to exceed supply for FCR-type retail space, we expect our properties will continue to perform well. Following a record high occupancy level of 97.2% in Q2, occupancy remained solid at 97.1% in the third quarter. Our average in-place net rental rate in Q3 stood at just over $24.50 per square foot, which is an all-time high. During Q3, we renewed approximately 550,000 square feet across 146 spaces. Net rental rates in year 1 of the renewal terms averaged $27.41 per square foot representing a year 1 renewal rent increase of over 13%. Approximately 3/4 of our renewed leases in the third quarter included contractual rent escalations throughout the renewal terms. This resulted in a renewal lift of over 18% when comparing net rents in the last year of the expiring terms to the average net rent during the renewal terms. In addition to renewal leasing, we also completed approximately 150,000 square feet of new leasing at FCR share across 55 spaces. Leasing continues to be very strong. We own great assets and our leasing team's deep understanding of the strong fundamentals for our product type which I discussed in detail last quarter, positions them well to capitalize on countless opportunities for rent growth. We continue to have confidence that these market dynamics provide a very long runway for accelerated and sustained rent growth for our portfolio. We're now just over halfway through our 3-year strategic plan that we presented to our investors at the beginning of last year. At its heart, the plan is focused on delivering on 3 primary investor objectives: stability and consistent growth in FFO per unit, growth in NAV per unit and absolutely stable, reliable monthly cash distributions to our investors and growth in those distributions over time. The business continues to perform exceptionally well. So we remain on track to achieve the operating FFO per unit growth and debt-to-EBITDA metrics that are the core premise of our 3-year plan. Through the first 21 months of the plan, our operating FFO per unit CAGR, excluding several positive but nonrecurring items, is approximately 5%. We're tracking ahead on OFFO. Our debt to EBITDA has improved to the low 9s and is on track to improve further throughout 2026. We're very pleased with our results to date. And with that, I will now pass things over to Neil to expand on them. Neil Downey: Thanks, Adam. Consistent with our usual practice, we also have a slide deck available on our website at www.fcr.ca. And in my remarks, I'll make a number of references to that presentation. So let's start with Slide 6. FCR generated operating FFO of approximately $72 million during the third quarter. This compared to $73 million in Q2 2025, and it was down from $77 million in the third quarter of 2024. The prior year results were elevated by the recognition of an $11 million density bonus, which was included in interest and other income. On a per unit basis, Q3 2025 OFFO was $0.33. This was down very slightly from Q2, and it was 7% lower than the $0.36 earned in the third quarter of 2024. Excluding the 2024 density bonus income of $0.053 per unit, the FFO growth rate was 9% during the quarter on a per unit basis. So once again, we characterize the Q3 results as being very strong, with same-property NOI growth as the key driver. Now turning to net operating income specifically. Same-property NOI, excluding bad debt expense and lease termination fees was $111 million in Q3. This represents 95% of total NOI. The year-over-year growth was 6.4% or $6.7 million relative to approximately $105 million in Q3 2024. Results for the quarter also included $900,000 of lease termination income. We currently expect upwards of $1 million of additional lease termination income in the fourth quarter of this year. On a year-over-year basis, the NOI loss from dispositions was approximately $1.6 million. This relates to property sales totaling $174 million from Q4 of last year through to the end of the third quarter of this year. And finally, within other non-same-property NOI, there's a $1.3 million year-over-year decrease. $1.2 million of this amount relates to lower straight-line rent. Further down the FFO statement, interest and other income of $5.4 million was $2.5 million lower year-over-year. This is due to lower interest income on cash balances. And it's really a function of timing in the prior period. FCR carried more than $400 million of cash in the early part of the third quarter of 2024. This was in preparation for funding a $300 million debt maturity. Moving on to general and administrative expenses, which were $10.2 million. This was a 4% decline year-over-year. We've carried a handful of vacant positions this year, and we've been very focused on containing discretionary expenses. Turning to Slide 9. It summarizes the 9 months results. And here, we generated same-property NOI growth of 6%, excluding lease termination fees and bad debt expense. We expect a solid finish to the year, and as such, we believe FCR can deliver 2025 same-property NOI growth of at least 5%, which is ahead of prior expectations. Slides 8 and 9 cover key operating metrics, most of which Adam has already touched upon. And really, the theme remains quite consistent through the third quarter with continued and broad strength across our key occupancy, leasing velocity, leasing spread and rental rate metrics. Slides 10 and 11 look at various distribution payout ratio metrics. During Q3 and on a year-to-date basis, FCR's FFO and AFFO payout ratios are running in the high 60% range and the mid-80% range, respectively. Advancing to Slide 12. The REIT's September 30 net asset value per unit was $22.29. This is an increase of $0.09 from midyear and it's a year-over-year increase of $0.37 or about 2% from $21.92 at September 30, 2024. The NAV change during the quarter included a very small net fair value increase of $1 million. Now for a bit more context, beneath the surface of this net number, FCR recorded total fair value increases of $68 million related to higher NOI and cash flow assumptions. These principally related to our core multi-tenant grocery-anchored shopping center portfolio. There was also a fair value increase of approximately $8 million in the quarter related to the mark to sale price of our Anjou development site, which was sold during the quarter and 1 small other asset. These fair value increases were largely offset by $75 million of fair value losses. And really behind the losses were 2 themes: these included lower valuations for residential development properties in the Greater Toronto area and lower values for certain operating multi-res properties where market rental rates continue to be a bit soft. Turning to capital investments as outlined on Slide 13. In the third quarter, $57 million of capital was invested into the business, bringing the 9-month to-date number to $160 million. Q3 capital investments included $43 million of development-related expenditures and $14 million of leasing costs and CapEx into the operating portfolio. The most significant development expenditures during the quarter related to our Yonge and Roselawn development, the Humbertown Shopping Center redevelopment where Phases II and III are advancing nicely and our 1071 King project. It was a fairly quiet quarter on the financing front, as summarized by Slide 14. On July 31, we repaid the maturing Series S debenture, which has a principal amount of $300 million and an effective interest rate of 4.2%. The cash resources for this repayment had been raised in mid-June through the issuance of a $300 million Series E debenture. We and our partner also financed the Whitby property with a new 5-year $38 million mortgage having an effective rate of 4.7%. This financing provided cash to First Capital of $19 million. Slides 15 through 17 summarize some of the key credit metrics and the REIT's debt maturity profile. FCR is in a strong financial position. The business ended Q3 with more than $650 million of liquidity in the form of cash and availability on the 3 revolvers. The unencumbered asset pool had a total value of $6.4 billion, equating to nearly 70% of total assets and the secured debt to total asset ratio was a low 16%. FCR has only 1 debt instrument maturing in Q4 which is at the $11 million share of a mortgage on Amberlee Shopping Center located in Pickering, the maturing debt has an interest rate of 6.2%. And this Friday, we'll be up-financing the property with a new $30 million 7-year mortgage of which FCR's share is 50%. The interest rate roll-down will be approximately 200 basis points and even though there will be only a small savings in our total interest expense, FCR will generate $4 million of cash proceeds from the up-financing. Now before wrapping up my prepared remarks today, I'll make a few comments related to the upcoming special meeting of unitholders. The meeting relates to a planned internal reorganization that will simplify First Capital's structure. During the quarter, we recorded approximately $2 million of restructuring and advisory costs. And in the fourth quarter, we currently expect to incur roughly $3 million of additional costs related to the planned internal reorganization. These costs have and will be grouped with other gains, losses and expenses, and as such, they're excluded from operating FFO. In terms of time line, on October 1, the REIT Board of Trustees unanimously approved the proposed reorganization. Last week, on October 27, we announced the special meeting date which is Monday, November 24, and the meeting materials were also mailed to unitholders last week with those on record as of October 20 being entitled to vote. This is a reorganization that FCR's tax team and advisers have been working on for many months. It will be completed by way of a plan of arrangement under the Business Corporations Act Ontario with an effective date of November 30. So what does this all mean. Well, in layman's terms, the effect of the arrangement will be to flatten and simplify First Capital's organizational structure. The reorganization will be accomplished through a series of steps that ultimately see the elimination of First Capital Realty Inc. as the REIT's wholly owned subsidiary that owns directly and indirectly all of the FCR property portfolio. First Capital has received an advanced income tax ruling from the Canada Revenue Agency in connection with the steps of the arrangement. The arrangement will not result in a change to FCR's overall strategy, portfolio or operations, and there's no change to FCR's outstanding units. They continue to trade on the TSX, same ticker symbol, same CUSIP number, current FCR unitholders continue to own the same number of trust units they held before the arrangement, and there will be no direct tax consequences at the time of the reorg. Having said this, there are several key benefits from the arrangements, including, number one, simplification. The arrangement is expected to simplify First Capital's operating structure and reduce the significant complexity of legal and accounting and reporting as well as income tax compliance inherent in the existing structure. Part of the simplification will include the alignment of tax years across the REIT's subsidiary LPs, trusts and corporations. Secondly, tax efficiency. Post reorg, FCR will become a full -- fully flow-through entity holding its interest in the underlying trusts and LPs directly. This will allow income to pass to unitholders in a tax-efficient manner into perpetuity. And in this regard, the elimination of FCRI as the principal corporate subsidiary, means that substantially all of FCR's $740 million deferred tax liability will be credited to unitholders' equity through a deferred tax recovery in the fourth quarter of this year. And the third benefit relates to unitholder taxation. Beginning in 2026, cash distributions to unitholders will mirror the income profile of FCR's underlying real estate business. Since converting to a REIT in 2019, distributions to date have been effectively 100% taxable. Future distributions, however, will include taxable income but we also expect there will be some periodic capital gains distributions, which are only 50% taxable as well as a tax deferred return of capital component within the regular distribution. Any return of capital, of course, is not taxable upon receipt by unitholders. Instead, it reduces the investors' adjusted cost base in the units and therefore, defers the taxation until the future sale of those units. We, the REIT's executive leadership team, have a meaningful amount of our investable net worth in FCR units. We're financially aligned with investors, and we're very enthusiastic about the benefits of the reorganization. So this concludes my prepared remarks. I'm now pleased to turn the session to Jordi to elaborate further on FCR's recent investing and related activities. Jordan Robins: Thank you, Neil, and good afternoon. Today, I will update you on our investment, development and entitlement activities. Starting with dispositions. During the third quarter, we closed or entered into binding agreements on 3 properties with gross proceeds of $39 million. The most notable of these sales was Place Anjou, a 4.7-acre site in Montreal's East End with 2 freestanding retail buildings totaling 52,000 square feet of GLA. The $33 million sale of this future residential development, which closed in July represented a 30% premium over our IFRS value and equated to a mid-2% yield based upon income in place. During the third quarter, we also entered into a binding agreement to sell a property we own, located on [indiscernible] in Montreal. This is an IPP site tendered by an Avis car rent location. At $4.5 million, it's a small transaction of a nonstrategic FCR asset, but at a 3.4% yield on its income in place, it's a logical and an accretive sale. Closing is scheduled for December 2025. We are active on several other dispositions, and we will update you on these files as they advance. On the acquisition front, we completed the purchase of a 50% interest in an 18-acre vacant and unimproved development site located in the Ottawa suburb of Canada. Capitalizing on the property's 2 existing signalized access points and its strategic location within a major retail node, we plan to develop a large retail shopping center site. Turning to development. Phases 2 and 3 of our modernization and expansion of Humbertown Shopping Center continues. On September 30, Loblaws, whose store sits in Phase 2 of our redevelopment took possession of their renovated and enlarged 34,000 square foot premises. They anticipate opening in Q2 2026. Phase 3, which includes a newly created 20,000 square foot Shoppers Drug Mart and the Scotiabank along with a number of other to-be-announced tenants are on target for completion in the second half of 2026. On completion of the redevelopment, we will have added a total of 23,000 square feet removed all of its enclosed common area and Humbertown will look and feel like a brand-new grocery and pharmacy-anchored shopping center with anchors in ideal formats paying market rents. Looking at the associated financial returns, we will have invested approximately $45 million on this redevelopment and will generate an unlevered return that exceeds 7%. We are also redeveloping a small property that we own in Calgary, The property is located in Bridgeland, a very desirable and gentrifying neighborhood close to Downtown Calgary. The new building will be entirely occupied by Shoppers Drug Mart with a turnover scheduled in Q4 of 2025 and their opening is slated for Q2 2026. We currently have other opportunities in the planning stages, including the redevelopment of several other shopping centers. We look forward to providing in detail on this redevelopment work in future quarters. Our active mixed-use developments continue to advance as well. At Yonge and Roselawn, we remain on schedule and on budget. We own 50% of the 636-unit residential rental building with 65,000 square feet of prime retail space and serve as its development manager. The second floor slab will be completed this month and formwork is progressing to the third floor. 82% of the project costs are now awarded. Construction of our 1071 King Street West development project in Liberty Village also remains on schedule and on budget. Formwork for the 11th floor slab is underway and precast and window installation is also underway. You'll recall, we own 25% of this 298-unit, 17 story, 225,000 square foot purpose-built residential rental project, including 6,000 square feet of at-grade retail space. During this past quarter, residential occupancy commenced at our Edenbridge condominium development, which forms part of our residential inventory. Possessions have gone very well. To date, 124 owners of the 187 units sold have been given possession with 1 purchaser in the fall. Turning to entitlements. In 2025, we anticipate that we will receive approvals for 2.9 million square feet of incremental density at share. This year, we also expect to submit rezoning applications for a further 1.6 million square feet of incremental density. To date, netting out the density we've already sold, we've submitted for entitlements on approximately 18 million square feet of incremental density. This represents 77% of our 23 million square foot pipeline. As the entitlements are secured and encumbrances removed, we plan to monetize its value through the sale of 100% interest like we did in Montgomery and Anjou or a partial sale to a strategic partner like Yonge and Roselawn. We look forward to sharing further details with you as we advance. Thank you for your time today and your continued support of FCR. And with that, operator, we can now open it up to questions. Operator: [Operator Instructions] We'll take our first question today from the line of Lorne Kalmar at Desjardins. Lorne Kalmar: On the disposition side of things, there was obviously a little bit of progress made this quarter. But there's still a decent amount of wood to chop in 2026. As we sit here in November, I guess, is achieving the $750 million target, and I guess, more importantly, the low 8x leverage target by the end of '26 still feel realistic? Adam Paul: Lorne, it's Adam. Well, short answer is yes. Agreed some wood to chop, always some wood to chop. Just for your reference, one of the things we do, do every quarter is review all of the key metrics outlined in the 3-year plan. And as you saw, I think it was a couple of quarters ago, we had a couple of changes versus what we presented initially and so we updated it. So what you should expect is that if we do expect changes to occur regardless of what they are in terms of the key metrics that we've outlined, we will be updating that on a quarterly basis. So where we sit today we're a little over halfway through the 3-year plan, metrics like same-property NOI, operating FFO tracking ahead of plan. . Our view is debt-to-EBITDA is tracking on track relative to where we thought we'd be, dispositions based on the $750 million, again, a little over halfway through time-wise. Similarly a little over halfway through of the $750 million. We're about $400 million of what's closed or been announced as firm. So yes, the disclosure that we've got out is very current and at this point, we believe we will meet the objectives that we played in. Lorne Kalmar: Okay. Fair enough. And then maybe just sticking with this. I think you guys listed a couple of Yorkville assets not too long ago. Just wondering if there was any update on how investor appetite and how that is progressing. Adam Paul: Yes. So normally, Jordi would answer this, but he's in the middle of a process, like right in the middle of the process. So the only thing we're going to say today about it is exceptionally high-quality assets. We require a significant premium to sell them. Otherwise, we're happy to keep them and grow their NOI and their value but we don't have anything further to report today on those assets. Lorne Kalmar: Okay. Fair enough. And then just lastly on the, I guess, slightly revised same-property NOI target I mean, I guess, 2% next quarter gets you to 5%. Is there anything you're seeing out there that would indicate 4Q would be meaningfully below what you guys been able to do year-to-date? Or are you just erring on the side of being conservative? Neil Downey: Well, Lorne, to be precise, I said at least 5%. So it doesn't have to square up to your 2% interpolation, that's for sure. The bottom line is we perceive very solid results around the fourth quarter. I can't tell you that they'll match the 6% that we've been able to lay down for the first 9 months of the year. But I think you'll -- they'll stack up quite well versus our peers. Operator: Next question will come from the line of Mark Rothschild at Canaccord. Mark Rothschild: And looking at the same property NOI growth, which is clearly strengthened, looking out longer term, I'm not asking for guidance or anything, but how does the slowing population growth impact the type of rent growth you can get at your properties or with the location of your properties? Does it really impact the ability of the retailers to drive sales growth and pay higher rents? Adam Paul: Mark, thanks for the question. Short answer is no. The main reason is that from our lens, the fundamentals that we have today are underpinned by 7 to 8 years of activity. And over those 7 to 8 years, we have seen a significant increase in the population within the trade areas of FCR properties and we have seen almost no supply of our product type during those 7 or 8 years to service those -- that growth in customer base for our tenants. And we've gone through a period now where sales across our tenant base have grown at a higher rate as a result of inflation and just as importantly, across our tenant base, the general norm is that profit margins have been protected. And so that means that every store we have is making more profit than it used to meaning they can afford to pay more rent than they used to. So we believe that what's going on now with respect to store expansion is a catch-up phase over the last number of years. And so I can tell you discussions, live discussions with tenants today are very robust. And just as optimistic and aggressive as they have been over the last several quarters. So we see a lot of future runway for sustained growth. notwithstanding the change in the federal government's integration policy and what the impact will be on population, and we're looking forward to capturing the benefit of that opportunity. Operator: Next question comes from Sam Damiani at TD Cowen. Sam Damiani: Just on the renewal spreads in Q3, a little bit moderated from the record piece in Q2. Was there anything different or anything that was unexpected, surprising in Q3 that led to that result? And I guess a similar question in terms of how you're thinking about Q4 and 2026 leasing spreads. Is there anything idiosyncratic that might impact the average in any given quarter or next year? Adam Paul: Yes. Thanks, Sam. So look, posting up 13.5% year 1 renewal spreads north 18% blended. We're thrilled with that. That works very well for our business. So we wouldn't view it as moderated. As you know, our long-term average is lower than that. So I feel like we've kept pace with the trend that's been established over the last several quarters. So very happy with those results. And yes, generally, we expect above average -- certainly above our long-term average, continued growth. Touching on 2026 expiries, so there's nothing out of the norm with the exception that in most years, we have a small amount but an impactful amount of very low rent space that's maturing, call it, single-digit net rent space, most notably occupied by Walmart. And so if you look at our 2026 expiries, well, I guess if you look at our 2025 expiries and where they were heading into the year, what you saw was an average rent expiring at about $22 a square foot. If you exclude that low rent space, I'm talking about like the Walmarts, it averaged about $27 a square foot. And so that's kind of the -- that's the baseline for where we're delivering these low double-digit renewal spreads. If you look at 2026, our average expiring rent is about $27. We view that as a very normal year. And the reason it's normal is that we don't have any Walmarts expiring in 2026. So other than that nuance, which I know last quarter, 1 of your peers asked a question about it. And so we wanted to take the opportunity to more directly answer it. But other than that, we expect a very normal expiry year next year. Sam Damiani: Okay. Great. That's helpful. And last 1 for me, just on Deidsbury Road in Ottawa. I meanJordan, if you can provide little bit of color about what you're planning to build there, what kind of leasing interest you have already and zoning and credit line approvals in place are expected to be so... Jordan Robins: Sam, thanks. In terms of what we're planning to build, I touched on it a bit in my formal remarks. It's, call it, a conventional unenclosed shopping center at this stage with respect to tenancy, very preliminary. We've had interest based on a very small period of time for which we've owned the asset. We've got some planning work to do and in that regard, we'll keep you posted as advances, but we like the site a lot and we like where it's located. Adam Paul: Yes. The only thing I'd add is a $10 million for 18 acres, we've got a lot of optionality. Operator: We'll hear next from the line of Mario Saric at Scotiabank. Mario Saric: I wanted to stick to the leasing discussion, commented, we just talked about 26. 'And if I may, I know '27 is quite far out there, but you do have 14.5% of your total GLA expiring in '27. I was curious if there was anything within those maturities. So that may be a bit anomalous with respect to kind of low rent renewals, any known vacancies, anything kind of any idiosyncratic that may drive a blended lease spread that might be different than what you've been doing over the past 12 months. Adam Paul: Yes. Thanks for the question, Mario. So short answer is no. Nothing different as we look ahead other than what I mentioned. We don't have any really low rent, but Walmart spaces expiring next year, which when you park that aside, we look at it as a normal expiry year, no major tenants that we believe are going vacant. Strong, strong leasing environment. So happy to lease space. Certainly hope there is a little bit of turnover, the rate turnover, which is what we expect. Wouldn't read too much into 14.5% expiring in 2027. That's not abnormal looking out this far. I can assure you that in a year's time, we will not be having 14.5% of our space maturing in 2027. Some of that is already under negotiation. But we typically have between 10% and 15% maturing in any given year. And certainly from our perspective, when we look 2026, 2027, we don't see anything out of the norm, and we expect to continue to benefit from a very strong leasing environment. . Mario Saric: Got it. Okay. And then, Adam, I think you mentioned 75% of leasing completed this quarter included contractual annual escalators. If we sit back and look at the entire portfolio today, and that number has been increasing over the past couple of years for your entire portfolio today, if we were to exclude NOI growth on blended lease extensions or lease spreads, just the contractual rent growth in the portfolio today, what would that amount to from a same-store NOI perspective? Adam Paul: So I'll have Neil address that one. But just for clarity, what I said in my prepared remarks is 75% or 3/4 of the renewed leases have embedded contractual rent steps throughout the renewal term that does not necessarily mean every single one of them has an annual step. Neil? Neil Downey: Yes. So Mario, you can look at the business as having a contractual growth rate between 1% and 1.5% of the NOI line. And that's generally been the historic range. And I would say today, we're gradually gravitating towards the higher end of that bound. Mario Saric: Okay. Great. And my last question, just with respect to the 3-year plan that you announced that you're executing on, at what stage can we expect a 3-year plan to be rolled forward to include 2027? Neil Downey: Well, we're in year 2 too, yes. Yes, no, you're not the first person that's asked us that. So we're -- and we appreciate people are eager to look that far ahead. From our perspective, from what we're prepared to talk about right now is the fact that we're in -- we're still in our second year of the 3-year plan. And we very much look forward to addressing the investment community and the analyst community with where we're heading beyond 2026. It will be -- we will do that during the final year of the 3-year plan and likely during the first half of that year. So sometime in the early to mid part of next year. Operator: Our next question comes from the line of Pammi Bir at RBC Capital Markets. Pammi Bir: Just with respect to -- from a development standpoint, can you remind us how you see development spending through 2026? Neil Downey: Yes. So the way you should look at it is that we are on track for roughly $160 million, give or take, this year. And we have laid out in our 3-year plan, the total number that we expected for the 3 years. So I think from that, you can do a pretty simple rough plug, if you will, for 2026. And more specifically when we come out with our fourth quarter results in February. At that point, we'll be in a position to give you, I'll say, more targeted views on our expectations for the calendar year. Pammi Bir: Okay. That kind of leads into my next question, which is around capitalized interest as some of these developments are delivered as part of that 3-year plan, including the condos, not sure if you're prepared to provide any sort of visibility on what the capitalized interest should trend down to in 2026. Neil Downey: Well, candidly, I don't have those numbers at my fingertips, which I hope that doesn't surprise you. But I would say in very generic modeling terms, you could probably decapitalize interest through a -- proportionate to the value space that's delivered. So I think that's a simple way to think of it. And that's rather -- that's agnostic to whether it's residential inventory being delivered or its investment properties being delivered. Pammi Bir: Okay. And then just lastly, on Edenbridge, it sounds like the closings are going quite well. I think you mentioned only 1 default if I heard correctly. But are you anticipating sort of that pace to pick up over, I guess, from what we've seen in the last, I guess, through or what we'll see through Q4 and into 2026? Jordan Robins: When you say pace to pick up, you're referring to the default? Pammi Bir: Yes. I think you said -- I can't remember the exact number in terms of closing. Jordan Robins: It was one. Yes, it was one. Pammi Bir: Yes, only one default. Jordan Robins: I would say, Pammi, this is Important to point out like this is an entirely owner-occupied building. The majority of the buyers have to live in the neighborhood today. They love the neighborhood, they want to stay in the neighborhood. We've sold, as I think I mentioned, 90% of the 209 units to date. And we expect that no major deviation from the pace that we've experienced certainly based on the first 124 deliveries. Neil Downey: Right. So those suites will continue to be delivered through year-end and into early Q1. And at that point, we'll have a closeout process where we turn ownership or time over to the owners and we effectively book the sales. So that's the way to think about the 90% that's sold, Pammi. Pammi Bir: Got it. And then just lastly, on 400 King West, I think some of those closings should start next year as well. Is the assumption there that based on what you see today, I guess it might be early, but that the default rate would be similarly low there? Or is that less owner occupied? Jordan Robins: Ami, it's Jordi again. Yes, I would say that building is, in fact, less owner occupied, I would say it's more, call itconventional. That being said, we've sold 97% of the units there, we have sold the majority of those units before really pricing peak. So we feel pretty good about its prospects going forward. I would suggest the default rate there will likely be higher, but it's not something that we're especially concerned about . Adam Paul: Well, it can't be lower. Operator: We'll move on to the question from Matt Kornack at National Bank Financial. Matt Kornack: Just wanted to quickly turn back because presumably in the '25 remaining lease amount, there is either a Walmart or a similar type tenancy in that figure. Is that subject to a fixed renewal rate? Or would that go to market in the remainder of the year? Or is it going to [indiscernible]. Adam Paul: You're talking remaining 2025 lease expiries? Matt Kornack: Yes. Adam Paul: Yes, there's no major fixed rate flat option, if that's what you're asking. Matt Kornack: Okay. So that you could have a pretty sizable spread then if you're getting 20% -- high 20s versus the 18% that's maturing? Neil Downey: Correct. Yes. I mean, Matt, the only thing I would say is, as you get into the final quarter or any individual quarter, of course, the sample size is smaller. So a 40,000 square foot space is more impactful than 100,000 square foot space on a 12 month of inventory roll. Matt Kornack: Fair enough. And then I guess, just in terms of the building blocks, we understand lease renewal spreads, your retention rate is very high. You're getting more of these annual rent escalators in the blend. But is there anything that you're gaining on kind of efficiencies, recoveries or anything tangential to that, that would boost the NOI growth a little bit again on the margins probably not that much, but.. Adam Paul: Yes. Well, it's something that our leasing team has been very focused on for quite some time, and they've done a great job over the last couple of years of anywhere between 50 and 100 leases where the recovery methodology has been less than proportionate share, and they've taken it generally to proportionate share which did not come through our lease renewal rates, that's strictly on net rent. So One of the things that is now cumulatively starting to augment the NOI growth is just better tenant recoveries on operating costs. I don't have the numbers to quantify specifically where you would put it to the building block, but it's starting to chip away and make a contribution. Matt Kornack: Okay. Interesting. Last 1 for me. I mean we've heard kind of land values in Toronto, Vancouver, under some stress, given the condo market. When you look at transactions today or other people look at assets, how are they thinking about the value of density at the end of the day versus obviously, at an implied cap rate where you are, that's probably the value of the retail, but does it make sense to sell if in the future density is going to be worth a lot more. Adam Paul: Well, if we had a strong view on that, the answer is no. We wait to sell when it was worth a lot more. Jordi and his team have done a great job in a really tough market. to sell density in Montreal and Toronto at prices that we're very comfortable with and obviously don't feel like we're leaving a lot on the table. This has never been a fire sale. And if you look at our premium to net asset value on the stuff we've sold, it's been remarkable. It's been much better than we expected. And so we'll continue to take that disciplined methodical, tactical approach. And we own great real estate, even though we're selling it, we still understand the quality, and we will make sure we sell it at the appropriate time for the appropriate price. Operator: Our next question today will come from Mike Markidis at BMO Capital Markets. Michael Markidis: Quick question for me, technical in nature. Apologies. Just on Eden Bridge, I guess you're starting to residents are in occupancy, but you're not looking any inventory gains that might be in contrast to what we've seen elsewhere. Just to confirm, I guess, 2 questions on me, you won't book inventory gains until you register the units as condos [indiscernible] and number two, is with respect to Pammi's question on the decapitalization. Is there construction lines tied to that project and has, of course, effectively pay that down and therefore comes in the point. Neil Downey: Okay. Well, the short answer is yes and yes. So we will look at as closings, and therefore, the residential profit, if you will, will occur at the time of closing in Q1. And there's a significant cash repatriation from those sales processes, of course, but a lot of that goes directly to pay the construction loan. Now as you know well, Mike, the market doesn't do a particularly good job of differentiating debt within our capital stack. In other words, it treats a construction loan on a condominium project the same way it treats an unsecured debenture that's been used to finance the income portfolio. So if we pay down the construction loan, our net debt balance decreases. Michael Markidis: Right. Okay. No, I got that. And then can you just remind me from a -- just from a time to how you're going to report for consensus and all that fun stuff. Are you going to book the condo gains in OFFO? Or are you going to exclude it from OFFO? Neil Downey: A good question. So it will be included in OFFO. But importantly, we benchmarked ourselves in terms of our 3-year plan to OFFO prior to any condominium profit. So that was the baseline on which we gave that 3-year guidance of average annual -- or growth averaging at least 3% in FFO per unit was excluding any condo profits. Operator: And also, we'll take a follow-up from Lorne Kalmar. Lorne Kalmar: Sorry for having to get back in here. I just had 1 quick follow-up on Toys "R" Us. There's been a lot of chatter about a potential bankruptcy there. Just wondering if you've taken any provisions related to them and if you have plan if you do, in fact, get the space back. Jordan Robins: So we really -- it's Jordi by the way, Lorne. We don't have anything to add, but what's really in the pump of domain. Our exposure to toys is really small, represents just under 0.4% of our rent. We had previously sold Anjou, which had toys in it. They recently closed another space that we own half of. So we have 2 remaining Toys locations, and they're current in their rent at both. Toys really in both these cases, pays below market rents, and they're located in very high demand centers, 1 in Toronto, 1 on Island in Montreal. We feel, to the extent we get them back, very confident about our ability to backfill them. And really, in the case of the Montreal property, it lends quite favorably to a grocery store, and we expect we'd be focused on that opportunity in particular to the extent this space does come back. Operator: Ladies and gentlemen, that was our final question in the queue for today. I would like to thank you all for taking time to join today's First Capital REIT's Q3 2025 Results Webcast and Conference Call. We thank you all, and we hope that you enjoy the rest of your day.
Operator: Good morning, and thank you for standing by. Welcome to Stella-Jones Third Quarter of 2025 Earnings Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded on Wednesday, November 5, 2025. I will now turn it over to David Galison, Vice President, Investor Relations of Stella-Jones. Please go ahead. David Galison: Thank you, Ina, and good morning, everyone. Earlier this morning, we issued a press release reporting our results for the third quarter of 2025. Along with our MD&A, it can be found in the Investor Relations section of our website at www.stella-jones.com as well as on SEDAR+. As a reminder, all figures expressed on today's call are in Canadian dollars unless otherwise stated. Please note that our comments made on today's call may contain forward-looking information, and this information, by its nature, is subject to risks and uncertainties. Actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please consult the company's relevant filings on SEDAR+. The documents are also available in the Investor Relations section of Stella-Jones website at www.stella-jones.com. Additionally, during this call, the company may refer to non-GAAP measures, which have no standardized meaning under GAAP and are not likely to be comparable to similar measures presented by other issuers. For more information, please refer to the company's latest MD&A available on Stella-Jones website and on SEDAR+. Lastly, we have prepared a corresponding presentation, which we encourage you to follow along with during this call. I'll now hand the call over to Éric Vachon, President and Chief Executive Officer of Stella-Jones, for a strategic business update, followed by Silvana Travaglini, Senior Vice President and Chief Financial Officer of Stella-Jones, who will provide a more detailed financial overview of the quarter. Éric, over to you. Eric Vachon: Thank you, David. Good morning, everyone, and thank you for joining us today. First, as some of you who are joining us virtually may have noticed, Stella-Jones recently unveiled a new brand platform. This includes not only a refreshed look and feel, but also an updated brand positioning to make Stella-Jones the backbone of solid infrastructures for stronger communities across the continent. We are thrilled with this new brand platform, which aligns seamlessly with our focus on building a strong, agile business and on being a partner of choice to our infrastructure customers. Our results reported today reflect another successful quarter, supported by the continued strong execution across our businesses. Our Q3 results benefited from the organic sales growth of our pressure-treated wood businesses as well as the contribution of our steel structure division, formerly known as Locweld. Particularly noteworthy is the continued improvement in volume momentum for utility poles. We remain encouraged that this positive trend will continue and be sustained going forward. Although railway ties sales did not increase as anticipated, the company generated more EBITDA and maintained strong EBITDA margins and cash flows. This allowed us to reduce our leverage to 2.2x and further enhance our financial flexibility to support ongoing strategic initiatives. The integration of our steel structures product category into our business and operational investments into the production capacities are well underway, having committed the majority of the planned $15 million capital. We remain on track to complete the expansion by mid-2026, with production ramping up in the second half of the year. We remain well positioned as quoting is very active for long-term contracts to fill the expanded capacity for major North American transmission projects. Consistent with our focus on creating long-term shareholder value, we were pleased to announce the closing of the Brooks acquisition, which further expands our product offering as we leverage our extensive sales and distribution network to better support the needs of our utility customers. This acquisition provides us with a presence in the wood distribution crossarm and transmission framing component markets, aligning with our vision to make Stella-Jones a partner of choice to our infrastructure customers. We look forward to welcoming into our team the group at the Brooks facility as we continue to focus on enhancing growth through acquisitions as a cornerstone of our value-creation strategy. I'm pleased to share that we published our latest ESG report in September, highlighting meaningful progress in our sustainability journey across the organization. Notably, we obtained limited assurance of our Scope 1 and Scope 2 greenhouse gas emissions, an important milestone in our commitment to transparency and accountability. We also advanced on our GHG reduction road map, launching several impactful projects aimed at lowering emissions throughout our network, such as the integration of heat recovery events or real-time energy monitoring at select facilities. I want to thank our team for their dedication and hard work in driving these initiatives forward and helping us build a more sustainable future. I will now turn to a performance overview of our main product categories starting with utility poles. As you are aware, a large part of our business is contractual, and our strong network and focus on quality have helped us secure additional contracts, which we are now starting to benefit from. Our volume growth this quarter is coming from these new contracts while we continue to see softness in the spot market. Given the additional industry supply, the slower demand has continued to impact spot pricing, which have remained below levels realized in 2024. For the full year, our utility pole sales growth outlook is expected to be in the low-single-digit range versus 2024. The pipeline of opportunities for volume growth in the utility pole business remains strong and continues to be key for Stella-Jones. While the pace of investments will continue to be influenced by our customers' capital deployment strategies, we have positioned the business well to benefit from meaningful investments required by utilities to replace aging infrastructures and increasing grid resiliency. For railway ties, volumes in the third quarter continued to be impacted by a Class 1 customer treating their railway ties internally as well as a lower-than-expected increase in commercial volumes. While commercial orders have been helping close the gap in volumes, delays in certain project starts are pushing deliveries into next year. As a result, we now expect the larger volume shortfall to act as a headwind for the remainder of the year, and we are now forecasting a mid-single-digit year-over-year decline in railway ties. Despite the lower volumes, our teams have worked diligently to improve margins and profitability. Once we reset this year with the lower external purchase from our Class 1 customer, we continue to expect our railway tie business to achieve a low-single-digit sales growth. We remain confident that we can leverage our upcoming Class 1 contract renewals and our customer relationships to develop potential solutions addressing the evolving needs, allowing us to capture a larger share of the industry's volume. The residential lumber business performance was solid with similar quarterly volumes as last year and better pricing in response to higher cost of inventory. In the fourth quarter, we will be focused on building inventory and working to support customers as we see good momentum going into 2026. We continue to anticipate sales in this product category to trend in the $600 million to $650 million target range over the long term. As we enter the last quarter of 2025, we are maintaining our financial objective for the year and remain confident in the long-term sales growth trajectory of our infrastructure product categories. The disciplined execution of our strategy will serve us well as our team remains engaged and dedicated to delivering strong customer and shareholder value. With that, I will ask Silvana to provide a more detailed overview of our third quarter financial results. Silvana Travaglini: Thank you, Éric, and good morning, everyone. Sales for the third quarter were up 2% organically compared to the prior year quarter, driven by higher infrastructure volumes, primarily for utility poles. Including the contribution from the Locweld acquisition, total sales were up 5%, or $43 million, compared to Q3 last year. Led by higher volumes, EBITDA increased to $171 million, and we continued to deliver a solid EBITDA margin of 17.8%. For utility poles, we generated $480 million in sales in the third quarter, up from $448 million in the same period in 2024. The pace of purchases of some utilities improved, and we benefited from new contracts secured last year. Volumes in the quarter were up 5%. Partially offsetting these volume gains was a 3% decline in pricing, largely driven by ongoing pricing pressures in the spot market. Our utility poles sales also benefited from a full quarter contribution and better-than-expected sales volume from our steel structure business, whose results are reported in the utility poles product category. Sales of railway ties were up $6 million this quarter to $211 million, all attributable to better pricing. Commercial volumes were higher this quarter, but not enough to offset lower Class 1 volumes, which continued to be negatively impacted by a Class 1 customer now treating railway ties at their company-owned facility. Despite relatively unchanged volume, pricing for ties improved by 2%, supporting margins in the quarter. Residential lumber sales increased to $201 million in Q3 2025 compared to $191 million in the third quarter last year. The increase reflects higher pricing supported by elevated inventory costs from purchases made earlier in the year. Demand levels were largely unchanged from the same period last year. Turning now to profitability. The business continued to generate strong EBITDA and EBITDA margin, reflecting the resilience and strength of our business. EBITDA in Q3 rose by $9 million to $171 million, largely explained by higher sales volume, partially offset by lower pricing, particularly for utility poles. EBITDA margin came in at 17.8% for the quarter and 18.5% year-to-date, excluding an insurance settlement gain. During the quarter, cash generated from operating activities was $198 million compared to $186 million in Q3 last year. Strength in cash generation benefited from a reduction in inventory as we continued to focus on optimizing inventory levels. We expect to end the year with lower inventories. Our prudent and balanced approach to capital allocation provides us with the financial flexibility to pursue strategic growth opportunities as well as return capital to shareholders. Over the last 12 months, we generated cash from operations of over $500 million, allowing us to invest approximately $90 million in our business, acquire Locweld, and return approximately $145 million to shareholders, with the remaining capital used to reduce our net funded debt. As of the end of September, we had returned $454 million to shareholders out of the $500 million committed for the 2023 to 2025 period through dividends and share buybacks. And yesterday, our Board of Directors approved a quarterly dividend of $0.31 per share. Our business is highly cash generative, and we continue to view share buybacks as a valuable capital allocation tool, which is why our Board of Directors had the confidence to authorize a new normal course issuer bid for share purchases for the upcoming year, which we announced in a dedicated press release earlier today. Stella-Jones is authorized to repurchase up to 1.5 million common shares for the period starting November 14, 2025, and ending November 13, 2026, representing approximately 2.7% of the common shares outstanding. We ended the year with $780 million in available liquidity and a net debt-to-EBITDA ratio of 2.2x, down from the 2.4x at the end of last quarter. In summary, we are pleased with our results for the quarter, which highlight the breadth of our network as well as the strength of our business and of our teams. Our healthy financial position and strong cash-generating ability allows us to continue moving our value-creation strategy forward with both organic and inorganic investments. Stella-Jones is well positioned for continued growth and success. I will now turn the call back to Éric for his concluding remarks. Eric Vachon: Thank you, Silvana. To put our results in perspective, we had a very good quarter as stronger utility pole volumes helped offset lower-than-expected railway tie volumes and margins remain strong overall. We generated good free cash flow and lowered our leverage while continuing to invest in our business. As we move into the final quarter of the year, our guidance for the year remains intact, and we are encouraged by the progression we are seeing in our business. Additionally, we look forward to sharing our updated views on the opportunities ahead at our upcoming Investor Day on November 20 to be held in Toronto. Before I conclude, I would like to welcome our 2 new Board members, Renée Laflamme and Sean Donnelly, whose wealth of experience and perspective will strengthen our Board and support the company's long-term success. Renée brings over 25 years of experience in financial services and insurance with a strong track record of introducing change and innovation to create value, including digital transformation and artificial intelligence. Sean's tenure as President and CEO at ArcelorMittal Dofasco, his experience in metallurgical engineering as well as his experience on the Board of a utility company will provide valuable insights. This concludes today's prepared remarks. I will now open the line for questions. Operator: [Operator Instructions] Our first question comes from the line of Michael Tupholme from TD Cowen. Michael Tupholme: Éric or Silvana, there were some minor changes in the language around 2025's outlook commentary for utility poles in the MD&A. You're saying, ex-Locweld, you're now calling for marginal year-over-year growth in utility poles for the full year. I don't think the language was quite framed like that last quarter. So I guess the question is, is there a change in your views around the full year expectation for growth in poles. That marginal year-over-year growth, is that consistent with last quarter? Or has there been a bit of a change there? Just not clear to me. Eric Vachon: Thank you, Michael, for the question. So if I look back, last time we reported results, our H1 views were that we were behind in the first half of the year on volumes for utility poles and that we would have some positive momentum in that year to finish more or less flat. Now as we look at our results in the third quarter and looking at the pickup in momentum in volume demand, we think for the year we'd be slightly up. So obviously, a low-single digit in H2 that more than offsets the H1 lower volumes, if that's helpful for you. Michael Tupholme: So it sounds like a little bit of an improvement. So would that then mean you're still on track and expecting to get back to that mid-single-digit utility poles' organic growth by year-end 2025 as you had previously expected? Eric Vachon: Yes, sir. Exactly. Michael Tupholme: And then maybe just one more here on poles. I think in the commentary, Silvana just talked about the pace of purchases of some utilities improve, but there's still -- you're still calling out in the MD&A macroeconomic challenges. You did see some continued pricing pressure in the spot market. So it sounds like there's different dynamics at play, some of which are a little more encouraging and, again, then still calling out some challenges. So notwithstanding your answer to the earlier questions about a slight uptick in your expectations for the year, can you try to frame up what you're seeing in the market now and how you think about some of the things that were holding utilities back previously and the spot market pricing pressure, when we can overcome some of that and start to see more of the positive side of what you're describing really come through here? Eric Vachon: Thank you, Michael. So as a reminder for everyone, 75% of our total utility poles sales are under long-term contracts and the other 25% is in the spot market. And the dynamics that we're seeing currently in the market for pricing are in that 25% category, which is, again, the spot market business. There is still some spotty demand in certain areas in North America. There is healthy inventory levels. So we are seeing, as a whole, some pressure on pricing in the market. So that's when we compare 2024 to 2025. So far this year, if we compare the trend quarter-to-quarter in 2025, it has more or less stabilized. So happy to see that leveling off, if you want. And then we'll see how that overall market demand trends into next year. We are very fortunate that we're seeing this volume increase that I was talking about, and to your previous question, be within our long-term contract customers. So obviously, we have a very long list of great customers that are the North American utilities. And those who have the long-term contracts, as far as we can observe, have been deploying capital strategically for the infrastructure upgrade or grid upgrade, if you want. But I can't say that it's moving that fast across the entire industry. But I do believe that there is some positive momentum to come here for the whole industry coming into '26 and '27. Michael Tupholme: And maybe just one last one. Just as it relates to the spot market pricing pressures. Based on the visibility you have, do you expect to see ongoing pricing pressure in that market for some period of time here? Is there any kind of light at the end of the tunnel as to when we could -- whether it's the comps getting easier or were some of the improvements in the industry maybe excess inventory getting soaked up, et cetera? Is there any visibility on that? Or should we be assuming continued spot market pricing pressure for some time? Eric Vachon: Well, it's difficult to predict. I think what's encouraging, as I described, if I look at Q1, Q2, and Q3 of this year, we've seen that pressure subside and flatten. So hopefully, that is the lower level of where we stand today. And obviously, we're normalizing, I guess, versus 2024. We're now at, I would say, hopefully a healthy run rate and any uptick in demand would just help that dynamic going forward. I guess something else to keep in mind without going too much into the weeds is what are the type of products our customers are looking for. So I have mentioned in previous calls, as we look at the demand profile over time, our customers are demanding or ordering more and more larger sized poles, which are harder to procure, harder to find. And then again, there's where our customers can find what they need at Stella-Jones versus an operation that has one facility and one procurement team and that in a given geographical area doesn't have the access or the network we have as a company with the breadth of our network. So that is also, I guess, potentially something that would be good for us going forward because we do have access to large quantities of inventories with profiles of poles that are what our customers are looking for. Operator: And your next question comes from the line of James McGarragle from RBC Capital Markets. James McGarragle: I just had a question on the railway tie segment. You flagged some potential share gain in 2026. Can you just talk about what's driving that? And then just as a quick follow-up there. Can, you just talk about where you're at in terms of renewing some of these railway tie contracts and potentially passing on higher price? Eric Vachon: Yes. So obviously, I guess one of the comment is, if I understand your question, with the pullback of -- given Class 1 that's now treating at their own treating facilities, it's a reset this year. So going forward, as we conclude 2025, I would expect 2026 to resume our low single-digit sales increases. We are looking at the contract renewals right now with a few Class 1 customers. So 2 things there. Obviously, each time we have an opportunity to renegotiate our long-term contracts, we're always shooting for the most volume we can get from them. And I think what we need to do is not -- it's the service that we do, it's the quality of the product, but it's also how we can help them solve certain of their needs, maybe logistically, maybe with new services. So we're definitely looking into opportunities from that perspective. And then with regards to price increases, I think we've been clear in previous calls that we are coming to the table and discussing with our customers to find mechanisms to adjust the pricing and ensure we preserve or improve margins over time. Obviously, as you can understand, customers never want to pay more for the product, so we need to come up with a value proposition. And our whole team is very much focused on that aspect and seeing how we can be that go-to supplier, I guess, for the rail infrastructure business. James McGarragle: And then I think there was 4 contracts that were coming up for renewal. Is that still the case? Or have any of those been negotiated recently? Eric Vachon: Yes. Still 4 that are outstanding. One might get just renewed for a 1-year period. Obviously, I don't want to start calling out names, but yes, we're still discussing with all 4 customers. Obviously,, some of them are later into next year. So some of them are well advanced and some of them are really preliminary as we're positioning ourselves. But I guess it will be an ongoing topic here through 2026. James McGarragle: Okay. Appreciate the color there. And then just one more on the railway tie segment, then I can turn the line over. Just on CN's lowered CapEx, they meaningfully reduced their CapEx when they reported Q3 results. It seemed to be that the maintenance would be intact, which I assume is where the ties would fall in that, that would impact your business. But any risk there to your tie outlook into '26 on the back of that announcement from Canadian National? And I'll turn the line over after that. Eric Vachon: Thank you, James. So with regards to the CN, we've obviously done all our work planning next year's program. Volumes are similar year-over-year. So we're not impacted by this, I guess, this CapEx reduction announcement. So we're definitely part of that maintenance piece of it. And our discussions with the CN just are reflecting flat volumes year-over-year. Operator: And your next question comes from the line of Benoit Poirier from Desjardins. Benoit Poirier: Just to come back on the railway ties questions. Obviously, any thoughts about the non-Class 1 customers these days? And what do you foresee from those segments? Eric Vachon: I think we had a reasonably good year for the industry as far as the demand goes. We have certain contracts -- not contracts, POs or bids that we have in hand that we are seeing the delivery dates being pushed now into next year. I'd like to think that we're past the comments or review by the U.S. federal government on different programs. If you remember in H1, there were a lot of reviews on different subsidy programs and things of the like, created a bit of uncertainty as far as the funding for, I guess, the short lines in particular. I think that's behind us. So I'm actually feeling positive about what's coming in 2026 with regard to that, that having resumed. Yes, that would be my comment there. Benoit Poirier: Looking at utility, Éric, American Electric Power and Quanta Services unveiled this morning a $72 billion partnership on a transmission expansion. I was just wondering, given you're obviously well connected, well positioned with the utilities, is it something that we might see down the road from you guys? Eric Vachon: Meaning as far as benefiting from that announcement? Benoit Poirier: Exactly. Is it something that will benefit Stella-Jones? Eric Vachon: So I believe that last quarter, AEP in their public disclosures had put forward 70 - 7-0 -- $70 billion in CapEx in the next 5 years. So the announcement of Quanta actually puts more actionable or meaningful actions towards executing on that CapEx. I know in the past 8, 9 months, they have given a good look at their capital structure to be able to deploy and invest in their network. So we're very pleased with that. We're very well positioned with AEP. They're one of our key customers. And obviously, from a distribution pole, transmission pole business and now with [ latest ] or steel structure division, I think we have opportunities here to bid on upcoming projects that will be coming forward. Benoit Poirier: Okay. And looking at your NCIB, Silvana, it has been renewed, but lower amount versus the previous 2 years. So just wondering, should we see that as a signal that the fact that you foresee more growth opportunities ahead? Any color with respect to the share buyback envelope? Silvana Travaglini: Yes. So I guess 2 comments on that, Benoit. The first is even though we had bigger programs, as you probably saw over the last 2 years, we did repurchase probably more in the 1.2 million shares. So we do think it is almost -- being more consistent with the actual usage of the program over the last 2 years. And we are definitely very mindful of all the potential investment activity going forward. Definitely, that is part of the mix. Benoit Poirier: Okay. And maybe last one, a quick one for me. In terms of working cap, Silvana, anything to call out going into Q4 and 2026? Silvana Travaglini: Yes. So, into Q4, as we typically see, we would expect, particularly for residential lumber, a build in inventory in that last quarter of the year, but more than offset by the decrease that we would expect in ARR just because of the seasonally lower sales in the Q4 versus Q3. So I think we would expect either a neutral or a pickup in the last quarter of the year in terms of our working capital, so adding already to the inflow that we have year-to-date. And going into 2026, I guess the color that I could give around that is that depending on the expected increase in sales that you put forward, we always say that we probably -- 40% of that increase is needed in terms of build of working capital for that additional sales growth. Operator: [Operator Instructions] And your next question comes from the line of Martin Pradier from Veritas Investment Research. Martin Pradier: My first question is about building material. I thought that the prices were up during the quarter, but the wood price declined. And you mentioned that there is a delay between when this gets into the sales. What delay are we looking at? I mean, when are the lower prices of wood going to impact your sales down the road? Eric Vachon: Thank you, Martin, for the question. So maybe as a reminder, when we start the year or as the industry calls it a season, we have a large buildup of inventory. And with our key customers, we set the price for -- in this case, for 2025. So we have not adjusted -- and you're completely right, the price of lumber has declined somewhat since January of this year. But we've also built a program for our customers. And when we negotiate a price, we need to hold it through. So we have not adjusted prices so far this year, slightly a bit here or there in the third quarter, but nothing that you could probably notice through our financial results. I do expect these prices to hold until the end of the year. We'll negotiate them again, revisit those prices when we start the new year here with our customers. We're actually currently -- through November and December of this year is when we set the programs for 2026. So we're discussing pricing now. So there might be a slight decline. We're trying to see where the market is trending right now. Obviously, there's a lot going on and to consider with duties and tariffs and curtailment of capacity. I do believe that a lot of sawmills in Canada are having a tough time financially because of the lower prices of lumber. And I do believe that their intention is to see that price go back up to make it worthwhile for them to operate. So if there would be an uptick here in lumber prices in the next 3 months, I think it wouldn't be that much of a decline in pricing next year. So hard to predict, but something that we monitor daily. Martin Pradier: my second question was, I was quite impressed with railway ties sales in this quarter, which was positive. And you come from 2 years of -- 2 quarters of plus 10% negative. But my understanding is that the next quarter is going to be negative again because there were a lot of sales in Q4 last year, and you're saying that some of these programs are delayed and then going to go to 2026. Is that the right way of thinking about it? Eric Vachon: Yes. I think you're thinking about it right. Q4 is typically a slower quarter. We see sometimes orders straggle Q4 of this year and Q1 of next year. But the way we're looking at it is, as you just expressed it, it will be slightly lower. So we will conclude the year in that down in the mid-single digits, if I think that's what you were expressing. Operator: And your next question comes from the line of Michael Tupholme from TD Cowen. Michael Tupholme: Éric, I just wanted to ask you if you could comment on the Brooks acquisition. Haven't talked about that much on this call. Just in terms of what you see that acquisition adding in terms of expanded product offering and whether you can roll that out more broadly across the network or if further acquisitions would be required in order to have that expanded product offering more broadly available? And then also just maybe just if you could comment on the M&A pipeline in general. Eric Vachon: Certainly. So the Brooks acquisition brings a few things. One, obviously, as Locweld, a bit of a diversification of our product offering, although mainly treated wood, but in the crossarms space. So very happy now to have a larger catalog, to have more in-depth discussions with our utility customers. We have acquired also a team with skill set and knowledge about this industry. So crossarms are unique dimensions with very particular procurement dynamics because of those dynamics. So we've acquired a leader in this space with some good knowledge. So the next steps, to your question, is obviously, there are customers that Stella-Jones has that Brooks was -- I don't know if they, let's say, didn't have much exposure to, we can definitely make new introductions or reintroduce them. I do believe that there might be an opportunity for us to consider if there's a -- if we can bring this into the Canadian market as well because Brooks has no exposure to the Canadian market. I believe they would have enough capacity/we would also internally in Canada, in particular, to be able to consider expanding that offering to our customer base. So obviously now that we have full access to the team and the assets, we're putting -- first integrating the group; and secondly, thinking about that strategy going into 2026. With regards to the acquisition pipeline, Michael, so, I'll go back to start with the basics. There's still some targets in wood poles and railway ties that are of interest to Stella-Jones, and we keep monitoring those opportunities. Definitely interested in expanding or growing our steel structure division. So obviously, with Locweld or the Candiac, we'll be doubling the capacity, as I said, mid of next year. But I do think there's some other opportunities for us to keep growing that division. We've had a lot of positive feedback from our customer base interested in understanding how will Stella-Jones be able to support these massive projects that are upcoming here. So one of the previous questions, for example, on AEP, when you think about $70 billion, obviously, there are generating assets in there, but there's also a good part of the money going there for transmission lines, which would, in most part, be steel and not to forget the maintenance of the entire network to which we're exposed. So definitely some thoughts there. And as we keep exploring opportunities and as we make these acquisitions, we get introduced to new relationships and discover new opportunities of businesses that service the utilities or the rail space that have attractive margin profiles and would be a good fit, and they're actually looking for a partner to come and help them grow the business. But when I say partner, it's really selling the business to us because with our access to capital, as we did with Locweld for example, we were able to invest and increase the capacity and get to that critical mass where certain customers are now taking notice. So I guess that would be how I need to think about the pipeline going forward. Operator: And your next question comes from the line of Hamir Patel from CIBC Capital Markets. Hamir Patel: Éric, your poles business, looks like the wood prices were down close to maybe mid-single digits in the quarter. I know you mentioned the spot market is about 1/4 of your mix. So that kind of suggests that spot pricing was down maybe mid-teens year-over-year in Q3. Is that a fair interpretation? And just wondering how much of that is mix? And if you could comment on how much lower is the spot market versus your typical contract price. Eric Vachon: So I think you're not quite there, Hamir, but I'll let Silvana cover that for us. Silvana Travaglini: Yes. So Hamir, so in the quarter, we said that our pricing accounted for a 3% decline in sales, and we said most of that was the spot pricing. But there was also some mix in there for our contracts. So like year-to-date, our pricing/mix decrease is less than 1%. So we're still expecting for the year that the spot pricing will remain below 2024. And as Éric said, there's some normalization there because the spot pricing last year was almost in line with our contract pricing. So we do expect that decrease to continue into the second -- into the last quarter when we compare to the same quarter last year. And that the contract pricing, as we always mention, is really we would have just expected as we have seen so far, just contractual increases that we have about mostly inflationary like 2% to 3%. But we have -- and I believe Éric must have mentioned, but we have seen the average spot pricing pretty much be in line with what we saw in Q2 in Q3. So we have seen some stabilization, if you want, between Q2 and Q3. Hamir Patel: And any sense yet as to how we should think about CapEx for 2026 and where you stand with potential greenfields on the steel side in the U.S.? Silvana Travaglini: Yes. So maybe I'll answer the CapEx piece, and then I'll pass it over to Éric. So we continue to expect, based on the -- on our current asset base, probably the higher end of our range, probably in the $85 million to $90 million, and this does not include the expansion CapEx expected for Locweld, which part of it is being done this year, but it will spill over into next year. It will only be ready probably mid- to second-half of next year. So you have to keep that in mind to add to our regular CapEx spend. Eric Vachon: And I'll follow -- I'll conclude on that topic, Hamir. So with regard to the expansion of our steel structure division, definitely focused right now on ensuring we properly execute on that expansion CapEx and roll it out. It's a big change because we're changing out the entire shop floor of the facility. I think we're well on our way. I had a few meetings in the last few weeks on the planning of that and how we're going to execute in the first 6 months of next year. But that being said, is there a potential for another greenfield facility in the U.S. or Canada or in North America, definitely looking into this and having discussions with customers. Obviously we do not want to build a facility that has no orders on the books. So we're seeking for commitments, but still working on the project, and we'll be discussing more at the Investor Day. Hamir Patel: And just the last question I had, Éric, I know the RTA recently held their annual conference. What were the volume trend expectations that you're hearing out of the various Class 1s? I know you already commented that CN was tracking flat, but curious about the others. Eric Vachon: Yes. Pretty, much flat for everyone, Hamir. There's no big intention of increasing maintenance programs as far as we've heard. We obviously have the UP and the NS that are a bit prudent as they're -- well, they can't talk to each other necessarily, but UP is expecting to close this transaction next year. So I think out of that, there could be some different views, but that would probably spill into '27 at that point in time. So I would say those -- so most Class 1s that were there or all of them were indicating similar volumes year-over-year. Operator: Thank you. We have no further questions in the queue. Please proceed. Eric Vachon: Well, thank you, Ina. Thank you, everyone, for joining us today, and we look forward to updating you when we release our fourth quarter results. Make it a good day. Operator: Ladies and gentlemen, this concludes today's call. Thank you for participating. You may now disconnect your lines.
Operator: Ladies and gentlemen, thank you for standing by. My name is Desiray, and I will be your conference operator today. At this time, I would like to welcome everyone to the DoorDash Third Quarter 2025 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Mr. Weston Twigg. You may begin. Weston Twigg: All right. Thanks, Desiray. Good afternoon, everyone, and thanks for joining us for our Q3 2025 earnings call. I'm pleased to be joined today by Co-Founder, Chair and CEO, Tony Xu; and CFO, Ravi Inukonda. We'll be making forward-looking statements during today's call, including without limitation, our expectations for our business, financial position, operating performance and profitability, our guidance, strategies, capital allocation and investment approach, our plans and expectations regarding the integration and benefits from our acquisitions, our expectations regarding new product and service initiatives, including our autonomous delivery platform as well as expectations regarding platform safety, our global technology platform and the broader economic environment. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those described. Many of these uncertainties are described in our SEC filings, including our most recent Form 10-K and 10-Qs. You should not rely on our forward-looking statements as predictions of future events or performance. We disclaim any obligation to update any forward-looking statements, except as required by law. During this call, we will discuss certain non-GAAP financial measures. Information regarding our non-GAAP financial measures, including a reconciliation of such non-GAAP measures to the most directly comparable GAAP financial measures may be found in our earnings release, which is available on our Investor Relations website at ir.doordash.com. These non-GAAP measures should be considered in addition to our GAAP results and are not intended to be a substitute for our GAAP results. Finally, this call is being audio webcasted on our Investor Relations website. An audio replay of the call will be available on our website shortly after the call ends. Operator, I'll pass it back to you, and we can take our first question. Operator: [Operator Instructions] And our first question comes from the line of Deepak Mathivanan with Cantor Fitzgerald. Deepak Mathivanan: Two-part question on the several hundred millions of incremental investments for 2026. First, how much of this is towards tech platform initiatives versus perhaps more direct product and expansion efforts that tend to have a very defined near-term payback? And then the second part is can you expand on the tech platform efforts. Are you sort of essentially rewriting the tech for AI development? Or is it more about integrating AI tools with additional token expenses into the service? And in addition to sort of opportunity for accelerating the product development, do you also see any potential for cost savings from these efforts over time? Tony Xu: Deepak, it's Tony. Yes, I can maybe start on both questions, and Ravi, feel free to add. Yes, look, on the first question of where are we spending, we're primarily investing in 3 areas and kind of the second part of your question kind of feeds into the first part. So the first major area is building a new global tech platform. And so this is an effort that's been underway for a couple of years now, but it's coming to a head where we're actually making the majority of those investments in 2026. And what is its purpose? Well, there are several reasons of what we're trying to accomplish. The first thing, what we're trying to accomplish, is we're trying to build a single global tech stack, where when we launched one experiment, the experiments that actually make it to our customers can be shipped at the same time across all of our markets and all of our audiences. Today, that doesn't work that way as we have 3 companies at DoorDash on the restaurant delivery, our marketplace front with Deliveroo, Wolt and DoorDash. In the new world, we'll actually be able to have 1 feature go live to all audiences; whereas today, that 1 feature would get to have -- would pretty much have to get shipped 3 times, which is very inefficient in how we do that. Another goal of the tech platform is to, like you said, in your setup, to make it AI native. And so there will be lots of tooling there where -- I may have mentioned this in the previous call before, where if we were starting a company over again today, I think we would write software pretty differently from how we used to do it. And so there's a lot of work in order to architect how we set up the architecture, so we can manage both agent workflows as well as how you would deploy software, test software, write software, what the role of the engineer is in that new paradigm. All of that is getting constructed as part of this work. Yes, and I do actually think that, at the tail end of this work, you'll see, on a go-forward basis, not only will we ship faster and ship improvements across the board globally. We'll actually be more efficient, and we'll have freed up engineering capacity to do a lot more work. And so that will allow us to not only have a better cost structure but really just be able to do a better job in solving the next problem for customers. So the first area of spend is in building our tech platform. The second area is investing in new products. And so we announced probably, well, several launches in our dashboard product events, which happened at the end of September. And we're really excited about them. A lot of times, when you're building a company, what you're really doing is you're starting with lots of experiments. Some of those experiments make it into products. Some of those products then can be graduated into commercialization where you're trying to test whether or not you have a good business. And then some of those candidates then ultimately yield big businesses that generate the cash flows to allow you to invest in the next set of products and experiments. And I think we're really fortunate at DoorDash in a couple of ways. One, in the area of local commerce, there's just a lot of different problems. And one is -- and the other way in which we're lucky is that a lot of the experiments, many of these have been running for years, are now coming ready for more investments. And so we're very excited to be investing behind them. We announced, for example, a lot of work on in-store and building several products there with going out, reservations and our CRM platform behind SevenRooms. We talked about DoorDash Dot, which is the customized, purpose-built for delivery autonomous vehicle, the first in the world to drive on the road, sidewalk and bike lanes in order to make that happen. We talked about DashMart Fulfillment Services, where we're creating an ability for any retailer to offer same hour or same-day delivery with near-perfect accuracy. So these are some examples of the new products that we're talking about. But if you think about it in each case, we're running the business exactly as we always have, where the goal is we want to make sure that we always can solve the most number of problems for our customers in the highest quality ways, and we manage our projects carefully to milestones. And as they deliver upon each milestone, we grow them into businesses, and we continue to invest behind them. I think our track record in investing in the areas that we currently have operating, whether it's U.S. restaurants, U.S. new verticals, the international business, our commerce platform, our ads business, have suggested that we've had some success in repeating this playbook, and we're doing this now for future growth. Ravi Inukonda: Yes, Deepak, I mean just to add to what Tony talked about, right, look, our core business is continuing to do really well. I mean you're seeing that come through in terms of the numbers where, if you're thinking about it from a growth perspective, growth accelerated for the fourth straight quarter. Overall unit economics are improving across the business as well as the profit dollars continue to increase. This is giving us the ability to reinvest back in the business. If you think about our operating philosophy, when the GOV is coming in ahead of expectations, when the unit economics are improving, our philosophy has always been to reinvest back in the business. If you're looking at the results today, it's a combination of these decisions that we've taken over the course of the last decade. That philosophy and how we are operating is not changing. Look, we're very disciplined in terms of how we operate. We're thinking in terms of IRR. All of the investments that we talked about, we think they're going to extend the duration of growth as well as drive strong IRRs for us. And if you're thinking about '26, what I would say is that the EBITDA margin for the existing business, including the investments, think of that as the overall business excluding Deliveroo, I would expect those margins to be up slightly compared to 2025. Hopefully, that should give you a sense of how we're thinking about investing. I mean net-net, look, the business is growing. The business is growing exceedingly -- exceeding our expectations. And our goal is to continue to reinvest, and we are very excited about the investments that we're making. Operator: Our next question comes from the line of Shweta Khajuria with Wolfe Research. Shweta Khajuria: Could I at least try 2? First one is also on investment. Could you please talk about where you're planning to invest as it relates to Deliveroo, what your goals are for the first year in terms of order of business and then -- and strategic focus areas? And then the second one is on automation. Could you please talk about where you are in terms of expanding your robots and your third-party partnerships? And how do you think about scaling it and deploying the opportunities over the next year or maybe 1 to 3 years? Tony Xu: Yes, Shweta, I'll start and Ravi, feel free to add. First question is about investing in Deliveroo. This is kind of similar to what I said about our general investing philosophy and kind of what Ravi said about why we feel like now is the right time to continue to invest for the long run, which is whenever we see -- it starts with making sure that we can build the best-in-class product experience measured in terms of the retention, the frequency of use and the engagement from the audiences. We think that we found a business actually in better shape than we had expected with Deliveroo, and we think that there's actually a lot of opportunity to add to the foundation that they already have and make continued product improvements so that it will achieve the best-in-class metrics along those dimensions. I think if we can do that and at the same time, improve the unit economics, I think that that's what will allow us to generate the greatest service for our audiences and also the greatest long-term business and returns for all of our shareholders. And so the first order of business really is making sure that we continue to invest in the product, make those improvements. And then, of course, over time, you'll see cost efficiencies come out of the business because we'll be combining 2 European teams on the same continent. But I think the first order of business continues to be adding to the strong foundation that the product has and making sure that we can make it best in class given the learnings that we've had with Wolt and DoorDash and then grow from there. On the second question around autonomy, the way that we're thinking about this is really pragmatic. And I think the most important thing is understanding that the vision for autonomy is really going to be a multimodal world where you're going to see different fulfillment methods. Some of those fulfillment methods will happen with Dashers. Some of them will happen with vehicles on land. Some of them will happen with vehicles in the air. Some of them will happen with vehicles built by DoorDash. Some of them will be filled by vehicles built in partnerships. And really, what's important is DoorDash has the luxury to create our own autonomous delivery platform where, depending on whatever the use case is or whatever the customer need is, we can solve it with the highest quality, the lowest cost and the best service, and that's really the goal. And so we'll be fairly pragmatic on how we do this. So a lot of it, we'll be testing within one market, getting that right, figuring out the go-to-market motion because there's many parts you kind of have to get right, everything from the manufacturing when it comes to making these products in-house to partnerships, to integrating the hardware and the software, to making sure you get the repair and the teleoperations correct, to making sure that you work well with city governments. There's a lot of things you kind of have to get right, and so for us, '26 will be the year where we're ready to commercialize some of these efforts. But I think this is going to take a while. This is not something that's going to happen overnight. It does require making investments upfront because sometimes these decisions are required upfront, and you don't really get the product until later. But for us, we're pretty excited about what we see as the potential. We also are very, very excited about this autonomous delivery platform, where we're going to be able to inject whatever the right fulfillment method is in order to give the best service. Ravi Inukonda: And Shweta, your point around Deliveroo, look, I mean, we're very excited with the partnership with Deliveroo. Look, I'll wind us back to the deal thesis that we have, right? This gives us the ability for us to operate in really large attractive markets where we could deploy our operational playbook, our product playbook to drive operational rigor. If you think about it, the focus for us is -- what we're learning is there's an opportunity for us to continue to improve product. There's an opportunity for us to improve the consumer experience. To your point around the focus, that's what we are focused on. Why is that important is because it drives scale by improving retention and order frequency, which will drive more gross profit dollars. That's honestly how we operate DoorDash. That's honestly how we operate Wolt. Deliveroo is going to be no different for us. What we see in the business is, from an EBITDA perspective, look, we are very comfortable with the profit generation of the business. It is in line with what we underwrote when we did the deal, which assumes some level of investment. Now what you're seeing in the business is the growth is exceeding our expectations. The business is growing double digits, which is giving us confidence to invest back in the business. The focus for us continues to be investing behind the team, investing behind product, which will ultimately drive your long-term free cash flow generation in that business. Operator: Next question comes from the line of Ross Sandler with Barclays. Ross Sandler: Glad to be back on the call. I guess just following up on just the broader consolidation that we've seen from you guys and from Prosus acquiring JET, how do you see the overall landscape in Europe evolving next year on the back of all of this? And Ravi, it sounds like you're investing in Deliveroo to grow a little bit faster. I assume that the $200 million of EBITDA is reflecting that investment and the platform consolidation investment that Tony just talked about a few questions ago would be kind of a separate thing, not included in reducing Deliveroo's run rate from what it was before to this $200 million based on some kind of like allocation of that platform investment. Just any clarity on that, that minutia would be helpful. Tony Xu: Look, on the first question on the European landscape, I think we have a great opportunity to be the leading local commerce platform there. And I think a lot of the confidence of what inspired us to pursue the Deliveroo acquisition really came a couple of years ago after gaining confidence in working with Wolt. The first test for us was whether or not we can actually take some of the lessons that we've learned at DoorDash and also combine them with the lessons that Wolt has learned in building their markets, to see if we can create the best-in-class product. And I think when you look at our growth rates, which continue to exceed those of our peers as well as just the retention and frequency levels and how they're progressing nicely as well as the unit economics improving at the same instance to all-time highs, we gained further confidence that we could kind of take on the next project. And that really is kind of how Deliveroo came into the puzzle. So when you add up our presence in Europe, you're talking about presence in over 20 countries and with the strongest position in the cities with the biggest profit pools, and so I think there's a lot of strong foundation to build from. And so in general, what I see is can we solve the most local commerce products in Europe the way that we're trying to do that in the States and in other countries. And so far, as I mentioned, we've been fortunate where some of the experiments that we've been running for a while now are now coming into fruition into becoming real products, and we're starting to invest behind those products, which is some of the investment commentary that we outlined in the letter. And that will translate over to Europe as well. Ravi Inukonda: Ross, to the second point, yes, I mean, the $200 million, think of that as the contribution from Deliveroo to the overall EBITDA. And think of that as the investments that I talked about earlier, right? It's investments that we're making behind product. It is investments in selection, quality as well as people. You should think of that as the contribution of Deliveroo EBITDA. Operator: Next question comes from the line of Josh Beck with Raymond James. Josh Beck: I wanted to kind of go back to the tech platform that you've been building in the background. I'm curious kind of what you've learned thus far and kind of why this moment in time was the right moment to inflect upwards. There's a lot of external changes in the AI stack. The international scale of the business is obviously very different. Robotics is having breakthrough. So I'm just kind of curious if there was maybe a smaller list of items that drove the step up. And then with respect to the integration, I think in some cases, they can be messy. You have obviously a lot of consumer-merchant-Dasher ecosystem. How do you minimize the disruption and kind of keep the strength? It sounds like the Roo business maybe is kind of in the double-digit range, so it seems to be in a pretty good spot. How do you maintain that throughout the integration? Tony Xu: Yes. I can take that. I guess with respect to the tech platform, I think this was something that always was in our heads when we're thinking about the acquisition of some of the companies that we're talking about, right? I mean, like, by and large, these companies perform the same service in each of the geographies. Now there are a lot of, obviously, local differences, but by and large, the service themselves are the same. And I think that's one of the things that screams that we should be building a single-type platform to actually make sure that all of the products are under the same data models, the same architecture, the same UX. But when you're doing that, especially when you have like a change as big as AI happening externally, you obviously have to take that into consideration. So I think some of these things kind of came together in the '24 time period, where it was exceedingly obvious like what the right thing to do is, and then now you just have to go and do it. And that's kind of the work that we've started here in '25. It will really take shape in '26, which is, again, a large part of the investments. Obviously, those investments will come off, but like -- but that's -- the timing of that really makes sense for us. On the integration of Roo, I mean, you're absolutely right. I mean we obviously -- one of the reasons why we're incurring extra cost is because we are making extra tech investments to make sure that Roo can continue to perform well on its own even as we're building the single tech stack. And so as a result, when you have these added investments, that's what explains it, and -- but that's also how you protect the experience and the service that the Roo customers get to see even as you're building this new foundation. Operator: Next question comes from the line of Jason Helfstein with Oppenheimer. Jason Helfstein: Just one and a follow-up. How should we think about advertising broadly? I mean it obviously comes in at a high incremental margin. There's flow-through versus reinvestment. So just how are you thinking about how we should think about how that flows through? And then second, there's been some questions, a report floating around about kind of documented workers and the government kind of cracking down undocumented workers and certain reports like talked about what percentage. Just any color you can have about how you manage making sure that you don't have undocumented workers on the platform and how you manage through that? And any exposure there? Tony Xu: Sure. I can take both of those questions, Jason, and feel free to add in here, Ravi. Look, on ads, I mean, we're pretty excited about the ads business, right? I mean it's -- it was the fastest business, ads business in history to get to $1 billion of annualized revenues. And it's also a business where we have extra budgets wanting to spend more on the Dash platform than we kind of give ad space to. And that's because, when I think about the ads business, I think the reminder I always give to our teams and I would say again here, is that you kind of have to solve for all of your audiences. On the one hand, you obviously have to maximize the return on ad spend for advertisers. On the other hand, you have to make sure that you are not degrading the consumer experience. And that's hard to do. There are real conflicts and real tensions and real trade-offs and negative consequences, I think, if you get that incorrect, and that's why I've always believed the right order to sequence things is to first build a very healthy marketplace, and then the monetization opportunities including ads will follow. And they have. I mean, look at our business. I mean we've continued to grow faster at bigger scale for many quarters in a row now, and you're seeing the bottom line contribution margins and EBITDA margins grow in the same instance. And so I think all of that is suggesting that, I think, we have the right trade-off, and we just have to make sure that we have the discipline to maintain it. On the second question, I mean, Dasher supply has never been healthier. It's always been something that's obviously very top of mind for us, which is making sure that we get correct all of the Dasher authenticity pieces. There's a lot of work that goes into it. We -- something that we've been investing into for many years now and will continue to. We've seen no challenges to our Dasher funnel or supply irrespective of whatever reports there might be out there, and it continues to be something that we've upheld the highest standards and something where it's -- we've always done it the right way, I guess. Ravi Inukonda: And Jason, just on your point on the ad business, right, just to clarify, I mean, I think the ads business is growing. It's growing quite nicely. We don't differentiate that from, okay, are we thinking about it just purely from a flow-through perspective because, for us, every dollar that we generate, our goal is to reinvest back in the business at healthy rates. That applies for improvements in unit economics or applies for dollars that we generate from ads. We think of efficiencies that we could generate so that we can put that back in the business. But net-net, ads business is growing, and it's growing quite nicely. Operator: Next question comes from the line of Michael Morton with MoffettNathanson. Michael Morton: I guess maybe one for Ravi to start. If I'm just doing like quick math here, looking at your guide and kind of what it means for the core business, it seems like this incremental step-up cost could maybe be like $100 million a quarter. You feel free to correct me on that. And then if -- Tony highlighted the buckets where the spending is going, and sorry, it's a stupid question, but from the outside looking in, just understanding maybe like where the platform development spend, like how that hockey sticks so much if it's something that's been going on for several years. And then what I found interesting was the DashMart Fulfillment Services comment he made. And I was just looking for any more details if you're really stepping on the gas there and if this is like maybe part of a partnership with some of like the, I'd just say, large AI platforms, where maybe you work local commerce more into these e-commerce searches. And is there more cost involved as you build out DashLink? Anything there would be really helpful. Ravi Inukonda: Yes, Mike, I'll take the first one. I think to your point around -- I mean, look, we are still early in terms of how we're thinking about planning. We'll give more precision as we give quarterly guidance. What I would say is if you're thinking about 2026, to the earlier point, what I made to Deepak, is I would think of margin for the existing business, including the investment areas, think of that as the existing business plus investment, excluding Deliveroo. I would expect the margins to be up slightly compared to 2025. Hopefully, that should give you a sense of how we're thinking about margins as well as investment into '26. Tony Xu: Yes, Mike, I guess what I'd add to some of your other questions is, first, the reason why the tech investments go up in '26 is because that's when they're actually happening, right? Like the way -- if you think about how would you build new software, the first thing you would do is you first have to architect it, right? And so you're not actually really doing much actual coding. But like, for instance -- but once you're ready to code, what do you have to do? Well, okay, well, one thing you have to do is you have to spin up some cloud instances. And if you're going to maintain multiple stacks as you're building a new one, you're going to incur extra kind of temporary cloud instances, right? And so that's one of the reasons why the costs go up. And that's -- so it's just basically like when you're actually ready to deploy the software and actually get everything onto the same tech stack, that's what's adding to the kind of temporal costs. With respect to DashMart Fulfillment Services, it's less about working with AI companies, although -- and more on how we work with our existing retail partnerships, right? So what is Dasher Fulfillment Services? Well, the goal is we want to -- one of the challenges in delivering from just third-party stores is that not every store and most stores actually, I would argue, do not know their inventory, and this is for a whole host of reasons. And even though we believe we have leading accuracy and the quality of delivery when it comes to any category, including those outside of the restaurant category, it's still not good enough because it's not perfect, right? And therefore, why would a customer pay a premium to get not what they ordered or to get a substitute of what they ordered? But if we could manage the inventory systems ourselves and actually run the fulfillment setup end to end from the warehousing to the inventory to the fulfillment, we get almost near-perfect accuracy. Okay. So how do you translate that and do it for every retailer, especially retailers who may not have the density of stores or the coverage in the country so that they can offer something like same-hour or same-day delivery? Well, I think what I would argue is you can literally turn every physical retailer into a omni-channel player. Now that's going to take time, and this is one where it takes time to set up supply chains with retailers, to test the right markets, so on and so forth. But what we're very excited about is that the quality is best in class. Now what we're doing is we're adding selection that's never been made available to customers before and bringing it close to where they are so that these retailers can offer same-day delivery, and that combination is now happening. Operator: Next question comes from the line of Andrew Boone with Citizens. Andrew Boone: I wanted to ask about new verticals. You guys talked about the fact that unit economics are still negative. Can you talk to us about the path and maybe the visibility that you have to breakeven? What are the key kind of operational things do you guys need to do to get there? And then in terms of just U.S. kind of growth overall, now gross adds were higher year-to-date versus 2024. Can you guys just talk about the opportunity of where you guys are finding new users? I know we've talked about this on past calls. But can you just revisit what pockets you guys unlock in there? Ravi Inukonda: Yes, Andrew, let me start. Look, I mean, talk about the overall performance of the new vertical business, right? Like look, new verticals had a really strong quarter. The business is growing really fast. We're the fastest growing. We believe we are leaders in terms of order volume share ahead of our expectations. Remember, if you recall, Q4 of last year, we talked about the fact that 1/4 of our users order from new verticals. That number has continued to grow quite nicely. Miles have increased. Order frequency is increasing. The overall basket size continues to increase, which just tells us that consumers like the product. The usage of the product then continue to go up. On the unit economics front, just to be clear, I mean, unit economics continue to improve. They've improved sequentially Q-on-Q as well as year-on-year. We're very comfortable where the unit economics are. We are comfortable on what it needs to get to, to be breakeven. Look, a lot of that is going to come from scale as well as continued improvements, whether it's quality of the product that we continue to improve. What we're focused on right now is scaling the business. We think there is an opportunity for us to continue to improve the product. As long as we continue to improve the product, this is going to be a large business for us, which will drive more free cash flow generation in the future. Tony Xu: Yes. And then your second question with respect to the U.S. strength, I mean, you're absolutely right. I mean we're thrilled with the performance of the U.S. marketplace. I mean 4 quarters in a row of increasing strength on a bigger base, especially at the scale that we're talking about certainly is something that we're very proud of. There's no one thing. I mean a lot of the performance that you're seeing today really were the result of actions probably initiated 3 years ago, where it's this continued maniacal focus on improving the inputs of the experience. How do we improve the selection, the quality, the affordability, the service levels? And when you do that -- and that's because the most difficult thing that we always compete against are increasing consumer expectation. You talked in your question about why are we seeing increasing monthly active user penetrations or perhaps why are we ahead of schedule on some of these forecasts. It's because we're delighting each cohort of customers, right? And each new cohort of customers obviously have a higher expectation bar than the previous cohorts. And if you can keep delighting the new customer cohorts where we are still the leader in acquiring new customers, whether it's in the restaurant category, in the grocery category, in any retail category, well, then you're also delighting all of your existing customers. And so you kind of have this bow that lifts all of your cohorts, and that's because of product improvements. And -- but a lot of the stuff started probably 3 years ago, and now we're making investments into things that we -- hopefully will have an impact 3 years from today. Ravi Inukonda: And Andrew, when you look at the underlying cohorts, right, the demand on the underlying cohorts continues to be very strong. Both MAUs are growing. Order frequency is growing. Even subscription, both in the U.S. as well as international, had a record quarter in terms of DashPass subscribers as well as Wolt+ subscribers. What we see in the business is even existing cohorts, cohorts that are quite old, they're also continuing to engage with us even more. All of this goes back to, look, I mean, improvements in product, improvement in selection as well as quality that we've been continuing to work on not just in the last quarter, right, over the last several years. Operator: Next question comes from the line of Nikhil Devnani with Bernstein. Nikhil Devnani: I had a clarification on the investment commentary. Is the bulk of the spend fixed cost investment that you get leverage on as you compound the top line? Or is it a step-up in variable costs as well? And then on new verticals beyond grocery and convenience, which categories of the retail or local commerce opportunity, do you feel, are showing the most promise from a demand perspective that becomes the next big category for DoorDash going forward? Ravi Inukonda: Yes, Nikhil, I'll take the first one. On the spend and the investment areas, look -- I mean, our goal is we are spending up and down the P&L. Some of that is going to come through in terms of cost of sales. Some of that is going to sit within sales and marketing as well as some of that is going to sit within R&D and OpEx. Look, the areas that we're investing behind are we're trying to increase and scale our autonomous program, obviously, doing it in a very disciplined manner. We're growing our software business. Both our digital ordering as well as our SevenRooms business falls under that. They're starting to generate revenue. That's going to continue to increase. And finally, some of the tech stack work that we are doing, which you talked about, that's going to hit across the P&L. So you should think of that as, a, some of that is going to drive leverage as we go through as we scale the business. Tony Xu: Nikhil, on your second question with respect to which categories are we seeing growth, we're actually seeing growth quite a lot across a lot of categories outside of -- multiple categories outside of grocery, convenience and alcohol. And it tends to be somewhat probably what you may expect that comes with time of the year. For example, pets is a category that's kind of a all-season category. As we head towards the holidays here in the U.S., you see categories like electronics really spike in terms of the gifting use case. We've seen growth in health and beauty. Home improvement has been a very big surprise to us, seeing growth where we're delivering, believe it or not, thousands of pounds of mulch per day. I guess, that more happen maybe in the summer time period. Again, so some of this has to do with when customers need different things. But I think what's really interesting, even without just looking at the performance of these categories, is just actually looking at where things are going, like the trend and the trajectory and the input metrics such as the searches for different types of products. And we're effectively becoming the everything inside your city store, and as a result, we're seeing growth across the board. And so sometimes, some of these new customers are coming in -- we talked a little bit earlier about MAU growth or monthly active user growth. They're coming in for the first time outside of the restaurant category. And then what you see happening is they'll then shop in the restaurants and then back and forth. And this is what we've always believed could be the case, where if you start with the highest frequency category of restaurant food, which is where we are the leader, you just get the most shots on goal. And then now we're also the leader in terms of transactions outside of restaurants, both in grocery, convenience as well as the categories outside of that. Then you really get this multishopping behavior across the board. And if you can do that the most number of times, which I believe is what we're on track to do, you'll create the most valuable membership program, which is DashPass. Operator: Next question comes from the line of Lloyd Walmsley with Mizuho. Lloyd Walmsley: I wanted to go back to the DashMart Fulfillment Services and just better understand the plan there in terms of integrating all this 3P inventory, especially on the grocery side. Is this going to require like a lot of build-out of new facilities? Or do you just sort of take control, pick and pack inside some of the partner facilities? And then as we think about the time line of that, and it seems like this could be a really big and attractive area of investment, is that something -- is this something where '26 is sort of continuing to experiment on this and maybe you scale it more in '27? Just like anything more you can help us understand like how that will work and the time line around that would be great. Tony Xu: Yes. Lloyd, yes, on DashMart Fulfillment Services, we're obviously super excited, and we share your optimism that this could be a very attractive area of investment. I think the short version of this, it really depends on the retailer we work with, right? Some retailers have different goals. For example, some retailers may want to launch new geographies. Some other retailers may want to densify existing geographies. Other retailers may want to find attractive uses for less productive existing square footage inside their existing stores. I mean there's a whole host of different goals, and this is why the question is a little bit hard to answer. There is no one-size-fits-all solution, I guess, is what I'm trying to say. And so as a result, I think what's most important is you have to build different capabilities and be flexible. What we're stubborn on is we're stubborn on building the best possible experience where you bring in selection. That's never been made available to customers before, right? If you think about it, there's -- roughly speaking, in cities, there's like tens of millions of items out there, and today, only a single-digit percentage of them are being delivered through DoorDash. And if you compare that to -- but DoorDash almost already carries the most amount of inventory for same-hour delivery. I just think there's a massive headway and runway in front of us in terms of how much more of that inventory we can bring and fulfill on behalf of customers and bring everything inside the city. Now this though is not our inventory, right? This is the key challenge. It's a retailer's inventory and the challenge is, well, one, like does the inventory exist. And that's one of the reasons why we're building DashMart Fulfillment Centers -- Services because sometimes the inventory can exist and it happens to be inside stores, but other times, it doesn't exist or it's missing or it's in delay somewhere in the first mile or the middle mile. And so it's complicated. But the simple thing that we want to give customers is we want to give them selection that's never been made available before to them, done same day or same hour. We're bringing a new e-commerce capability to a lot of physical retailers as a result on the retail side. But the answer to your question is a little tricky because each retailer may have their own goals, and so there may not be one answer that, that is the setup. And that's why we have a handful of these retailers that we're working with, and we're customizing the solution that makes the most sense for them. And of course, we're making sure that's the best-in-class experience for consumers. Operator: Next question comes from the line of Youssef Squali with Truist Securities. Youssef Squali: Tony, one subcategory we did talk about is perishables. I wanted to just pick your brain on how you think the entry of Amazon in that space is likely to kind of impact you guys. Not even sure how big perishables is to you. I'm assuming it's small again, but maybe you can help clarify that. And just how are you guys kind of positioned to kind of defend your turf? And then maybe just comment on the change in the guards at least in some cities like New York after the win of the Democrats last night, Mamdani, and how that potentially could impact Dashers pay, eventually Dashers organizing and just really not just in New York City but in other big cities as well? Tony Xu: Yes, I'll take those. Look, on the first question, look, I guess 2 sentences have always been true for the history of DoorDash, which is, one, it's always been a competitive space no matter which space we're talking about; and number two, DoorDash just continue to grow and I guess now even grow faster at bigger scale. And so I guess, like you may wonder how is that possible. How can you square away some of these things? Well, I would say a few things. I would say the first thing is the market is still very not penetrated, right? If you look at something like grocery penetration, it is so low relative to something like restaurant delivery. And the reason, again, has to do with this inventory fulfillment challenge that I've talked about probably for several years now. Actually, when we launched DashMart in 2021, this was the original vision for DashMart Fulfillment Services, which I'm glad that we're now making come alive. But it's can we get you exactly what you ordered, and if you can't get customers exactly what they ordered, guess what, they're not going to order. And that's really the challenge, I think, when it comes to the grocery delivery space or the perishable delivery space. With respect to retailers and folks coming in, well, I think at the end of the day, it's really about consumer choice, right? I mean consumers -- DoorDash was created so that we want to give and create a world where consumers can choose from any retailer of their desire. And we believe that maximal choice versus just choosing from 1 or 2 retailers is something that is not only both good for all audiences, but it's great for cities. I mean that's the whole point of why DoorDash exists, to connect every local business to every local consumer. And if we can do that, we're going to grow the GDP of those cities and create more jobs for everybody and make better neighborhoods and all the good stuff that you'd want to see inside the city that you live in. I guess that leads me to the second question, which is around what's happening with some of the different cities and kind of recent elections and stuff. My position on this has always been that governments and businesses should always work together. And that's what produces the best possible outcomes for all constituents. And I think this, again, is where several sentences can be true at the same time, even though they sometimes come into tension, I believe that all audiences deserve to be treated fairly. For example, one of the hot topics in a lot of these coastal cities today, including the city where I live, San Francisco, is affordability. DoorDash has -- is probably the most aggressive on making sure that we are the most affordable platform. This is something that we've been doing since our history, and most recently, we're -- we took the lead, for example, on making sure the SNAP benefits could continue for those who needed them the most. When it comes to Dasher pay and Dasher protection, that's something -- we were the first platform in 2019 in this country, in the U.S. to offer occupational accident insurance to Dashers without their asking us to. And it's something that we've always believed in. And I think that what I found to be most productive is finding commonsensical solutions and helping politicians create commonsensical policies so that they actually get what they want. I think what sometimes unfortunately gets in the way is when ideologies or biases come without even evaluating the facts or what audiences want. And I think that so long as we put what audiences want up there, I think that businesses and governments can coexist. I believe that businesses should be allowed to be for-profit companies, and I believe that audiences deserved to be served. Operator: Next question comes from the line of Justin Post with Bank of America. Justin Post: I don't think you've really had a chance to outline synergies with Deliveroo on the -- maybe on the order and the top line side revenues, but I would love for you to talk about that if you can. And then maybe talk a little bit about the take rate differences in the accounting. That would be helpful. Ravi Inukonda: Sure, Justin, I'll take both of those. Look, I mean, the focus for us -- like I said on the earlier question about Deliveroo, right, the focus for us is always, on day 1, is to continue to improve the product. It's to continue to improve the consumer experience. Why is that important is because that drives scale and the combination of scale and improvement in unit economics drives more gross profit dollars, right? For us, the philosophy is to improve the product, to improve the overall gross profit dollars. That's what we are focused on from a day 1 perspective. Look, I mean, obviously, part of the deal thesis was to have cost synergies. We operate a global platform. We think there's going to be synergies largely from scale as well as cost redundancy. Some of that is going to take some time. We are excited about, a, the partnership as well as what we're seeing in the business. To your second point around some of the accounting differences, the way I would think about it is, from an EBITDA perspective, you should assume roughly an USD 8 million to USD 10 million impact or an expense to EBITDA as you're thinking about modeling going from Roo definition of EBITDA to the DoorDash definition of EBITDA. Operator: Next question comes from the line of Lee Horowitz with Deutsche Bank. Lee Horowitz: I guess going back to investments. I guess, how should we be thinking about the payback period? I mean a lot of talk about taking time, past dependency and spinning up an environment. So it sounds like payback periods are perhaps getting extended relative to your typical investment plans. Is there anything in this new bucket of investments that is perhaps more of the traditional quicker payback periods that is part of your typical playbook? And then maybe relatedly, retail obviously sounds like a big and compelling greenfield opportunity for you guys. Any way to contextualize how much of this new investment plan may be specifically targeted at this vertical and driving faster growth outcomes there? Tony Xu: Yes. I can take both, Lee, and feel free, Ravi to add in here. On the payback period, nothing has changed. Our bar for payback period is still the same, and that's true whether we're taking on something in a completely new domain like DashMart Fulfillment Services or autonomy or our tech stack, for example. It's just that we're taking on more projects now, right? And like I said, it's very hard to kind of forecast the progression of which experiments you ran many years ago to now which experiments have actually now earned their privilege of getting more investment. And so it's just more projects have found product market fit in our portfolio that I believe will achieve our investment philosophy, which is to maximize long-term free cash flow per share. So the payback period and kind of the methodology in which how we think about capital allocation has not changed. On retail, I think it's probably similar to maybe a previous question about it. We are seeing a lot of growth in retail right now, and I think it's kind of similar to where -- but from a product perspective, I think we, DoorDash, are kind of in retail today where we, DoorDash, were in grocery maybe in 2021 or something like that or the tail end of 2020. So we're just very early on the actual product experience itself, and that's why it's super encouraging. It actually means that the real reason why we think there's a massive opportunity in retail is because consumers are actually pulling us in. You see this not just in the buying behavior, which is great. But you also see this in the search behavior. You see this in what we talk about with retailers as well. A lot of what DoorDash does is kind of 2 sided, right? We have a consumer business, which maybe most people know us for, but we also have a commerce platform, which -- and already, we've created 2 of the most successful B2B products out there with DoorDash Drive and DoorDash Storefront. Obviously, we're adding SevenRooms to the mix, which is really in the restaurant category. But in the retail category, we get a lot of requests to help there because I think these retailers recognize that we have a large audience, a large consumer base that we can certainly bring, but we also have capabilities that we can bring, right? And DashMart Fulfillment Services is now part of the capability offering. Online ordering and fulfillment with Drive always have been there. But -- so as you kind of think about this, DoorDash is a 2-sided player in the retail realm where, obviously, there's the consumer front, but there's also the B2B front with retailers. Ravi Inukonda: Yes, Lee, on the payback period, right, like, look, nothing is really changing about how we operate the business, right? Look, when we think about investments in payback, I think of it in terms of 2 dimensions. One is, is it ultimately improving retention order frequency. The other one is, is it driving free cash flow and IRR. So that framework and how we operate, that discipline is not changing. Let me give you an example, right? We start with small levels of investment. As we find product market fit, we continue to increase the level of investment. Look at our new verticals business where we've increased our unit economics year-over-year. Look at our overall international business. That's close to being contribution profit breakeven. That just goes to show you the discipline of us being operators in how we operate the business. As you think about the investment areas, look, I mean, the software side, the payback period is going to be shorter, but our goal is to continue to invest because that's going to drive revenue. Whereas if you think about our tech stack, all of that is going to increase our tech feature development velocity, which ultimately is going to help us release features faster, which is going to drive retention and unit economics, right? That's the distinction we have as we think about our investment areas, but the core philosophy and discipline in how we are operating the business, that is not changing. Operator: Next question comes from the line of Justin Patterson with KeyBanc. Miles Jakubiak: This is Miles Jakubiak on for Justin. I'd like to start with one on grocery. Just curious if you're seeing -- you had some nice grocer adds during the quarter. Curious if you're seeing any increase from grocers to move a bit faster on the delivery side and coming to the platform. And then one just on going out or dine-in, in-person dining. Saw you had the Going Out launch and some SevenRooms stuff launched during the quarter, so curious if you could just expand on how you view that dining out experience fitting within the DoorDash ecosystem and the opportunity there. Tony Xu: Sure. Miles, it's Tony. I'll start, and feel free to add in here, Ravi. Look, on the first question with grocery, you're right, I mean, we're super excited about all the selection that we're adding, including Kroger, who we announced in the recent quarter. I think the short version of this is we've never been in a better position in grocery. And we're also adding across the board, not just the top grocers in terms of kind of the national scale players but also the local grocers and really across the board. I think every grocer is recognizing that DoorDash is now the leader in order volume in this category and the leader in acquiring new customers. And so this is something that I think people understand. And as a result, it's become more habitual that way. I also think it's interesting that some of these grocers, kind of similar to the comment I made earlier about retail, are starting to ask us to help with other things. And so I think there's an interesting -- there's always this kind of 2-sided opportunity for us really on the -- certainly on the consumer front but also B2B. With respect to Going Out, you're right. Going Out has been an experiment that we've been running for a while, and we kind of shipped more recently in some select markets. And it's going really well. I mean I think this kind of goes to maybe some commentary. I forget whether it was 4 earnings calls ago or 5 where we talked about there's more than 1 way to connect every local business and every local consumer. Today, I know we're known predominantly as bring everything to you, whether you're at home, you're in the office or wherever you are, but there's no reason why we can't bring you to everything. And again, the goal of the company is to connect every local business with every local consumer. On the consumer front, we obviously have the largest audience with the most number of kind of frequency not just in terms of buying but also just in opening the app and the searches and everything else that they take action on in the product. But we also have quite a lot of information with merchants because of our B2B commerce platform. A lot of these merchants are increasingly asking us to help them from not just online ordering, we have hundreds of thousands of those businesses, but analytics and marketing solutions. And I think with the addition of a product like SevenRooms, we can really democratize this ability that I think a lot of tech companies have and give it to every small, medium and large restaurant to be able to understand all of their guests and really allow the restaurants to maximize whatever might be the best thing to maximize for them at that moment in time. Sometimes, it's going to be driving new customers. Other times, it's going to be driving adoption of a new product. And that's really what the point of Going Out is. It's really to introduce customers to restaurants that they maybe never tried before or add an occasion to build increasing loyalty to an existing restaurant that they do have a relationship with. Today, DoorDash effectively has a lot order frequency on bringing things to you, and we have almost no order frequency on having you go to a store, but we believe that can change. Operator: And our last question comes from the line of Ron Josey with Citi. Ronald Josey: That's great. Going back to Roo really quick. Understood the investments needed here and the acquisition literally closed, what, around 4 weeks ago. But would love to hear what you all think or learned thus far on ways to improve the product and the consumer experience as we think about these investments. And then I believe it was mentioned in the letter or the press release that unit economics were flat quarter-to-quarter for U.S. restaurants. I'm just wondering if that's a change in trajectory or anything to call out there. Tony Xu: Yes, I can start, Ron, on Roo. Maybe, Ravi, if you want to take the unit economics question. On Roo, I think there's a lot that we can do, and I think that's mostly because DoorDash has ran just a lot of experiments at this point, tens of thousands of experiments. And as you can probably guess, the vast majority of those experiments fail and never make it to you as a customer, but we have taken a lot of these lessons that have done well and brought them over to Wolt, for example. And we think that there's a lot of experiments that Wolt has ran, too, that can be portable to Roo in addition to those that would come from DoorDash. And so there's no like one thing. I think that like I probably bore you with the list of features that, that would be talking about, but this really is the same answer to the question of how is it possible that the DoorDash marketplace can -- the U.S. marketplace, that it can continue to grow faster at higher volumes and increase our penetration with users. And it's because there is no one thing. There's thousands of small things that add up in terms of how we deliver on the selection, the quality, the affordability and the service. And so it will be a collection of things that we've already identified, and we're excited to ship them. Ravi Inukonda: Ron, on the second point around U.S. restaurants, I mean, look, the business is doing well. We talked about the fact that the business is growing. Unit economics are still progressing quite nicely. Quarter-to-quarter, there's moving parts. But overall, I mean, really excited about what you're seeing from a unit economic perspective. I think a few years ago, we talked about the fact that the incremental margins over the last 8 quarter average was above 7%. That still continues to be the case. I mean this business is growing at larger scale, accelerating as well as the unit economics continue to progress quite nicely. So we're really pleased with how the restaurant business is doing in the U.S. Operator: Ladies and gentlemen, that concludes the question-and-answer session. Thank you all for joining, and you may now disconnect.
Ivan Vindheim: Good morning, everyone, both in the room and online. Thank you very much for joining us this morning in connection with the release and the presentation of Mowi's third quarter results of 2025. My name is Ivan Vindheim, and I'm the CEO of Mowi. And together with our CFO Kristian Ellingsen, I will take you through the numbers and the fundamentals this morning and to the best of my and our ability, add a few appropriate comments to them. And after presentation, our analyst, Ole Petter Urheim, will host Q&A session. Those of you who are following the presentation online, can submit your questions or comments in advance or as we go along by e-mail. Please refer to websites at mowi.com for necessary details. Disclaimer is both long and extensive. So I think we leave it for a self-study. So with that out of the way, I think we are ready for the highlights of the quarter. And to begin with, and on a general note, I think it's fair to say that the third quarter was like previous quarters this year, characterized by soft prices following well-supplied markets. And in the third quarter, with prices even below industry cost. For our part, this translated into EUR 1.39 billion in operating revenues and an operational profit of EUR 112 million on record high harvest volumes of 166,000 tonnes. The latter slightly above our guidance. Otherwise, the third quarter is typically the more challenging time of year biologically, and this third quarter was no exception to the rule. But despite this, our weighted realized production cost of EUR 5.42 per kilo for 7 farming countries was stable quarter-over-quarter and down by 5% year-over-year. So all else being equal, our P&L cost in the third quarter is down by EUR 50 million year-over-year and EUR 126 million year-to-date, which are both considerable amounts. And furthermore, our standing biomass cost continues to develop well on lower feed prices, which bodes well for our P&L cost next year. But in the third quarter, however, we expect a stable realized production cost quarter-over-quarter. Otherwise, our acquisition of Nova Sea was approved and closed in October. So now we are in full swing with the integration chasing EUR 34 million in synergies among other things. And for this sake, this entity will be fully consolidated as from the fourth quarter. Carrying on 2 other divisions, Consumer and Feed. They delivered another strong quarter. I think it's fair to say with record-high earnings to mention some. And in terms of our strategic review of the Feed division, it's progressing, and we expect to reach a conclusion before year-end. And finally, as the last bullet point reads, our Board of Directors has decided to distribute a quarterly dividend of NOK 1.50 per share after the third quarter. I think that does it for the highlights of the quarter. So then we move on to our Farming volume guidance. As we can see from the chart here, we have update since last time we reported, once again, now from 545,000 tonnes to 554,000 tonnes, primarily due to the consolidation of Nova Sea as from that fourth quarter. And it's equivalent to a growth of as high as 10.5% year-over-year. And next year, we expect to have 605,000 tonnes in Mowi, and that translates to a further 9.2% growth year-over-year. And finally, we reaffirm our 2029 organic farming volume target of at least 650,000 tonnes. And this, will achieve through, among other things, increased smolt stocking and by means of postsmolt because we are still unutilized license capacity in Mowi in several other countries where we operate. And with postsmolt, we can increase the productivity on licenses already in operation, which are to be set into operation. And further on that note, this is a picture of Kilvik, which will be a 6,000 tonnes state-of-the-art postsmolt RAS facility on the coast of Helgeland when finished and which came in with a Nova Sea acquisition. And in October, we were ordered 4 new closed containment systems for postsmolt production in Region West in the wake of the new environmental licensing scheme in Norway and the return of previously revoked licenses under the traffic light system. So altogether, this increases our postsmolt volumes in Norway from 30 million postsmolt to 40 million postsmolt and to 50 million postsmolt on group level in the 500 grams to 1.2 kilograms range. So Mowi's Farming volume growth continues unabated after the rather quiet 2010s and is now surpassing that of the wider industry by a large margin, cementing our #1 position in the market for the Atlantic salmon. Then from the grand scheme of things to more specifically about the third quarter. And first here, our key financial figures. There are a lot of numbers on this slide. So I think you will have to focus on the most important ones now and leave the rest for later in Kristian's session. And as we have just been through turnover profit, I think we skip them here and go straight to cash and net interest-bearing debt, which stood at EUR 1.76 billion at the end of the quarter. And when Nova Sea fully consolidated and paid for, it would have been EUR 2.51 billion with a corresponding equity ratio of 46%. But the latter is indicating a sustainable debt level and a solid balance sheet also post-closing. But having said that, we will revert to our new and exact debt target after the fourth quarter when the budget for next year has been set. Furthermore, underlying earnings per share was EUR 0.13 in the quarter whilst annualized return on capital employed was 7.5%, both affected by the soft prices in the quarter. And the same goes for our region margins for the value chain, which we will get back to in detail shortly when we go through the different business entities. But first, somewhat more about the prices in the quarter, which we have characterized as soft a few times already following well-supplied markets in the third quarter like previous quarters this year and in the third quarter, with prices even below industry costs. But on a positive note, however, industry supply growth has now normalized after unprecedented growth earlier this year and is now hovering around 0%, which under normal circumstances should pave the way for better prices going forward. Then our own price performance in the quarter, which I would say was strong in relative terms as it was 15% above the reference price, which is the standard we like to hold ourselves to internally and against which we measure ourselves, as you can hear. Positively, impacted by contract share 21% in the quarter and contract prices above the prevailing spot price in addition to reasonably good harvest weights and the high quality of our fish. So with that, I think we can start to drill down into the different business entities. And we begin as usual with Mowi Norway, our largest and most important entity by far and locomotive our business model. And if you take the numbers first, operational profit was EUR 111 million from Mowi Norway in the quarter whilst margin was EUR 1.5 per kilo and harvest volumes 99,500 tonnes. In a rather challenging quarter for Mowi Norway, I think it's fair to say, given the season but still a decent quarter with costs down year-over-year, as you can see from the chart here on quite neutral harvest volumes, but unfortunately, more than outweighed by lower prices year-over-year, which is where the shoe pinches this year. And these comments also apply to the different regions in Mowi Norway in the quarter and to some more than others with our margin slam dunk by Region North this time around on good biology and on very low cost whilst we struggled somewhat more in the other regions, but still a decent quarter for Mowi Norway, I would say, all in all given the prevailing prices. Then the volume guidance for Mowi Norway, which we have upped since last time we reported from 320,000 tonnes to 329,000 tonnes due to primarily the consolidation of Nova Sea as from the fourth quarter and is equivalent to a growth of 8.4% year-over-year. And next year, we expect to harvest 380,000 tonnes in Mowi Norway, and that translates to a further growth of 15.5% year-over-year. But the short-term goal on these assets is still 400,000 tonnes, which we hope to reach in the not-too-distant future and which would be the next milestone in Mowi in Norway. Then the last slide on Norway, our sales contract portfolio. Contract share was 19% for Mowi Norway in the quarter and was with that spot on our guidance. And these contracts contributed positively to our earnings, as I said earlier this morning. As for the fourth quarter, we expect our contract share in Norway to be about 23%, relatively stable contract prices quarter-over-quarter. And this contract share is including Nova Sea. And finally, as to next year, as we are negotiating new contracts as we speak, we cannot say much about that today other than to refer to the fourth quarter release. In the meantime, we must keep our cards close to our chest for natural reasons. That concludes Mowi Norway. So then we can have a look at our 6 other farming countries and we start with Mowi Scotland. Mowi Scotland was a margin winner in the third quarter, only beaten by Region North in Norway, thanks partly to the highest contract share in the group in the quarter. And this resulted in a margin of EUR 1.54 per kilo for 17,000 tonnes harvest volumes in Scotland, which in turn translated into an operational profit of EUR 27 million, which is a strong result, I would say, on reasonably good biology, I guess, it could add to that. Otherwise, this is a picture of our new broodstock facility at Ardessie, which will supply us with high-quality eggs in Mowi Scotland going forward. As you all know, it all starts with high-quality eggs in this industry as genetics trumps most things for all living beings and even more so for the salmon as the environment in the sea is much tougher than on land. And speaking of the sea, then overseas to Chile. Mowi Chile posted an operational profit of EUR 12 million in the third quarter by means of a margin of EUR 0.55 per kilo on 22,000 tonnes harvest volumes, which is a decent result, I would say, given the prevailing prices, thanks once again to the lowest cost in the group in the quarter. And finally, biology was also once again strong in Chile in the third quarter. That was unfortunately not the case in Canada in the quarter. We suffered a loss of EUR 31 million due to very challenging biology, particularly in the East, following a prolonged period with very high sea temperatures, which led to several low DO incidents and significant issues with sea lice with all that entails. But on a positive side, biology has now recovered. So hopefully, we have put this behind us, knock on wood, which brings us to our 2 smallest farming entities, Mowi Ireland and Mowi Faroes. And if you take Mowi Ireland first. Our Irish operation has also been through a few challenging months biologically this summer and autumn. So in light of that, I would say, an operating profit of EUR 1 million in Ireland in the quarter is respectable. The same, I would say, about Mowi Faroes margin of EUR 0.55 in the quarter, considering that we have 100% spot price exposure in the Faroes. It is translated into an operating profit of EUR 1 million for Mowi Faroes in the third quarter on almost 2,500 tonnes harvest volumes. Biological metrics was once again strong in the Faroes in the quarter. Then further out into the Atlantic Ocean and to Iceland and our Atlantic farming operation, Arctic Fish. Arctic Fish wrestled both low prices and high cost in the quarter, and this resulted in a loss of EUR 6 million in Iceland in the third quarter. But biology continues to develop reasonably well. And combined with our cost measures in Iceland, we still believe we will get the cost level down to a sustainable level. I think that concludes Mowi Farming. So then we can move on to Consumer Products, our downstream business. Low prices for farming means low raw material costs for Consumer Products and therefore, higher profit. And this relationship proved to be true also in the third quarter as we posted a quarterly record high operating EBIT of EUR 66 million, which is up by more than 50% year-over-year on sold volumes at record high levels, where the latter is also demonstrating a strong demand for our products. Then last one out this morning, Mowi Feed. The third quarter is high season for our feed operation as it follows the sea temperatures in the Northern Hemisphere and the growth in sea for Mowi Farming, and this translated into a quarterly record high operational EBITDA of EUR 26 million in the quarter. Otherwise, our Feed continues to perform well. And in terms of our strategic review of this division, as we said earlier this morning, is progressing, and we expect to reach a conclusion before year-end. But beyond that, we do not have any further comments on this, this morning. So please bear that in mind when we come to the Q&A session. So then, Kristian, the floor is all yours. You can take us through the financial figures and the fundamentals. Thank you so far. Kristian Ellingsen: Thank you very much, Ivan. Good morning, everyone. I hope you are doing well. As usual, we start with the overview of profit and loss, which shows record high year-to-date volumes and revenues while quarterly revenue was stable from Q2. Operational EBIT was down from Q3 '24 on lower spot prices, partly offset by lower costs and higher volumes. And with regards to the items between operational EBIT and financial EBIT, this was mainly related to the net fair value adjustment of biomass, which was positive this time around on higher salmon prices, including forward prices versus the end of the second quarter. Income from associated companies was mainly related to Nova Sea with an operational profit of EUR 0.87 per kilo in the quarter, and Nova Sea will be consolidated into the group figures from Q4. Net financial items were relatively stable as lower interest cost was offset by other movements. Earnings translated into an underlying earnings per share of EUR 0.13 while the cash flow per share was good at EUR 0.39. Return on capital employed year-to-date was 12.6%, slightly above the minimum target level, and this reflects a year with higher supply and pressure on prices. We then move on to the financial position, the balance sheet, which was relatively stable from Q3 '24 as we see here in the table. Mowi has a strong financial position. And including the effects of the acquisition of Nova Sea, equity ratio would be 46% or 49% measured on the covenant methodology. There was a good cash generation in the quarter, and net interest-bearing debt ended at EUR 1.76 billion. Working capital release contributed positively. This includes the effect of lower biomass costs, which was down 5% from last year and 4% sequentially from Q2. On taxes and CapEx, the comparison figures in Q3 '24 were impacted by some special effects such as tax refunds in Canada and traffic light auction in Norway on CapEx. So adjusted for these effects, tax and CapEx were in practice quite stable. Interest payments are down as reflected here. Our long-term net interest-bearing debt target will be updated after Q4 when the budget for '26 has been set. Yes. So our cost -- sorry, our cash flow guidance for 2025 has been updated related to the inclusion of effects for Nova Sea in Q4. And in brackets, we have listed the previously indicated figures. So working capital tie-up is estimated to EUR 75 million. On CapEx, we expect EUR 355 million. Nova Sea has ongoing construction projects related to fresh water expansion and the new processing facility. And the estimate on interest payments has been increased to EUR 95 million while the updated tax estimate is now EUR 170 million. This overview on our financing is unchanged from the previous quarter. So we then leave this for self-study. We then give some words here on the cost development, which definitely goes in the right direction as also shown here on the graph. As guided, the realized P&L costs in Q3 of EUR 5.42 per kilo was stable from EUR 5.39 in Q2. And the realized cost is also expected to be stable on this EUR 5.4 level in Q4 based on current information. The cost reduction in Q3 '24 was EUR 50 million, and the year-to-date effect is EUR 126 million. The cost reductions are driven by lower feed prices with feed prices being down 13% versus Q3 last year, but our various cost measures, operational and improvements have also helped. So the cash cost has come down, and the cost at stock per kilo standing biomass is down 5%, as mentioned from last year. And we expect realized P&L cost in 2026 to be reduced versus 2025. And it's, of course, very positive that our different cost measures are now visible in our numbers. And since 2020, the cost focus in Mowi has been significantly increased. Cost has been emphasized as one of our strategic pillars. And operational improvements throughout the value chain and the cost saving program in recent years with almost 2,000 different initiatives have given results. And we have a very good starting point for our cost work as we are now the #1 or #2 performer in the various regions. And the 3-year average shows that we are all -- we are also #1 in Norway as shown here on the growth. But we are not finished here. We have identified a potential for EUR 300 million to EUR 400 million savings in the next 5 years through postsmolt Mowi 4.0, yield, automation and of course, the cost saving and productivity programs. And that is a nice segue into the next slide, which shows productivity and FTEs. Salary and personnel costs, that's the second largest cost item after Feed. And since we initiated this productivity program back in 2020, we have reduced close to 3,500 FTEs as shown here on the graph on a like-for-like basis. And if you also look at nominal FTEs, they are down 7% in a time with a significant volume increase for Mowi. So productivity has really improved significantly. We make sure that all of our measures do not negatively impact operations or HSE, and this has been achieved through automation, rightsizing, natural turnover, less overtime, less contracted labor, retirement, et cetera. This slide here shows some of our achievement on productivity, including preliminary 2026 figures. And in Mowi Farming, we see that we have a 38% increase on tonnes per employee. In Norway, we started on a higher productivity level, but productivity is still up 20%. And in downstream, we have a 30% productivity improvement. And this has been achieved through a combination of automation, digitalization, general focus on cost, focus on FTEs, looking through the value chain, challenging the business units, the departments. So a solid work. We then move on to market fundamentals starting with supply. Supply growth was, as already mentioned, record high also in the third quarter with more volumes than Q3 '24, driven by Norway. The biological improvements earlier in '25 combined with seasonal challenges in Q3 led to this growth, which came after 3 years with 0 growth for the industry. We estimate 5% demand growth in the quarter with a 12% higher consumption, partially offset then by lower prices. In Europe, consumption increased by 7% year-on-year on strong retail performance. Promotional activity and lower shelf prices has had a positive effect on demand. In the U.S., consumption increased by 13% with the prepacked segment driving good retail volumes. And Asia has seen a 34% volume increase with strong growth in all regions. And lower price points and more large-sized salmon was more available this quarter, and that has helped. And China has been particularly strong at 40% growth, as we see here in the numbers. And while demand has been good at 5% growth, the high supply in the market has taken its toll on prices. And we saw an inflection point on supply in September and a good price response from that. If you take a look at industry supply growth estimates for Q4, we expect negative volume growth year-on-year in Europe but positive in Chile. And also for 2026, the situation is a bit different in Europe versus Chile. If you look at the total, based on overall biomass statistics and current trends, we estimate 1% global industry supply growth versus as high as 9% than for 2025. Mowi's own volume guidance has been increased to record high 554,000 tonnes for 2025. That's up 10.5% year-on-year. And for '26, we then estimate a further increase up to 605,000 tonnes, up 9.2%, supported by biomass and sea up 10.9%. Then we're ready for some comments from Ivan on the outlook. Ivan Vindheim: Thank you, Kristian. Much appreciated. Then it's time to conclude with some closing remarks before we wrap up the Q&A session hosted by our analyst, Ole Petter Urheim. And to begin with, and on a general note, as I said earlier this morning, the third quarter was like previous quarters this year, characterized by soft prices following well-supplied markets. And in the third quarter, the price is even below industry cost. But on a positive note, however, industry supply growth has now normalized after unprecedented growth earlier this year and is now hovering around 0%, which on the normal circumstances should pave the way for better prices going forward. Otherwise, we continue to see strong demand for our products, demonstrated by sold volumes at record high levels in Consumer Products in the quarter. And our standing biomass cost in sea continues to develop well on lower feed prices, which bodes well for our P&L cost next year. In the fourth quarter, however, we expect a stable realized production cost quarter-over-quarter. So then the only outstanding piece of the puzzle is our farming volumes and our volume guidance, which we have increased since last time we reported for this year, once again, now from 545,000 tonnes to 554,000 tonnes. This is equivalent to a growth of as high as 10.5% a year-over-year. And next year, we expect to harvest 605,000 tonnes in Mowi, and that translates to a further 9.2% growth year-over-year. So Mowi's Farming volume growth continues unabated and is surpassing that to the wider industry and our listed peers by a large margin, as we saw earlier this morning. So once again, a big thank you to all of my colleagues who have made it happen. It's, of course, much, much appreciated. So with this short summary, Ole Petter and Kristian, I think we're ready for the Q&A session. So if Kristian can please join me on the stage and help me out with answering the questions, then you, Ole Petter can administer the questions from the audience and the web. Ole Petter Juvik Urheim: Yes. And I think we will start with questions here from the audience. Christian Nordby: Christian Nordby, Arctic Securities. We've seen in Chile quite a buildup in overall biomass. What's your view on biology in Chile based on this higher biomass there? And do you fear that this could backlash into worse productivity later? Ivan Vindheim: So that's a good question, Christian. And biology in Chile has been really good this year. And I also say last year. And as I said, during the presentation this morning, the lowest cost in Mowi is in Chile. So that is also a proof. So -- and we expect a continued good biology going forward. Christian Nordby: And you're now going into closed cage postsmolt production. Can you -- is it the same design for all the ones you're ordering? Or is it different? Or have you done this before at that design? And can you give some insight into it? Ivan Vindheim: This, we have done in Mowi for a long, long time. We started in 2013. So when we order the 4 new ones here, we go from 6 to 10 closed containment systems for postsmolt production. We use the same technology. We use it for postsmolt, as you said, and it works also financially. The reason why we ordered 4 last ones here was because of the new environmental licensing scheme in Norway, which makes this viable from a financial point of view. Henrik Knutsen: Henrik Knutsen, Pareto Securities. You mentioned biomass close to 11% higher year-over-year. Do you have a comparable figure if you were to include or exclude Nova Sea? Ivan Vindheim: That we can take after the Q&A session. Henrik Knutsen: Okay. And how much more biomass do you have in sea in Norway, again, including or excluding Nova Sea? Ivan Vindheim: And again, that should be taken after the Q&A session. Martin Kaland: Martin Kaland, ABG Sundal Collier. Have you seen or experienced any impact from the tariffs in the U.S. on prices to end consumers, consumption or trade flows? Ivan Vindheim: That's really a good question. So, so far, so good. But of course, there is impact here, but nothing that has been dramatic so far. So let's see how this develops. Martin Kaland: And did you mention CapEx for the closed containment systems and the volume potential you expect from it? Ivan Vindheim: We don't. As said, we will order this month, right? So we are a little bit ahead of the curve and we start to talk about the CapEx amount, et cetera, that we have to work to at a later stage. But again, it's financially viable with the new environmental licensing scheme. So we use licenses we have, which will be returned to us. So there was a silent audience today. Do we have any questions from the web, Ole Petter? Ole Petter Juvik Urheim: Yes, we have. So we have received a question from the web on how demand in China is given the strong developments in recent quarters? Kristian Ellingsen: Yes. China has been very good in recent years. We see now that China is around 6% of the global consumption for salmon. So the position has been increased. We see in China, of course, positive responses from lower prices. But we also see a growing middle class. We see that logistics has improved and various restrictions have improved. We also see that there are some interesting trends on sales channels in China. We see that there is an interesting mix of e-commerce and home delivery solutions, et cetera. So the take from the Norwegian Seafood Council is that the home consumption for salmon in China is higher than we have perhaps previously estimated. It's actually around 60% according to them on the total consumption. And if you take that home consumption, it's actually tilted a little bit towards various e-commerce solutions than more traditional retail that we know from, for example, Europe. So there are some interesting developments, interesting trends. Again, the positive effects on prices are there. But we believe also that should salmon prices improve, there are some structural things that also happened here on the demand side. So at least this is partly sticky. So -- and with the growing middle class, I think there is still good potential in China. Ole Petter Juvik Urheim: Yes. And we have a question from Alexander Sloane from Barclays. Can you quantify expected farming costs decline in 2026 as you see it today? Kristian Ellingsen: We choose not to be that specific. But let's say it like this, we have indicated, of course, the cost level in Q3, Q4. It's around the EUR 5.4 level. We will see that there is a potential versus that to put it like that, so i.e., lower than that. But apart from that, I think the best indication is what we have already said on the biomass cost at stock reductions, 4% quarter-over-quarter and 5% year-on-year. And then, of course, there's always a question of how much inflation will contribute on the other side. Will there be any surprises on the biology, et cetera. So that's why it's always very difficult for us to give any numbers on these kind of estimates. But I think those -- looking at the biomass cost of stock, the current cost level and down from there, at least those are some indication. I could also just add that we, of course, have talked a lot about feed prices here today and the effects of that. But if you look at the cost year-to-date in farming and the reduction there, it's actually between 75% and 80% that's related to feed. But that also means that there are some other elements that also down like health costs, like productivity helps, more volumes helps, of course, on dilution, but also repair and maintenance costs down. So we see that it helps to work with our cost base and to realize reduction also in other areas. Ole Petter Juvik Urheim: Another question from Alexander Sloane. With your 1% global supply growth forecast for 2026, what do you see as key upside and downside risks? Ivan Vindheim: Yes. Maybe I can start. So no, internally, we see more downside risk than upside risk. So to say less is more when you answer questions. So that's at least the start of the question. Maybe you have some more bits and pieces you want to add, Kristian? Kristian Ellingsen: No, I think that's a good summary. And of course, Ivan has also mentioned the 2-way division of the market. That could be expected on the current composition of the biomass, et cetera, but I definitely agree that there is on the downside risk. Ivan Vindheim: And maybe I could add this to the question. No one has better biological KPIs, metrics, of course, than the Chilean farmers. So bear that in mind, all of you. So we are not world champions in Norway, although we'd like to think we are. Ole Petter Juvik Urheim: Okay. So last question from Alexander Sloane here. What impact do you think that Peru reduced quota could have on fish oil and fish meal prices? Any risk we see repeat of 2023 spike? Kristian Ellingsen: I think it's important here to say that there has been such a provisional quota so far on the anchovy fishery in Peru. There is an ongoing research fishery to determine this quota what that will be now in the end. There are some rumors that stocks have -- that there have been some migration then from the northern part to the more southern part. Usually, it is a northern fishery, that's the most important in Peru. But of course, we have to look at both the quotas for the northern fishery and also the southern fishery should there be any movements here on the stocks. So it's a little bit early to give any more information that. Let's wait for the final quota information, et cetera. Ole Petter Juvik Urheim: Yes. And then seems to be the last question from Knut-Ivar Bakken, Sparbanken Markets. Mowi will invest in 4 closed containment system to restore 2.6 licenses in Region West. In addition, you already operate other closed containment systems. Should we expect that Mowi will invest in more closed containment systems in 2026 and 2027 to restore all of the 10.5 withdrawn licenses? Ivan Vindheim: It depends. It depends. So let's revert to that at a later stage. Ole Petter Juvik Urheim: Okay. With that, I think we can conclude the Q&A. Ivan Vindheim: Thank you. Then it only remains for me to thank everyone for the attention. We hope to see you back already in February at our fourth quarter release, if not before. So in the meantime, please take care and have a great day ahead. Thank you.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to PTC Therapeutics Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Today's call is being recorded. I would now like to turn the call over to Ellen Cavaleri, Head of Investor Relations. Please go ahead. Ellen Cavaleri: Good afternoon, and thank you for joining us to discuss PTC Therapeutics' Third Quarter 2025 Corporate Update and Financial Results. I'm joined today by our Chief Executive Officer, Dr. Matthew Klein; our Chief Business Officer, Eric Pauwels; and our Chief Financial Officer, Pierre Gravier. Today's call will include forward-looking statements based on our current expectations. These statements are subject to certain risks and uncertainties, and actual results may differ materially. Please review the slide posted on our Investor Relations website in conjunction with the call, which contains information about our forward-looking statements, our most recent quarterly report on Form 10-Q and annual report on Form 10-K filed with the SEC as well as our other SEC filings for a detailed description of applicable risks and uncertainties that could cause our actual performance and results to differ materially from those expressed or implied in these forward-looking statements. Additionally, we will disclose certain non-GAAP information during this call. Information regarding our use of GAAP to non-GAAP financial measures and a reconciliation of GAAP to non-GAAP are available in today's earnings release. I will now pass the call over to our CEO, Dr. Matthew Klein. Matthew Klein: Thank you all for joining the call today. I'm excited to share our outstanding third quarter results. The highlight of the quarter was the initiation of the Sephience global launch in Europe and the United States. As we have discussed, we expect Sephience to be the foundational product for PTC's sustainable growth and near-term path to profitability. Overall, third quarter revenue totaled $211 million, which includes the first revenue from the Sephience launch as well as continued contributions from our DMD franchise. With this strong quarter performance, we are narrowing our 2025 full year revenue guidance to $750 million to $800 million, the upper end of the initial revenue guidance range. The Sephience launch is off to a great start. As of September 30, Sephience generated $19.6 million in revenue. This includes $14.4 million in the U.S. and $5.2 million ex U.S. We have seen a great deal of enthusiasm upon launch with 521 patient start forms received from U.S. centers as of September 30. We have received start forms for patients of all ages, including adults, all disease severities, including classical PKU and various treatment histories, including patient switches, previous treatment failures and treatment-naive patients. While these are still early days, the fact that we are seeing demand from all key patient segments underscores the significant unmet need for PKU patients and the potential for Sephience to become the standard of care, providing a safe and effective therapy for both classical and nonclassical PKU patients. While we are presenting results today through September 30, the results for the month of October show sustained momentum. We are encouraged by the strong initial numbers and broad interest from the physician and patient communities. To sustain broad uptake, our teams are continuing to gather data to help reinforce the highly differentiated Sephience profile. At the International Metabolism Meeting in September, we presented the results from the AMPLIFY head-to-head study comparing phenylalanine lowering between Sephience and BH4. In this crossover study, Sephience treated resulted in an average of 70% greater reduction in phenylalanine levels compared to BH4, demonstrating once again the robust and clinically differentiated benefits Sephience can provide. Additional presentations at the conference highlighted Sephience benefits on cognitive function and diet liberalization, including in the most severe patients with classical PKU or BH4 non-responsive mutations. We are also finalizing a publication on the Sephience mechanism of action, including in vitro, in vivo and clinical efficacy data in the most severe PKU mutations, supporting the potential ability of Sephience to provide a safe, well-tolerated and efficacious therapy for the full spectrum of PKU patients. Eric will provide additional details on the launch. I will now briefly provide an update on the development and regulatory status of our other programs. Starting with the votoplam Huntington's disease program, a meeting with FDA is planned for the fourth quarter to align on the study design for the next efficacy study as well as to discuss the data package that could potentially support an accelerated approval application. For the vatiquinone Friedreich's ataxia program, we are planning to meet with FDA this quarter to discuss potential next steps for the program. And for Translarna, the NDA remains under FDA review. Finally, we remain in a very strong financial position, ending the third quarter with approximately $1.68 billion in cash. As we have discussed, this enables us to reach cash flow breakeven as well as participate in strategic business development activities to complement our R&D and commercial portfolios. Additionally, as the company continues to build for future success, we will be hosting an R&D Day on Tuesday, December 2nd, to share progress on our research programs, including those from our splicing platform. I will now turn the call over to Eric to discuss details of the Sephience launch and our commercial performance. Eric? Eric Pauwels: Thanks, Matt. We are very pleased with the early momentum of the Sephience global launch. Our seasoned customer-facing teams are off to a strong start, leveraging their years of preparation and experience and delivering across all fronts. We are excited to simultaneously launch Sephience in the U.S. and Europe following regulatory approvals, and we are actively preparing for the upcoming launch in Japan following MAA approval anticipated in Q4. As of September 30th, Sephience global revenue reached $19.6 million and 341 patients on commercial therapy, driven by robust performances in both the U.S. and Germany. Following FDA approval on July 28th, our U.S. team made the first Sephience shipments to patients approximately 2 weeks afterwards. Through the end of the third quarter, our PTC Cares teams received 521 patient start forms from 141 unique prescribers. The response thus far from U.S. health care providers has been overwhelmingly positive with a high willingness to prescribe Sephience to a wide range of PKU patients, including switches, poorly controlled or failed and treatment-naive individuals as well as to children and adults. Many of these health care providers have shared their observations of the rapid benefits of Phe lowering and improved patient outcomes and indicated their intent to continue to prescribe Sephience to a broad spectrum of PKU patients. U.S. payer engagement continues to be positive. And our market access and medical affairs teams have met with more than 35 payers covering approximately 250 million lives. U.S. payers continue to recognize the highly differentiated profile and strong value proposition of Sephience. We have seen initially favorable payer policies that maintain broad access with coverage that includes prior authorizations to the label, no or limited step edits and refills for 6 to 12 months. Although we are still in the early stages of the launch, we have seen a favorably higher commercial payer ratio and expect this payer mix to stabilize at 65-35 as Medicaid and Medicare plans finalize their policies in Q4. Likewise, the launch in Germany is off to a great start as we quickly converted compassionate use program patients that were on Sephience prior to EMEA approval onto commercial therapy. We have also received prescriptions for new patients from Germany and additional EU countries on a named patient basis and are preparing health technology assessment dossiers to secure pricing and reimbursement across many international markets with early access programs. Throughout Europe and other key markets, we see similar dynamics with health care providers prescribing Sephience to a broad range of PKU patients. Along with the positive feedback from health care providers, we have also seen a highly engaged response from the PKU patient community worldwide. Social media serves as a powerful platform to see firsthand patients experience with Sephience and is also a strong channel for patient-to-patient communication. Instagram and other channels, including stories and posts from patients who have started Sephience, some who are even tasting new foods for the first time. The excitement for Sephience is equally tangible at PKU community events such as NPKUA Annual Gathering in September, where many PKU patients shared their desire for new treatment options. Our customer-facing teams continue to lead medical education programs at key congresses such as ICIEM and ESPKU in September, featuring roundtables, scientific exchanges and investigator meetings in the U.S., Europe and Japan, highlighting the strong clinical data of Sephience. As Matt mentioned, these activities featured new Sephience data, including long-term results from the APHENITY extension study and new data from the head-to-head study, further supporting the differentiated efficacy of Sephience. Additionally, data were presented in Japanese patients showing robust Phe lowering and safety results consistent with the global PKU population. We continue to expand the global launch with our experienced teams in key international markets. We recently received approval for Sephience in Canada, and we anticipate regulatory approval in Japan and Brazil later this year. As we have previously discussed, we will continue to maintain a narrow pricing corridor throughout this early stage of the launch. Now turning to our established portfolio, we continue to defend our DMD franchise by maintaining patients on Translarna across the majority of European markets, leveraging Article 117 and fostering brand loyalty for Emflaza with targeted programs for health care providers and DMD patients in the U.S. despite multiple generic entries. In summary, the early global rollout of Sephience is off to a great start. We are very pleased with the early results in the quarter with the U.S. being our main engine for product growth, supplemented by other key international markets that we expect to bring on board over the next 12 months. With that, I will now turn the call over to Pierre for a financial update. Pierre? Pierre Gravier: Thanks, Eric. I'll now share the financial highlights of our third quarter of 2025. Beginning with top line results. Total revenue for the third quarter was $211 million. Starting with Sephience. Net product revenue in the quarter was $19.6 million, as of September 30. DMD franchise revenue for the quarter was $86 million with Translarna net product revenue of $51 million and Emflaza net product revenue of $35 million. For Evrysdi, Roche achieved third quarter global revenue of approximately USD 532 million, resulting in royalty revenue of $71 million for PTC. For the third quarter of 2025, non-GAAP R&D expense was $91 million, excluding $9 million in noncash stock-based compensation expense compared to $152 million for the third quarter of 2024, excluding $9 million in noncash stock-based compensation expense. Non-GAAP SG&A expense was $74 million for the third quarter of 2025, excluding $10 million in noncash stock-based compensation expense compared to $63 million for the third quarter of 2024, excluding $10 million in noncash stock-based compensation expense. Cash, cash equivalents and marketable securities totaled $1,688 million as of September 30, 2025, compared to $1,140 million as of December 31, 2024. The third quarter cash balance reflects the previously announced purchase of 90% of our Sephience annual global net sales payment obligation of 8% to 12% owed to former Censa shareholders for approximately $225 million upfront and future sales-based milestone payments. Given the significant Sephience revenue opportunity, we expect meaningful value creation based on the transaction terms. We remain well capitalized to reach cash flow breakeven and profitability as well as pursue business development opportunities that will further enhance our commercial portfolio and expand our innovative pipeline. I will now turn the call over to the operator for Q&A. Operator? Operator: [Operator Instructions] Our first question comes from Kristen Kluska with Cantor Fitzgerald. Kristen Kluska: Congrats on an amazing start for Sephience really exciting to see that. I wanted to ask what's going to give you confidence that beyond this really strong out-of-the-gate launch, you're going to see maintained durability and that patients will be on therapy for a while. Matthew Klein: Kristen, thanks so much for the question. We too are quite excited with the start and seeing a lot of what we believed we would see, which is given the highly differentiated profile of Sephience uptake in all segments, right, including those who have been on previous therapies, therapy-naive patients, who're getting -- adults who are therapy naive, who people thought were so remote, that would be hard to get. And what we're consistently hearing -- and I should add also classical, nonclassical full spectrum of severity. And what we're continuing to hear from physicians and from the patient community is great response. We're seeing on social media, patients being able to eat food for the first time that they couldn't eat before like hamburgers and pizza and then a lot of physician feedback that some of the more severe patients that they wanted to try first are responding and are responding really well. We even heard from one of the early skeptics, one of the physicians, who was a bit skeptical at first to whether or not Sephience could have a place for the classical and more severe patients. And we heard recently, she said, I'm converted, and I'm ready to try all my patients on Sephience, which is something we're hearing again and again from a number of physicians. So we've got this broad interest in trying patients. We're getting initial feedback that patients are responding, responding in terms of lowering Phe as well as being able to start to liberalize their diet. Look, it's early days. We're only a few weeks into the launch, but what we're seeing early looks good and we'll see. We'll see as things continue to unfold. We keep in mind that in our clinical studies, we saw up to 75% response rate in patients of the full spectrum, which again suggests that we can deliver benefit to the broad spectrum of patients. And of course, as you've talked about a lot in some of the research notes that you've written that patients really want to have lower Phe and also see the diet liberalization, and that's really going to be a key factor in adherence. Operator: Our next question comes from Tazeen Ahmad with Bank of America. Tazeen Ahmad: Congrats from me as well on a really strong launch out of the gate. Matt, maybe I wanted to ask you a couple of questions. So can you just talk to me about what magnitude of Phe reduction are doctors and payers looking for in order to keep a patient on treatment beyond the trial period? Maybe related to that as well, what's your expectation for percentage of patients that are going to stay on treatment following this initial trial? And how are you thinking about guiding the Street on that particular dynamic as well? Matthew Klein: Yes, absolutely. Thanks for the question, Tazeen. I'll give an initial response, and I'll ask Eric to provide a little bit of color. On your first question, of magnitude of response. We're hearing different things from different folks, right? We're hearing that for some patients, certainly ones that are more severe that have never had a therapy that they could tolerate or respond to that 15% Phe reduction could be meaningful for them, 20% Phe reduction. Others say we're going to look for maybe 30% Phe reduction, which is what we used in the trial and others say it's not really a number. Are patients feeling better. And one of the exciting pieces of data we reported at the International Metabolism Meeting in Japan is that we are able to see in the clinical study that patients' cognitive function, executive function and mood are improving. That's another aspect of benefit that is not as easy to quantify, but it's another example of the kinds of things that physicians would be looking for in addition to quantifiable reductions in phenylalanine. Patients report that they can liberalize their diet in this overall sense that they're feeling better. So I think it's going to be a combination of factors. And again, I'll ask Eric to comment a little bit what we're hearing in terms of the dynamics in terms of payer requests and things like that. In terms of expectations for patients to stay on it, look, it's early. It's also too early to your third question to provide specific guidance as we get further into the launch, we'll be able to do that. But again, we've fallen back a bit on the clinical trial data, which shows that we have anywhere between a 66% to 75% response rate, looking at 15% or 30% as a threshold for Phe reduction with very good adherence given the safety, the tolerability, the ease of administration of the drug. So again, that's why we're so excited about being able to see early starts from all segments of the population because our experience has been that patients regardless of their age, regardless of their severity or previous treatment history, once they get on the therapy, it's a low burden to take and the vast majority of patients report having some benefit. Eric, do you want to provide a little bit more color on what we're hearing in terms of defining [ responsers ] and staying on therapy. Eric Pauwels: Yes. Thanks, Matt. Thanks, Tazeen, for the question. Clearly, what we're seeing is a very, very quick and rapid response from these centers of excellence. We -- it's very early days, but we're really pleased not only with the interactions that we've had with the payers, but also the way the physicians have adopted Sephience. The clinical data that has been highlighted that we provided, including the APHENITY long-term extension and the AMPLIFY data has been leveraged not only with physicians but also with payers. And the things we see right away is that the robust efficacy is seen within days, days and weeks. It's rapid acting, and I think that's something that patients and physicians look at. The safety profile has been excellent. It's an ease of administration with once-daily oral administration. Physicians like that. The value proposition to payers right now, we have seen no major obstacles and no significant restrictions at all right now for access to Sephience. And the teams have been really working very closely and productively with these payers now covering more than 250 million lives, and the clinical data and the value proposition is clearly what has been driving some of these policies. So it's early days now, but these policies are very favorable, and we're seeing physicians who are not only writing their first prescriptions, but also we're seeing good momentum in October with refills. Operator: Our next question comes from Brian Abrahams with RBC Capital Markets. Brian Abrahams: Congrats on the launch. I was wondering if you could talk a little bit about just what the time line is like from a new start form to a patient receiving a prescription and actually getting the drug, getting access. And then should we be -- I guess, how should we be thinking about the patients who for whom there are start forms, new start forms who are not yet on Sephience, should we expect those patients to roll on to treatment in the fourth quarter? Matthew Klein: Yes. Thanks for the question, Brian. I think, again, so far, things have been moving through quite well. Eric can give a little bit more detail, but I just want to give a particular mention to our PTC Cares team, which is our team of case managers who are incredibly experienced and provide a white glove service. Again, they were with us through all the Emflaza days, they're battle-tested through that and are really at the front lines now working with the patients, working with the physicians' offices, working with nurse practitioners, who are writing a lot of the prescriptions to really get the start forms and then quickly get those start forms processed and shepherd them through the system so we can get these patients on drug as quickly as possible. Eric, do you want to provide some detail on the time lines? Eric Pauwels: Yes. And again, Brian, keep in mind, it's early days. It's only been a few weeks here, but we're really surprised to see that there's already a number of commercial payers that have written policies, highly favorable ones. This has really helped in terms of the speed from the time of PSF to actual fill. The one thing we have to look at is, have there been denials or restrictions, and we haven't seen that. In the case, it's very limited. If there are denials, there are no hard denials. And of course, we're working through those through medical necessity documentation. As Matt said, our PTC Cares team is very experienced at managing this for the last 8.5 years in DMD, and we're working through all of these very, very quickly. I would say that right now, we're seeing somewhere -- depending on the plan, whether it's a commercial plan, it could actually be from the time of PSF to fill could be days. On average, we're somewhere between 2 to 4 weeks and that's really depending on the plan. We would anticipate that many of the government plans, Medicare, Medicaid, it's probably going to take a little longer for them to write there and finalize their policies. But even then, we're seeing patients on Medicare, Medicaid and Tricare being reimbursed. Operator: Our next question comes from Brian Cheng with JPMorgan. Lut Ming Cheng: I just want to pass on my congrats here as well. Just on the 521 start form number, how should we think about the rate of start form that is coming in? I think earlier, you said that October, you're seeing sustained momentum. Can you provide just more color on that comment? Is that specifically referring to the pace of uptick in start form or access with payers? What is the momentum specifically based on? Matthew Klein: Thanks for the question, Brian. So there's not much more color we can provide because we are still very much early days other than to say we've seen pretty consistent rates in the start forms and patients getting on to drug. We'll continue to watch this as we head through the rest of the fourth quarter. Of course, there's Thanksgiving, there's Christmas, there's holidays and things, which may or may not affect the dynamics. But again, for now, things seem to be from the start until now, pretty consistent. Operator: Our next question comes from Judah Frommer with Morgan Stanley. Judah Frommer: Let me say congrats, too. So a couple on Sephience. I guess, first, just can you help us with the narrowing of the full year guide? Is that solely tied to Sephience? Any other moving pieces you'd call out like the legacy portfolio coming in ahead this quarter? And second, I guess, just for those centers of excellence, I think you called out 104 of them. Can you talk maybe in numbers, how far you've penetrated those centers, what the opportunities left are within those? Matthew Klein: Absolutely, Judah, thanks so much for the questions. Pierre, do you want to talk first briefly about guidance and what went into that? And then Eric, if you want to talk a little bit about the center of excellence and the high penetration rate we've seen? Pierre Gravier: Yes. On the guidance, I would say this is the upper end of our initial guidance, which highlights our confidence in our ability to execute on our launch and all our products. And the delta is really Emflaza. We always talked about the delta being Emflaza, and that's the main delta from the $750 million to the $800 million. Eric, do you want to talk about PKU? Matthew Klein: Yes. Let me just add in that because Judah, when we started the year, we were $600 million to $800 million, thinking that we could [indiscernible] Emflaza last year came in at $208 million. And the question was with all the generic entrants, where would that be? Would we see a rapid decline. And so a lot of that wide gap was around Emflaza. Now that we've come through 3 quarters, and we're seeing -- despite there being 6 generics, we're still seeing consistent performance on Emflaza, which gives us the confidence along with the early Sephience numbers as well as the remaining portfolio continuing to do well to narrow to that upper end of the guidance of $750 million to $800 million. Pierre Gravier: And to answer your question regarding the centers of excellence, so we have called on every center of excellence. There's 100% awareness of Sephience in each one of these centers, and we've received prescriptions from all of them. However, and what we're really interested in is how many of these centers have actually prescribed more than one. And we've seen about 2/3 of these centers actually prescribe more than 1 prescription. And of course, there are some that are a little higher concentration than others. But overall, I think the centers of excellence are really bringing in patients at a nice cadence, and we're working with each one of them to increase the volume of patients to get on Sephience. Operator: Our next question comes from Clara Dong with Jefferies. Yuxi Dong: Congratulations on a great launch. So can you share a little bit more details on the patient profile for new prescribers? And specifically, are you seeing any initial uptake more concentrated in one group than the other? And also, just want to get your updated thoughts on the size of the overall opportunity given such very strong early launch momentum in [ U.S. including ] [indiscernible]. Matthew Klein: Clara, thanks so much for the questions. Look, again, it's early days. So it's really hard to give specific numbers on the breakout. of how many from each segment. But I think what we're seeing importantly is contributions from all segments. Again, as we said, we're seeing treatment-naive patients. We're seeing switches from other therapies, including Palynziq. We have a full age range. I think we have patients down as young as 2 to 3 months of age. We have a patient as old as 79 years of age who's been prescribed. So I think what we're seeing is this full spectrum of patients getting put on therapy. So it's -- and again, so as we get further into the launch, I think we'll be able to give more concrete metrics [ size ] penetration into each segment. But again, the important point is we're seeing that we are getting patients from every possible segment. And so the start has been great. I think it's still a little too soon for us to give revenue projections. What we've said all along is we've always thought of Sephience, as a highly differentiated rare disease therapy. And therefore, as we think about the market opportunity with 17,000 patients in the U.S., we think of it, again, very much like you would think about with a new, highly differentiated, safe and well-tolerated therapy with a strong data package that can provide potential benefit to the full spectrum of that 17,000 patients. Operator: Our next question comes from Paul Choi with Goldman Sachs. Kyuwon Choi: Congrats on the early progress with the Sephience launch. I want to ask with regard to Europe, any additional coverage updates you could provide for both Germany and the other major markets there? And my second question is, as you think about sort of the outlook for '26, it looks like you guys are in a position to start generating leverage maybe ahead of Street expectations. Can you maybe just sort of comment on the trajectory of OpEx and just how you're thinking about it perhaps versus where consensus estimates are? Matthew Klein: Yes. Absolutely. Thanks for the questions, Paul. Eric, do you want to take the first just about how dynamics are playing in Europe? And then Pierre, do you want to talk a little bit how we're thinking about balance sheet? Eric Pauwels: Sure. Yes. Thanks for the question, Paul. So in Germany, we're still in the free pricing period at this point in time. And obviously, we'll be looking at benefit assessment and going through the MNOG process, which will take it for approximately another 6 months into 2026. So that process right now will keep going. And we have -- in addition to that, we have actually submitted HTA dossiers in most of the countries in Southern Europe. We're working in parallel there with a number of their mechanisms for early access and named patient programs that are being paid at prices, which are equivalent to the German price. We've also opened up other markets in Southern -- Central and Eastern Europe as well. And those patients -- those countries also have mechanisms. We've received prescriptions as well in the Middle East as well as in Latin America. And again, we are working through all the named patient programs country by country as they have specific rules. But we're very pleased so far with the progress. Keep in mind that in Europe, is usually a relative -- Southern Europe, particularly is a long-term process, somewhere between 6 to 12 months between HTA assessment and then final price negotiations. Pierre Gravier: And in terms of OpEx trajectory, I will say a few things. Number one, as usual, we will provide 2026 guidance at JPMorgan. It's a bit early. However, you should expect OpEx to decline. Operator: Our next question comes from Joon Lee with Truist Securities. Joon Lee: Really congrats on the strong launch. I was a little bit surprised to hear that you're seeing switches even from Palynziq. Is that an outlier? Or is there any reason why someone on Palynziq would consider BH4 or even Sephience? Or is there -- are there people who are on Sephience, who really should be on Sephience? And a quick follow-up on how quickly could you launch in Japan post approval by year-end? And where would you put the peak opportunity in Japan vis-a-vis U.S. versus EU? I think you said that at least $1 billion in U.S. and half that in EU. Just curious where you would put that Japan in that spectrum. Matthew Klein: Jim, thanks so much for the questions. On your first question regarding Palynziq switches, look, we're just reporting what we're seeing and hearing from the field. Again, it's early days to say what's going to be a trend and not a trend. But what we have heard from KOLs, and I think several folks who've done KOL calls have shared similarly, the realization that the physicians and nurse practitioners and care teams have that Sephience can provide significant benefit to patients with severe mutations, including patients with GPV values of 0, which is the most severe genotypes, classical PKU patients. And for them, it's the question of can we give a once-a-day, well-tolerated oral therapy that can deliver significant reductions in phenylalanine and the ability to liberalize diet. And when you consider that opportunity with Sephience, that is something that physicians want to try, certainly considering the potential tolerability profile of Palynziq. But again, this is what we're hearing, and also, again, emphasizing that we're hearing that a number of physicians are saying their intent is to try all patients on Sephience knowing that, of course, not every patient is going to respond. But certainly, given the fact that the severe patients, classical PKU patients can respond, can have Phe lowering, can liberalize their diet and the once-a-day oral well-tolerated profile of Sephience really makes that the attractive place to start. And then, Eric, do you want to talk a little bit about the timing of Japan launch and the dynamics there and pricing? Eric Pauwels: Sure. Yes. Absolutely. Yes, Japan for us is an important market, a key market. This will be our first approval, and we're anticipating that before the end of the year. So Sephience is we're anticipating like the U.S. and Europe, a very broad label. We -- prevalence right now for PKU patients is approximately 1,000 patients. However, this is -- while it's smaller market in terms of overall prevalence, it's very high value. Both Kuvan as well as Palynziq are approved, and we anticipate the price of Sephience to be at a premium to that given our clinical data, which would make that higher price than in Germany and higher than the U.S. We have a full team that is experienced and is already on the ground right now, ready to promote Sephience once it is approved. And we will likely be in discussions for the next few months to finalize the price. There will be one discussion, and it should probably be done through that period and negotiation by the first quarter. And at that point in time, we'll be able to launch with fully reimbursed. So Japan is incredibly important to the overall sequence. We anticipate approvals in other markets as well, but we'll be maintaining a very narrow pricing corridor, which makes Japan very attractive. Operator: Our next question comes from Gena Wang with Barclays. Huidong Wang: I also wanted to congrats on the super impressive first quarter. So regarding -- since we are talking about price, I did my quick math. You delivered $19.6 million, you treated 341 patients. So this is 2 months of the full quarter. So if my math is correct, net price is about $350,000. Is that the right calculation? And should we think about the net price that is that the right benchmark? So this is the first question. And then second question is, what is the average time patient on drug right now? Have you seen how the -- sorry, retention of the patient so far? I know it's still very early, but have you seen any -- like so far, all the patients doing very well on the drug? And then lastly, very quickly, how do you book the revenue? Is that the monthly review? And then every month, once patient review, you will book the revenue? Matthew Klein: Gena, thank you very much for your questions. On the first one, respectfully said, I think your math is a bit off just because it may be that the patients -- you have to consider when we actually were able to ship the first drug, which wasn't from the start of the -- it wasn't from approval, it's when we're able to do launch. And then also, of course, different patients are coming on at different times. I'll let Eric give more color on how we're thinking about gross to net at this point. But we've talked about the WACC being somewhere around $490,000 with an expectation that the average patient is approximately 45 kilograms. What we're seeing is that we are, in fact, in that ballpark at this point, which again is not surprising, but it's also early days. Do you want to talk a bit, Eric, just any color you want to give about how we're thinking about gross to net over time, booking revenue and such? Eric Pauwels: Yes, sure. I mean, first of all, we book revenue and we recognize revenue and we ship to our specialty pharmacies. We book our revenues immediately in Germany because we ship directly to pharmacies immediately after a prescription is written. There's very little inventory that's actually kept. It's usually just on demand as needed. So that's one thing. But importantly, around the gross to net, I think it will be important what drives that is, of course, in the U.S., our payer mix. And the payer mix right now is slightly more favorable to commercial. We anticipated that. That's generally the case with most orphan launches anyway because commercial plans tend to write their policies quicker, and we've had very favorable policies in the beginning. Now it's still early stages, and we're seeing that PKU patients in general and the PKU population is more skewed to commercial anyway. And so that's what's helping in terms of the favorability of gross to net. However, we also know that Medicare and Medicaid will be writing their plans and Tricare and a number of other government plans will be finalizing them over the next few weeks. We've guided that ultimately, when this stabilizes, this will be about a 65% to 35% patient mix, meaning 65% is commercial. We're tracking a little higher than that right now, but that's as expected. Matthew Klein: And then, Eric, do you want to also comment on what we're seeing in terms of refill dynamics. As we said, it is early days, so it's really hard to see that. But… Eric Pauwels: So this is very early days. And interestingly enough, the vast majority of patients that we've seen both in Germany as well as in the U.S., the ones that were put on prescriptions in August or early September, we're seeing refills, the vast majority of them. And it's interesting more than not is that these physicians and the health care providers who have prescribed Sephience for the vast majority of them, these have been patients who have been the most challenging. So they're the ones who are poorly controlled, the ones who are failed on previous therapies. And so, when we look at that patient population and we see the results and very fairly good momentum in terms of refill rates, I mean, that gives us some real good confidence moving forward. Operator: Our next question comes from Sami Corwin with William Blair. Samantha Corwin: I want to share my congrats as well on the strong launch. Matt, I know you said that the average weight is falling within the ballpark of 45 kilograms. But can you provide a bit more granularity on if you're seeing these initial patients are [ skewing ] more towards pediatric or adults? And then switching gears a little bit. Given the recent news from a competitor, how are you and Novartis thinking about the registrational trial for Huntington's disease? And what are you hoping to get out of that meeting with FDA? Matthew Klein: Yes. Thanks so much for the question, Sami. On your first question, we're seeing a good mix. As we said, we're seeing this full age spectrum. We've had infants all the way up to septuagenarians, which is pretty interesting. And also, I'd say on average, we're late adolescent and 17 years old, I think, is probably where we are in terms of an average. So again, things that we pretty much expected. And again, still early days. We'll know better as time moves on. In terms of HD, I mean, look, we all saw the news yesterday. Look, I mean, we have a very different therapy and a very different program. Votoplam is an oral small molecule. We've conducted a placebo-controlled study that has over 140 patients. We've been able to provide proof of target engagement and mechanism of action, dose-dependent effects. consistent safety profile in that large population and a protocol for the long-term extension that prespecified that we'll be doing a natural history comparison to determine treatment benefit over the long term. So we think we're in a kind of different context here. We expect that all patients [ will cross ] 24 months in the spring. We'll analyze those data. And then with Novartis, make a plan to go to FDA to talk about the potential for accelerated approval based on those data. The fourth quarter meeting what we've talked about has 2 objectives, right? One is to talk about what a path to accelerated approval could look like, but then also to align on what that efficacy trial would look like, whether that's a Phase III approval trial or whether that would be done as a confirmatory study in the context of a potential accelerated approval. But again, I think we're in a very different framework with votoplam. Operator: Our next question comes from Joe Schwartz with Leerink Partners. Joseph Schwartz: Congrats on a strong launch so far. Can you quantify for us how the response rate for Sephience is tracking in the real world based on refills or any other metrics you have? I heard Eric mentioned you have good momentum in October with refills. It would be helpful to hear how the response rate is tracking relative to APHENITY in the real world. Matthew Klein: Yes, Joe, I think it's too early for us to give those numbers. Again, we have -- we started with the first shipment of drug in August, and it's really too soon now to give any kind of granularity detail on that. I think as we get further into launch, we may have a better handle on that other than the color we provided that we're hearing very good response rates and the commentary Eric gave on the refills thus far, though, and with the caveat that it's all very early. Operator: Our next question comes from Peyton Bohnsack with TD Cowen. John Peyton Bohnsack: Congratulations on the strong launch. I guess talking maybe about the Sephience launch in Brazil, assuming it's approved, can you kind of quantify the opportunity for us? And then maybe talk about any difference in patient population in terms of history of disease severity? And then what the steps are from a potential approvement to a launch? Matthew Klein: Sure, Peyton. As we said, we expect the Brazil authorization would come this quarter. We're still expecting it to come this quarter. I'll let Eric talk a little bit about the dynamics in Brazil and what happens between approval and how we get on to the market there. Eric Pauwels: Yes. I mean Brazil will be an important market for us. I think there's a lot of differences in terms of how Brazil approaches PKU differently than perhaps the U.S. and Europe and other markets. I mean, there are certain states that do newborn screening, but not across the board. Patients are going to be likely going to be diagnosed and they're going to be a little older in age. They're going to be adolescents in some places. But in terms of the process itself, we're first going to have registration. Obviously, we have a very experienced team in there that's been managing right now 4 rare disease products over the last 10 years. So they understand the dynamics, whether it's small molecules, DMD, metabolics with FCS, TEGSEDI, WAYLIVRA, all of that. So as we know right now, the experience of that team is first going to get -- after the registration, we'll get pricing from ANVISA-CMED. That will be referenced to the prices that will be currently available at the time, which will be Germany, Japan and the U.S. and other markets, where we maintain a narrow pricing corridor. There will be a process afterwards by which once the product is approved, we already will be working with many of the key centers to ensure that patients are diagnosed and on to therapy. Some of these processes may include some judicialization. But for the most part, we believe that the opportunity will be very, very similar to other key markets. Certainly, the number of patients, well over 6,000 patients right now means that there is a significant opportunity. And then, of course, diagnosing new patients at younger ages will be another key area. But I would go back and say that Brazil is a very important market. Our experience there with rare disease means that we will be working very closely to bring this on board in -- likely in revenue in 2026. Operator: Our next question comes from Luke Herrmann with Baird. Luke Herrmann: Congrats on the quarter and the Sephience launch project -- progress. Just a follow-up on patient weight thus far. Given the commentary around trying new foods, do you think diet liberalization can be a tailwind to patient weight over time, particularly for those starting with poorly controlled disease? Matthew Klein: Luke, thanks so much for the question. It's hard to say. I would say that not all PKU patients are many individual PKU have average typical weights for their height. They're not all underweight. In fact, we have patients who've had lifelong PKU who have much greater body weight than one would anticipate. In terms of the diet liberalization, this is something we haven't thought about in terms of a tailwind. What we've been thinking a lot about with diet liberalization is making sure we are working very closely with the dietitians and nutritionists at the PKU centers so that we ensure that when patients do begin to liberalize their diet, they do so in a very steady, gradual way. And then it's being done very thoughtfully in terms of the diets and the nutrition quality of the foods being introduced into an individual's diet. So I think we're thinking of it more in terms of setting individuals up for success, the ability to liberalize their diet doing so in a gradual fashion, which is not such an easy thing sometimes, right? If you have an individual, a teenager, who is going to have a hamburger for the first time, they may want to have a hamburger for lunch and pizza for dinner. But this has to be done in a very thoughtful, managed way. And we've, again, worked very hard with the centers of excellence to ensure that there's protocols for diet liberalization so that we set all patients up for success so they can enjoy as much diet liberalization as possible and still maintain control of phenylalanine. Operator: That concludes today's question-and-answer session. I'd like to turn the call back to Dr. Klein for closing remarks. Matthew Klein: Thank you all again for joining the call today. We're excited about the performance for the quarter and the strong start to the Sephience launch. This really reflects a lot of work by our team over the past 2 years to get ready for this launch and really a strong desire to ensure that we could provide what we view as a very efficacious, safe and well-tolerated therapy to as many individuals with PKU as possible. Thank you all again. We look forward to keeping you updated on the launch as we progress, and have a good evening. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Paylocity Holding Corporation First Quarter 2026 Fiscal Results 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, Ryan Glenn, Chief Financial Officer. Please go ahead. Ryan Glenn: Good afternoon, and welcome to Paylocity's earnings results call for the first quarter of fiscal '26, which ended on September 30, 2025. I'm Ryan Glenn, Chief Financial Officer. And joining me on the call today are Steve Beauchamp, Executive Chairman; and Toby Williams, President and CEO of Paylocity. Today, we will be discussing the results announced in our press release issued after the market closed. A webcast replay of this call will be available for the next 45 days on our website under the Investor Relations tab. During the call, we will use certain non-GAAP financial measures as defined in Regulation G. You can find the related reconciliations to GAAP in our press release, which is located on our website at paylocity.com under the Investor Relations tab. We will also make forward-looking statements. Actual events or results could differ materially from those projected in our forward-looking statements. Please refer to our press release and SEC filings, including our most recent 10-K, which contains important factors that could cause actual results to differ materially from the forward-looking statements. We do not undertake any duty to update any forward-looking statements. In regard to our upcoming conference schedule, we will be attending the Annual Needham Tech Week, the Cowen Virtual Human Capital Management Summit, the Barclays Global Tech Conference, the Raymond James Tech Conference and the Needham Growth Conference. Please let me know if you'd like to schedule time with us at any of these events. With that, let me turn the call over to Steve. Steven Beauchamp: Thank you, Ryan, and thanks to all of you for joining us on our first quarter fiscal '26 earnings call. We started off fiscal '26 with strong financial results with Q1 recurring and other revenue growth of 14% as our differentiated value proposition of providing the most modern software in the industry continues to see success in the marketplace. Total revenue was $408.2 million or 12% growth over Q1 of last year. Our growth continues to be led by our ongoing commitment to driving innovation and providing the most modern AI-driven platform for business, highlighted by the recent launch of Paylocity for Finance, which expanded our market-leading workforce platform for HCM into the office of the CFO, which we have further expanded across IT. We are very pleased with the early response from both existing clients and prospects to the value proposition of managing all spend and key business workflows in a single AI-driven platform across critical company functions, HR, finance and IT, all driven by employee data, which contributed to our strong results in the quarter and the increased confidence reflected in our updated fiscal '26 guidance. Our AI strategy is also setting us apart in the market and contributing to our strong financial results and increased guidance as we expand and deepen AI capabilities throughout our platform to deliver the next level of business impact and user experience. For example, at HR Tech in September, we announced the next generation of our AI assistant, which now turns everyday questions into instant action by providing users the answer, data or the workflow needed across both desktop and mobile. With our AI assistant, users can now ask how many vacation days do I have left this year and immediately see their up-to-the-minute vacation balance with a direct link to submit a new request or a manager may say, "Show me open headcount for my department." And the AI assistant will show real-time openings for their specific teams or department and provide direct links for planning new hires, backfills or role transfers. We believe these enhancements will help to further increase the value proposition of our platform and is beginning to drive wider product adoption across our client base by enabling an even more simplified user experience with direct access to answers and actions. To this point, in the past year, usage of our AI-powered features has more than doubled, including over 1.2 million questions answered by our AI assistant. Our innovation also continues to be recognized by third parties as Paylocity was recently named as an overall leader across 10 HCM product categories in the latest G2 Fall 2025 Grid reports. I would now like to pass the call to Toby to provide further color on the quarter. Toby Williams: Thanks, Steve. As Steve noted, we continue to see strong demand for our platform across our target market, and we're pleased with the momentum of our sales team as we enter the heart of selling season as evidenced by our strong Q1 recurring revenue performance. We also continue to be pleased with the consistency of our referral channel, which once again delivered more than 25% of our new business in Q1. The sustained success of our broker channel continues to be driven by our modern platform, third-party integration and API capabilities and because we do not compete against our broker partners by selling insurance products. We remain committed to investing in and supporting the broker channel with the goal of continuing to deliver real value and true partnership and support to our referring brokers and their clients. We also saw strong client retention in the quarter, which contributed to our strong financial performance and reflects our commitment to world-class client service and client partnership. As Steve noted, our AI strategy has continued to progress, delivering predictive and actionable insights, generative AI functionality, the Paylocity AI assistant and a growing number of autonomous agents across the platform to drive productivity through task and workflow automation that goes beyond the basic search capabilities that are considered table stakes in today's evolving AI landscape. Our continued investment in AI across our platform is driving increased adoption of our broader product suite with these new features resulting in simplified and connected user experience across HCM, finance and IT use cases, driving higher utilization and increased business value for our clients. While still in the early days, we are seeing this translate to stronger product penetration, higher average revenue per client and improving client satisfaction and retention. In addition to embedding AI capabilities within our product suite, we are also investing in AI and broader automation efforts internally to help drive greater efficiency and productivity across our business. For example, our engineering teams are now using AI coding assistants on a daily basis for code generation, testing and design mockups and are realizing increased productivity and code quality through these investments. Similarly, our operations teams have seen a reduction in client case volumes, and our sales teams are investing in AI tools to drive efficiencies in our go-to-market motion to automate rep day-to-day activities. We will continue to invest in AI and broader automation and believe these investments will drive further efficiencies and provide for more time to focus on strategic and value-added work for all of our teams while also driving continued leverage in our business over time. Next week, we will hold our annual Elevate Client Conference, where we will host thousands of business leaders representing HR, finance, IT and operations across dozens of sessions over the course of 2 days. At Elevate, we will highlight the continued investments in our differentiated AI strategy and our expanding platform capabilities, delivering automated workflows and seamless user experiences across the platform enabled by AI. In addition to our market-leading financial performance, our strong culture at Paylocity continues to be recognized externally as we were recently named to Time's America's Growth Leaders 2026 list. I would now like to pass the call to Ryan to review the financial results in detail and provide updated fiscal '26 guidance. Ryan Glenn: Thanks, Toby. Total revenue for the first quarter was $408.2 million, an increase of 12%, with recurring and other revenues up 14% from the same period last year. Our sales team had a solid start to the year across both our HCM and finance suites, and we were pleased to come in $5.7 million above the top end of our revenue guidance, with the majority of our revenue beat once again coming from recurring and other revenue, allowing us to raise our fiscal year guidance by more than our beat in Q1. Our adjusted gross margin was 75.1% for Q1 versus 74% in Q1 of last year, representing 110 basis points of leverage as we continue to focus on scaling our operational costs while maintaining industry-leading service levels. We continue to make significant investments in research and development and to understand our overall investment in R&D, it is important to combine both what we expense and what we capitalize. On a dollar basis, our year-over-year investment in total R&D increased by 16.4% when compared to the first quarter of '25, and we remain focused on making investments in R&D throughout fiscal '26 as we continue to build out the Paylocity platform to serve the needs of the modern workforce. In regards to our go-to-market activities, on a non-GAAP basis, sales and marketing expenses were 21.3% of revenue in the first quarter, and we remain focused on making investments in this area of the business in fiscal '26 to drive continued growth. On a non-GAAP basis, G&A costs were 8.8% of revenue in the first quarter versus 9.5% in the same period last year, representing 70 basis points of leverage. Briefly covering our GAAP results. For Q1, gross profit was $279.8 million, operating income was $74.2 million and net income was $48 million. Our adjusted EBITDA for the first quarter was $146.4 million or 35.9% margin and exceeded the top end of our guidance by $11.4 million, resulting in increased margin guidance for fiscal '26. Excluding the impact of interest income on funds held for clients, adjusted EBITDA margin for Q1 was up 110 basis points over Q1 of fiscal '25, and we continue to be pleased with our ability to drive both durable recurring revenue growth and expanded profitability. To this end, we remain focused on driving leverage by improving operational scale and through improved efficiencies resulting from our ongoing investments in automation and AI across our business, which are helping us scale our teams and providing the ability to focus on more strategic work, which is ultimately helping to drive increased adjusted gross margin, adjusted EBITDA and free cash flow. Additionally, given the confidence we have in our business and our strong cash flows, in Q1, we repurchased nearly 1.2 million shares of common stock at an average price of $172.30 per share for $200 million in aggregate repurchases. Since May of '24, we have repurchased approximately $500 million or 3 million shares and with $500 million remaining under the current repurchase program, we anticipate continuing to be active going forward. In addition to our expectations for continued growth in adjusted EBITDA and free cash flow, the combination of increased profitability and reduced diluted shares outstanding will drive continued expansion of earnings per share on an annual basis. In regard to cash flows, we expect the impact of the recent tax legislation changes to benefit fiscal '26 free cash flow by approximately $65 million as a result of a reduction in our fiscal '26 cash tax payments, primarily driven by changes to tax deductibility rules for domestic R&D costs, and we continue to be pleased by our ability to drive the best combination of recurring revenue growth and free cash flow margin in the industry. Looking at the balance sheet. We ended the quarter with $165.2 million in cash, cash equivalents and invested corporate cash and $81.3 million outstanding on our credit facility related to the Airbase acquisition with approximately $81.3 million repaid on our outstanding balance in Q1. In regard to client-held funds and interest income, our average daily balance of client funds was approximately $2.9 billion in Q1. We're estimating the average daily balance will be approximately $3 billion in Q2 with an average annual yield of approximately 360 basis points, representing approximately $27 million of interest income in Q2. On a full year basis, we are estimating the average daily balance will be approximately $3.25 billion with an average annual yield of approximately 340 basis points, representing approximately $110 million of interest income. In regard to interest rates, our guidance reflects the recent 25 basis point rate cuts in each of September and October with additional 25 basis point rate cuts in each of December, March and April. Note, our guidance reflects an additional 25 basis point rate cut during fiscal '26 versus our initial expectations for the year we provided on our August earnings call. Before I provide our updated financial guidance, as a result of the confidence we have in our ability to drive durable growth, the significant profitability increases we've realized over the last several years, the long-term opportunity we see in AI and automation benefits and natural scale in our business, we are increasing our long-term financial targets as follows: Our revenue target increases from $2 billion to $3 billion; our adjusted gross margin target increases from 75% to 80% plus; our non-GAAP total R&D target remains at 10% to 15% of revenue; our sales and marketing spend target decreases from 20% to 25% to 15% to 20% of revenue. Our G&A spend target decreases from 5% to 10% to 5% to 7% of revenue; our adjusted EBITDA margin target increases from 35% to 40% to 40% to 45%; our free cash flow margin target increases from 20% to 25% to 25% to 30%; and our stock-based comp target decreases from less than 10% of revenue to 5% of revenue, and we expect to make progress against these updated financial targets on a go-forward basis, and there is a table in our earnings press release that provides our prior and updated financial targets for reference. In regards to our financial guidance for Q2 and full fiscal '26, for the second quarter of fiscal '26, recurring and other revenue is expected to be in the range of $378.5 million to $383.5 million or approximately 10% growth over second quarter fiscal '25 recurring revenue. And total revenue is expected to be in the range of $405.5 million to $410.5 million or approximately 8% growth over second quarter fiscal '25 total revenue. Adjusted EBITDA is expected to be in the range of $131.5 million to $135.5 million and adjusted EBITDA, excluding interest income on funds held for clients, is expected to be in the range of $104.5 million to $108.5 million. And for fiscal '26, as a result of the strong results we are seeing across our HCM, finance and IT solutions and our confidence in our ability to continue to drive competitive differentiation in our AI strategy, we are increasing all aspects of our guidance as follows. Recurring and other revenue is expected to be in the range of $1.605 billion to $1.620 billion or approximately 10% growth over fiscal '25 recurring and other revenue. And total revenue is expected to be in the range of $1.715 billion to $1.730 billion or approximately 8% growth over fiscal '25 total revenue. Adjusted EBITDA is expected to be in the range of $615 million to $625 million and adjusted EBITDA, excluding interest income on funds held for clients, is expected to be in the range of $505 million to $515 million, which represents approximately 40 basis points of leverage at the midpoint. In conclusion, we are pleased with our Q1 results, the early success of Paylocity for Finance and the continued momentum we have across our sales and operations teams as we enter the busiest time of the year. Operator, we're now ready for questions. Operator: [Operator Instructions] Our first question comes from Brad Reback of Stifel. Brad Reback: Can you all give us an update on the macro, maybe how things were trending over the course of the quarter into October and your headcount assumptions in the updated guide? Ryan Glenn: Yes. Brad, it's Ryan. I think, what we saw in the quarter was continued stability. So workforce levels at our clients were up a touch year-over-year, very consistent with what we saw in Q4, a little bit better than expectations. And from a guidance standpoint, continue to have the same philosophy. So we've assumed flat workforce levels over the balance of the fiscal year. That was our experience, as I said, not only in the quarter, but through October as well and continue to run the same playbook relative to guidance. So I feel like if we continue to see strong execution, we have the ability to beat and raise and continue to feel like we've got a level of prudence embedded in guidance as well. Brad Reback: That's great. And then switching to the updated long-term guidance, and I appreciate it may not be able to perfectly parse the answer on this. But if you think about the natural scale of the business driving the upside versus AI benefit helping to drive the upside, does it skew more one way than the other? Ryan Glenn: Yes. I think, still early days from AI and automation. But I think, where we sit today, that gives us certainly incremental confidence on a multiyear basis to be able to continue to drive leverage. We've always had confidence that this business will continue to scale. That continues to be the case. You heard in the prepared remarks, Toby referenced reduced case volume we're seeing in our operational teams, all of our engineers using coding assistants. My teams are using it from a back-office standpoint as well. So not sure I'd parse out how to break out the leverage we'll see on a go-forward basis, but certainly seeing the early benefits both from a margin expansion standpoint as well as the ability for the teams to really focus on the most important elements of the business. Operator: And our next question comes from Mark Marcon of Robert W. Baird. Mark Marcon: Really nice quarter. Wondering if you can talk a little bit about the office of the CFO and the Airbase acquisition. Can you give us a little bit more dimensions with regards to like number of clients approach, what the go-to-market motion is? I know it's early, but still any sort of reading on the sales trajectory, who is it appealing to the most, et cetera. We demoed it at HR Tech, and we thought it was really slick. And it sounds like it's got a really good ROI for users to take it up. So I'm just trying to get a little bit more color there. Toby Williams: Mark, it's Toby. Thanks for your question. I'm glad you got the chance to actually check the product out at HR Tech. We're pretty proud of what we've been able to launch so far. And I think, I would start with just a few comments on the quarter. I think, to your beginning part of your question, I think it was a strong quarter really across the board for the business. And we had mentioned in the prepared remarks that the launch, which we did in July of V1 of the finance product, I think, has really been well received in the market. I think we are starting to see early days still, of course, just with the launch in July, but I think starting to see traction in the market, both from a new client perspective and back into the client base, which is an important part of the motion. To the part of your question on the go-to-market piece, those are both avenues for us, both with new clients coming on to the Paylocity platform and then being able to add that value through our platform back into the client base. So I think early days, but I think we're pleased with the momentum and the trajectory that we're seeing. I think the thesis has very much been validated in terms of the value of having that product set and that category on the platform and the value that, that can add to clients. So I think overall, we're pretty happy in the early days. Steven Beauchamp: The one additional comment I would make, Mark, is the feedback we get from our field who we've got fully trained on the product, they're identifying prospects. They're really telling the broader story upfront. It's certainly helping from an overall differentiation perspective. And then we've got an inside sales team that can take those spend management opportunities and take them over the finish line. And so we're seeing really good partnership across our organization, and we're getting really good feedback that this is really resonating with prospects in our overall platform differentiation. Mark Marcon: That's great. And then really nice performance for the quarter. The EBITDA ended up beating roughly by $13.4 million, but you raised the guide by less than the beat. What would be the driver for that in terms of -- what you ended up doing in terms of the full year guide for adjusted EBITDA? Ryan Glenn: Yes, Mark, I think similar thoughts relative to a level of prudence in guidance. I think really happy with Q1, as you said, strong performance versus our expectations. We're certainly seeing some of the benefits of the investments we've made to continue to scale the business. There's always some timing elements, certainly one quarter into the year, want to maintain a level of flexibility to make the investments that we've talked about to drive continued growth. But at the same point, we are expecting increased profitability for fiscal '26. We're guiding to leverage again in Q2 as well. So probably some timing elements of that. And I think as you've seen historically, to the extent we continue to see overperformance, then that would accrue to increased margin as we go over the balance of the fiscal year. Operator: And our next question comes from Daniel Jester of BMO Capital Markets. Daniel Jester: Maybe Steve or Toby, you've been talking about the opportunity in the IT department of your customers a little bit more recently. So I'd love if you can maybe expand on sort of the opportunity you see there? And how should we view that relative to Paylocity for finance? Steven Beauchamp: Yes. I think just from a product perspective, we have the opportunity to really leverage the employee record data that we have to be more comprehensive in terms of the tasks we can help our customers accomplish when they onboard and offboard employees. We know who they work for. We know the department they need. And now in our product, we can store the equipment that they need. We can track all of the devices. We can really -- through partnership and API, we can really help them get the equipment delivered right on site. So it's both asset management as well as identity management, really leveraging the employee record data. So that's also kind of in the early innings. So similar comments to Paylocity for Finance. But I would make the same comment I made earlier, which is it's really helping from an overall platform differentiation. We're seeing great feedback from clients that are on the service already. And so when you combine a leading HCM modern platform with the ability to scale across finance and IT, we think we have a more unique value proposition than we had a year ago prior to the launch of those 2 categories. Daniel Jester: Great. And then on the updated financial targets that you provided today, I guess, why was this the right time to update them? If I remember correctly, I think you just updated the $2 billion revenue target, not even 2 years ago. So maybe a little more context would be helpful in terms of why you decided to make these adjustments to the long-term model today? Ryan Glenn: Dan, it's Ryan. I think we've obviously been really pleased with the progress we've made across those prior targets, which we did set in August of 2023. Since that time, we've driven several hundred basis points of EBITDA leverage, free cash flow leverage as well. We've reduced stock-based comp. So I think these updated targets are really just an acknowledgment of what we see as continued confidence in the ability to scale the business, having made a lot of progress against those prior targets, it felt like the right time to acknowledge the fact that we continue to have a lot of confidence in driving durable revenue growth across the business, being able to scale from a profitability standpoint. And I think this is that natural extension. When you start to layer on the early benefits we're seeing [indiscernible] broader AI, I think that is another element that as we looked at where we are from a financial standpoint, gave us incremental confidence. And as you think about that $3 billion target, 25% to 30% free cash flow, this is a very attractive opportunity for us and one that we think when you look at $3 billion of revenue, 30% free cash flow margin, what we're really excited about what that can be on a multiyear basis. Operator: And our next question comes from Terry Tillman of Truist Securities. Connor Passarella: This is Connor Passarella on for Terry. I just wanted to follow up on the previous one, looking at the long-term targets, specifically around the updated $3 billion of total revenue. So I guess just as you look at FY '26 here, maybe what are the 1 or 2 execution milestones, whether it's cross penetration of Paylocity for finance, attach rates on newer modules or even partner productivity that you kind of view as the highest confidence drivers towards driving towards that $3 billion long-term target? Steven Beauchamp: Yes, sure. So I'll start. So first of all, I think I'd like to mention that we've got a huge TAM. And so we're still relatively low penetration in terms of the total addressable opportunity in front of us. And so we think there's a ton of runway just in the HCM category. So by no means extending into these other categories, does that mean we don't think we're excited about what we can do in HCM. And then I think when you add on top of that, the ability for us to expand that TAM, HCM TAM by moving into the office of the CFO as well as IT, it gives us even greater confidence and be able to scale this business from under $2 billion today to that $3 billion target. And then to Ryan's point, hitting all of those other profitability metrics at the same time. Toby Williams: The only thing I'd add is I think there's all of the above element to your question in terms of continuing to drive the unit growth consistently that we have been able to drive and also increasing the overall ARPU on a go-forward basis. And that's, I think part of what Steve said is what gives us the opportunity to do that on the ARPU element. But I think as we look at '26 in particular, I think we're taking, again, same as we did last year, a pretty balanced view of the ability to continue to drive new client acquisition, drive unit growth while also expanding the ARPU, which has been, I think, a key part of the growth algorithm for years. And I think we see that same opportunity as we look forward to that $3 billion mark. Connor Passarella: Yes, that's great. That's really helpful. Maybe just as a follow-up. So as you continue to take Paylocity for Finance to market, how are you kind of thinking about the pricing? Are you kind of thinking about this more testing on a stand-alone versus bundled approach? Or what do you guys -- what I guess, are you learning about the willingness to pay from the early adoption of clients? Toby Williams: Most of what -- the way that we price across the suite is really ends up being on a bundled basis, and that's not anything new for us. So that's a consistent approach that we have taken with whether it's things in the office of the CFO from a finance and spend management perspective or from an IT perspective. So pretty consistent strategy as we have looked to extend into those areas and the bundled approach that we've taken, whether that's from a new client perspective or otherwise. Steven Beauchamp: I think the only thing I would add is we have the flexibility with some of these newer product offerings. If we think that a per user model is more attractive to the market, we can easily pivot to that. To Toby's point, we kind of sell it as a bundle and here's what your whole overall annual spend would be, here's the ROI you're going to get on that investment. So no real change in the sales motion, but we definitely see some of our products being priced on a per user basis, obviously, a higher price point, lower number of users, whereas the HCM products are largely on a per employee basis. Toby Williams: I think the interesting thing about what we've seen so far as we've gone to market still in the early days is the fact that there is a willingness to pay based on the value that's being delivered. So I think that's certainly a part of the traction that we've seen is clients and prospects are finding value in it. They're willing to invest in it. And that has not been a challenge from a value perceived and price perspective. Operator: And our next question comes from Siti Panigrahi of Mizuho. Sitikantha Panigrahi: I just want to drill into the comments, strong demand environment. Can you talk about the demand you're seeing in a different employee segment? And specifically, now that your platform you offer finance, HR and IT, what kind of feedback you are hearing from different segment -- employee segment base about the value you offer versus your competitors? Toby Williams: Yes. I think through the course of Q1, we've seen a very stable demand environment. I think really pleased with the results overall in Q1. And I think that's part of what's reflected in that is the strength of the execution in our go-to-market teams, and that was really well balanced across the entirety of the target market that we're focused on. So I wouldn't call out any specific difference whether it's in HCM or the finance area in any segment that we have, I think it's pretty broad-based. And I think the demand environment was stable throughout the course of the quarter. And I think our teams did a really good job from an execution perspective in go-to-market across the segments that we're in. Sitikantha Panigrahi: Okay. And as you talk about efficiency gain from all the AI uses in engineering, sales, marketing and operation, it's early stage at this point. But as you gain efficiency, are you planning to invest back that more into your go-to-market and sales to drive growth? Or are you going to offer more efficient margin? Steven Beauchamp: Yes. So I think we've had a pretty consistent approach of driving margin expansion across most of the line items. We also see a big opportunity to continue to invest in products so that we can fuel that growth. And so you can see R&D spend was up nicely, while at the same time, we were able to get margin across the board everywhere else more than make up for that. And so we're always making that balance of decisions. We're confident in the long-term prospects of the business. We think there's great opportunities to continue to invest in R&D, while at the same time, getting leverage in all the other parts of the business. And so I think you see that kind of reflected in the long-term guidance that we -- the new long-term guidance that we just launched today. Operator: And our next question comes from Raimo Lenschow of Barclays. Sheldon McMeans: This is Shel McMeans on for Raimo. I would love to ask, you have your upcoming Elevate conference. Is there any insight from sign-ups for the event or broadly from your top of funnel metrics that you're seeing? And can you speak to how that plays into your thinking entering the large end of your selling season? Toby Williams: Well, I think so far, I mean, you can see what I think we believe were pretty strong results in Q1. So I think we're pretty happy with how our go-to-market motion has progressed through the course of the fiscal year. You're right, we're definitely in the heart of selling season. And I think I would just give you that same commentary. I think we've been really pleased with our go-to-market initiatives and efforts throughout the course of the year so far to date. And I think we're certainly excited about Elevate. That's always a great opportunity for us to spend time with our existing clients and really excited about the registration levels that we've seen so far. So I feel like we have had year-to-year positive momentum with Elevate, and I think we do again this year. And I think we are, again, just excited to be able to spend time with clients. It's always, I think, a valuable set of days for us. Sheldon McMeans: Got it. Understood. And so I would love to ask on the new generation of the AI assistant. Just any color on -- sometimes it's great when your salespeople have a new nice product to sell. I know you're not explicitly monetizing it. But is there an opportunity to go back to your customer base, show off that new product and potentially drive more platform expansion? Because from my understanding, you need to have all of the underlying modules to extract the most value from the AI solution. Steven Beauchamp: Yes. I think you heard us say in the prepared remarks that some of our investments in AI are driving broader product adoption and kind of sale back to the client base. And so I think you're absolutely correct. The more products you use, the more value you can get out of these integrated AI experiences where something that might be more difficult to use, I might have to take 3 or 4 different steps to figure that out, it's pretty seamless certainly from an employee and manager perspective, I can use natural language. I can interact with the software, really simplifies the user experience, and it really makes that value proposition much easier for a customer to implement and use. I think we're still in the early innings of that, but we are definitely seeing that trend early on. And I think if you really talk to the customers, that's where they're getting a ton of value. My employees are going to be asking me less questions because it's super easy for them to get things done. I myself as an administrator, you've reduced the number of steps that it takes for me to accomplish the task. You're automating from an agentic experience, things that I used to have to do manually. And so that's the concept really where we see the differentiation opportunity. And the simpler we can make that user experience, the more product adoption. And I think that it's also true as you start to extend beyond HCM and think about the integrated experience across IT and finance. Operator: And our next question comes from Jared Levine of TD Cowen. Jared Levine: I first want to start on your IT offerings. So with the Airbase acquisition, you called out an ARPU comparable to HCM somewhere in the neighborhood of like $25,000 to $30,000. Can you talk about the ARPU opportunity your IT offerings present? Steven Beauchamp: Yes. I would say it's a little bit smaller. We're a little bit earlier in the launch of that cycle. We certainly have clients on it. We are actively selling it in the market. But we're probably just from a timing perspective, a couple of quarters behind where we were with the Airbase offering. I don't think we're prepared to give you kind of the exact number. What I would say is it's larger than most of our HCM modules. And so I think we're excited about that. So it's a good sized revenue opportunity. And again, some of this is a little bit of pricing mix. Some of you had to price on a per user basis versus per employee. So there's a mix there. But think about it as somewhere between one of our larger HCM modules and that Airbase number. Jared Levine: Got it. And then, Ryan, in terms of -- heard you in terms of the $65 million of expected tax benefit this year from OBBA, but any headwinds to be mindful of as we think about FY '27? Ryan Glenn: Well, I think we're calling that out as a onetime benefit in fiscal '26. So you'd have to adjust the model as that benefit would not be recurring. I think there are likely some other tailwinds from the new tax legislation that will help in '27, but that big element, that $65 million is onetime. So I would adjust that out in '27. Outside of that, there's nothing at this time that I would call it on free cash flow other than the fact that we would expect to continue to drive leverage certainly in '26, but on a go-forward basis as well. Operator: And our next question comes from Jacob Roberge of William Blair. Jacob Roberge: Just wanted to follow up on the demand environment. Can you talk more about how the start to the end of the year selling season has gone thus far? And just how the pipeline you're seeing this year may compare to some of those prior year periods? Toby Williams: Yes. I think it's been good so far. I mean we've described the demand environment as being stable. I think from a quarter-to-quarter perspective, throughout the course of last year, we would have called out stability in the demand environment and then strong execution from our go-to-market teams, which is really what gave us, I think, a great performance in the course of fiscal '25. And I think that has really carried through into Q1 and as we've really gotten into the heart of selling season. I think the demand environment has continued to be stable, and our teams have executed really well. So I think we have -- we're pleased with the momentum that we've seen so far from both a pipeline and a conversion standpoint. Jacob Roberge: Okay. That's helpful. And then just on the sales side, now that you're selling a bigger platform into a few different departments, are you seeing any changes to the time it takes you to close a deal just given you may need more signatures? Or have those remained fairly consistent since the launch of Paylocity for Finance? Steven Beauchamp: Yes. I would say, no, we have not. We've been very conscious of that fact. And I think our go-to-market strategy really mitigates the potential to have elongated sales cycles. So we're very comfortable getting them up and running on any of the products first and foremost, and it typically happens with HCM since that's obviously the bigger part of our suite today. And then they may take a little bit longer to implement any of the additional modules. That's a motion we're very used to that happens sometimes even within the HCM products. And so we try to get them up and running, deal with the decision-makers that are ready to move. I think it's important that they understand the breadth of the platform. And then sometimes they implement at the same time, sometimes they implement a little bit later, and sometimes we got to go back and sell them the additional products, which is a very consistent motion with finance, IT, just as it was with the additional HCM module. So no elongated sales cycles. Toby Williams: I would also say that it is the usual occurrence that in the context of selling HCM, you are also talking to someone from one of the other areas. So the idea that this is a totally new motion with a totally new buyer is just not right. It is very -- it is usually the case that we are talking to the Head of HR, someone from the finance area and someone from the IT area, which could be the CIO, the CFO and the Head of HR. It could be someone on their teams, but it is usually the case that we're dealing with someone in all 3 of those areas. Operator: And our next question comes from Scott Berg of Needham & Company. Ian Black: This is Ian Black on for Scott Berg. Does the Paylocity for Finance solution impact your long-term financial targets at all? Is there an impact on gross margin specifically? Steven Beauchamp: Yes. We've had that question in the past that we were pretty comfortable that over time, we can get the Paylocity for Finance solution to be similar margins to the rest of our portfolio. And I think you see that kind of reflected in our confidence in increasing the target for long-term gross margin. So we don't necessarily see that as being a headwind at all. Operator: And our next question comes from Samad Samana of Jefferies. Jordan Boretz: This is Jordan Boretz on for Samad. Congrats on the strong results. I wanted to touch on the competitive front for a second. You called out product differentiation in your own platform driving kind of key strength. I'm curious with some noise of consolidation in the market, both at the high end and the lower end, obviously, with Dayforce and Paycor, are you seeing any notable changes in win rates against those competitors more so on the lower end of the market as that product -- excuse me, that company segment kind of navigates the changing landscape there? Steven Beauchamp: Yes. I would say we've always felt like we've got a differentiated product portfolio, and it has been a competitive environment and remains a competitive environment. I do think that the value proposition, as Toby mentioned in his prepared remarks, of really being broker-neutral and broker-friendly has been a key part of our go-to-market motion for many, many years. And so I think there's some uniqueness to that, and we have been a leader in that space for a while. So I think some of the consolidation is certainly helpful in that category. And -- but I will just go back to the fact that you've got to win based off of your product, your service that you provide every single day. It's a competitive market, and we're really proud of the results that our sales team were able to generate in the first quarter. Jordan Boretz: Awesome. And then on the go-to-market side, I was wondering if you can maybe parse out how sales rep productivity is trending versus hiring and how hiring is trending versus your initial expectations into the year? Toby Williams: Yes. I think we came into the fiscal year with around an 8% increase in headcount. And obviously, you can see where we landed the quarter and where we've guided the year. So I think our focus going into fiscal '25 and then coming into fiscal '26 again was to be able to drive the type of performance that we've actually delivered and to be able to do that focused on our sales rep and go-to-market productivity, which, again, I think by looking at the headcount increase versus the amount of growth we've been able to deliver in Q1, I think we've done that again in Q1 of fiscal '26. So overall, I think we continue to focus on the productivity of the teams, including our go-to-market teams, and I think that's what we've delivered again in Q1. Jordan Boretz: Congrats on the strong start to the year. Operator: And our next question comes from Brian Peterson of Raymond James. Jessica Wang: This is Jessica on for Brian. I was just thinking a bit of a follow-up to earlier discussions we've had at comments is as you have this increasingly differentiated value of your platform, are you seeing customers trying to trend towards landing with more products than prior cohorts were? Or has this been more of a benefit of saying like [ Paylocity ], you guys have more places that customer can land on and then from there building out to expanding later? Toby Williams: I think we've seen both. I mean I think we've seen -- to Steve's comments, we've seen differentiation gains that we've had from the broader platform that I think help us from an overall client acquisition and unit growth standpoint. I think we have, over a very long period of time, continued year-to-year to see the amount we realize out of the total amount that's chargeable on the platform increase. And I think that reflects the fact that year after year after year, clients are taking a larger amount of product from us. And then I think you also get the benefit of being able to sell those products back into the customer base. So I think you see it in differentiation. I think you see it in driving higher ARPU at the time of client acquisition. And I think you see it in the ability to drive an overall higher ARPU as you sell back into the customer base over time. Operator: And our next question comes from Pat Walravens of Citizens. Kincaid LaCorte: This is Kincaid LaCorte on for Pat. You guys highlighted your sales reps are going to be using some AI tools to automate parts of their go-to-market. Is there any specific tools that you could call out there? Toby Williams: Yes. I think when we look across all of the tech that our go-to-market teams in sales and marketing are using, I think our effort has been to try and find -- and this is true across the business. You're trying to find opportunities to automate the processes that everyone is going through day-to-day, including our sales reps. And you're looking at what AI tools each one of those pieces of technology has available to them and making sure that we're leveraging each one to the fullest extent while also, again, trying to take the lens of what can we automate in the process. And I think that's what my comments in the prepared remarks were referring to. So I think this is broad-based commentary across all the tech that we're using from a go-to-market standpoint. Kincaid LaCorte: And then on the brokerage channels, it's more than 25% of your new business in Q1. Is there a level that you'd like to see that get to? Or is it around where you hope it is? Toby Williams: Well, I mean, I think we've been saying for a very long time, making the same comment that we've been able to drive more than 25% of new business coming from the broker channel. And Steve made the comment before that when the business went public in 2014, looking at the size and scale of it then and now as you see us guiding towards just under $2 billion in revenue for this fiscal year, our ability to continuously for the last decade plus, deliver 25% of our new business coming from the broker channel, I think, is a testament to the focus that we put on it, the investments from a technology perspective that we've made that well serve the broker channel and their clients. And then I think ultimately, the investment that we have made to build those relationships over that period of time. And I think it reflects the fact that they see real value and real partnership in how we approach business with them. And I think overall, I think we're really pleased at what we've been able to deliver in Q1, the part that the broker channel has played in that and look forward to continuing to partner with our broker channel throughout the course of the rest of the year. Operator: And our next question comes from Alex Zukin of Wolfe Research. Aleksandr Zukin: I think most of the questions have been asked, but maybe just help us think about the impact to retention rates. I think they're still 92% at this time. As you look at the elements from selling more AI functionality into the base or monetizing that functionality, getting greater usage, monetizing Airbase, or cross-selling that functionality. How does that retention rate evolve, if at all? Does it go up over time, particularly as you approach that long-term target? And then how do you think about kind of organic versus inorganic going forward? Now we're 1 year past Airbase. It seems like it's going really well, and it's meaningfully increasing the addressable market opportunity. Maybe just comment on kind of your view on organic versus inorganic innovation at this time. Toby Williams: Yes. I mean I think you're right. I think we're pleased with how the Airbase acquisition has gone. We're pleased with, based on the prior commentary, the level of traction that we're seeing at least in the early days with the spend management and finance part of the suite. And I don't think our -- I think that is a proof point of what we've been able to do from an acquisition standpoint, but I don't think our -- I don't think we've fundamentally changed our mindset around capital allocation or the role that M&A plays in the business. I think if you look back over time, we've been able to build out an awful lot of new products organically, that's certainly still an important part of how we view innovation when we found extraordinary opportunities to acquire something that would speed up our product roadmap and was really strategic, and we thought that we could integrate really well. We've had really good luck there with, again, Airbase being the most recent data point on that. With respect to your question on retention, I mean, I think our view has been for a long time that if you continue to broaden out what you're able to deliver from a product perspective while also providing world-class service, that's a recipe for being able to deliver against the expectations of clients, and that will provide a positive result from a retention standpoint over time. That's exactly what I think we've seen. Again, your reference is 92% plus is our -- how we've described retention continues to be the case. And I think that is very much what we see the opportunity as we look forward. Steven Beauchamp: I guess just one additional point on the M&A strategy. I completely agree with Toby. There's no strategic shift here, but I think it's probably important to note that is the largest acquisition that we have made kind of in our history. And so the ability to integrate that product portfolio, get it to launch, see the early success that we're having in go-to-market certainly gives us more confidence in our ability to do things like that on a go-forward basis. Operator: And our next question comes from Matt VanVliet of Cantor. Matthew VanVliet: I guess, first, on the comment you made earlier about growing revenue per customer, curious how much of that is being driven by the cross-sell of whether it's the finance or IT modules or just some of the expansions of the product versus the AI and usage component being monetized already? Steven Beauchamp: Yes. I would just say from a product perspective, some of that's a little bit challenging to differentiate. As Toby mentioned earlier, you're kind of selling a bundled package. And even when you're cross-selling back to the client base, you sometimes can get an uplift of not just a singular product, you may get 1 or 2 as you're kind of evaluating that. And so I think they're both in the mix. I think we're in the early innings still for finance and IT. So a lot of that cross-sell is being driven by our HCM suite currently. But we're really excited about the early feedback that we've got and particularly because those products are a little bit more on an average revenue per customer. So we think that, that opportunity is certainly there. But I think we've always talked about this as really an extension of our product strategy that will allow us to continue to have a mix in our growth algorithm of unit growth, which we expect to continue to drive as well as average revenue per customer growth, which will be enabled by IT and finance expansion. Matthew VanVliet: All right. Helpful. And then as we look at the long-term financial targets, curious if you can give us a little update on what the original $2 billion target of primarily the HCM business, what that looks like as part of the $3 billion? And then the obvious other part is sort of the TAM expansion, platform expansion. How much of that $1 billion raise in the revenue target is almost exclusively from finance and IT? Toby Williams: Yes. I'm not sure we would have thought about it the same way that you asked the question. I think if you step back and you look at how we have driven growth every single year, it has been a mix of client growth, so new client acquisition and client growth and then ARPU expansion from a both new client and existing client standpoint. And I think that's really -- and a lot of that ARPU growth comes from our ability to continue to innovate and continue to expand the product set. And so if you look back over the course of the last decade plus that we've been public, that's what we've delivered every single quarter and every single year is a fairly consistent. Yes, it's changed depending on what's going on in any given year, but that there's been consistency in the mix of both new unit growth, new unit acquisition, client growth and ARPU expansion over time. And I think that's really how we thought about the formula of how we get to $3 billion. You've got to be able to continue to drive client growth. You've got to be able to continue to drive ultimately ARPU expansion that comes with the TAM expansion of adding on things like finance and IT, but I think you get there through that, that's the execution formula. And with respect to the product pieces, I think there is an opportunity to continue to grow the product set from an HCM perspective. There's certainly an opportunity to grow the product set from a finance perspective, and we're in the earliest days of product from an IT standpoint. So I think you've got growth across all those 3. And if we can continue to drive that growth, continue to drive ARPU, continue to drive client growth, I think that's the formula, and that's a consistent formula that we've executed against for the last 10-plus years. Operator: And our next question comes from Jason Celino of KeyBanc Capital Markets. Jason Celino: Just one follow-up on Paylocity for IT. Obviously, a very complementary area. When I think about your customers today, what are they hypothetically using for asset management, identity management? Do you see yourself competing more with like the traditional ITSM players? Steven Beauchamp: Yes. So I think from an asset management perspective, and a lot of it is fairly manual. And so whether they're tracking that in spreadsheet or frankly, at the lower end of our market, whether they're really not tracking it very effectively at all. And so being able to automate that as people are going on board, when they're changing positions, when they're coming off board and then being able to manage that for an IT user is really, I think, critical for organizations. And so I think that's something that we've been really happy with the receptivity. I think for the identity management the strategy is a combination of our own capabilities as really -- as well as really integrating from a marketplace and API perspective. And so you can get some value out of really leveraging the data in the employee record and not actually have to change your identity provider, or you can leverage our solution to be able to take on some of those capabilities for you. And so we see opportunities to be able to grow the category for sure, but we really are trying to help customers with that use case, both from an access and identity of really offboarding, changing positions and onboarding. Jason Celino: Okay. And then this is more of a philosophical question. But at this point, it looks like you're touching the HCM part of the business, the finance part of the business and now the IT part. Long, long term, when we think about unified platform, could you ever see Paylocity expanding into more front office areas? Or is it just too early? Steven Beauchamp: I think we're pretty excited about the size of the TAM that we have in front of us. Again, I go back to HCM, we still have very low penetration in our core marketplace, and we're having good success driving that. We're pretty early in IT and finance. I think if you were to take a broader point of view, really, when you think about having that employee record, having the workflows across the organization, I think you've got a real opportunity to power much of the back office over time, and we can continue to stay focused on that. I think to think about getting into maybe front office solutions that are often more vertically based, it's probably not on the horizon. Operator: And our next question comes from George Kurosawa of Citi. George Michael Kurosawa: I'm on for Steve Enders. Maybe just a high-level question. A lot of discussion about the impact of AI on labor markets more broadly. It sounds like headcount in your customers was a touch better than expected this quarter. Is there anything you guys have seen or heard that might indicate that your customers might be changing the way they're thinking about hiring based off of use of AI? Ryan Glenn: No, not at this point. I think we obviously are able to track workforce levels as well as a host of additional elements across our client base. And we continue to see stable data points. We look at those certainly on a weekly basis. But to date, there's nothing that I would call out that would suggest a different experience than what we have seen. George Michael Kurosawa: Okay. Great. And then a question on the back half of the year and seasonal trends, form filings. I think you've said in the past, Airbase is maybe a bit less seasonal of a business than the core HCM side? Just anything to help us think through what that pattern will look like seasonally relative to typical historical patterns? Ryan Glenn: Yes, nothing onetime that I would call out at this point. I think you're right, Airbase would not necessarily have the same seasonal cadence that the HCM side, although obviously, that is a very small part of our business today. So not sure I would discretely adjust for that. Outside of that small item, everything else, I think so far, nothing I'd call out as far as onetime or different seasonal impacts as we think about the back half of the year. Operator: And our next question comes from Zachary Gunn of FT Partners. Zachary Gunn: I just wanted to follow up on one of the earlier questions around Airbase and the longer-term financial targets. And just thinking about -- you've talked in the past about the 10% to 20% kind of cross-sell opportunity. Is there a way to think about what cross-sell is embedded within that $3 billion? I recognize it's still a small portion of volume, but just any context on have the long-term goal shifted there? Steven Beauchamp: Yes. So, I think, Toby, kind of answered this question. I'll maybe take a different tack at it. It's really about unit growth and average revenue per customer growth for us. And so that formula for us historically has moved around year-by-year, but we've been pretty consistent. Roughly half the growth has come from units and the other half from average revenue per customer. That has shifted a little bit as we've had certain product launches and they've moved up the adoption curve. But we're not fundamentally thinking that the launch of IT and finance changes that equation materially. You may see some shifts in that over time. But we feel more confident having that opportunity to expand in those areas that we can absolutely continue that ARPU expansion. And certainly, it is a factor in giving us confidence to be able to not only look towards $2 billion, which is kind of around the corner, but look beyond that to $3 billion. Operator: And our next question comes from Madeline Brooks of Bank of America. Madeline Brooks: Just a quick one for me, guys. Looking at your long-term targets and how they've changed, it looks like the updated target for sales and marketing as a percent of revenues actually went down a little bit. And I'm just curious as to why because if we look at the opportunity ahead of you, both in the businesses that you operate in, but then largely in the market in terms of AI and broader technological shifts, most other companies are ramping up investment in their go-to-market. And I understand efficiencies from AI. However, I think, the trend that we've seen is that those efficiencies kind of more supplement versus are used for total OpEx reduction. And so I'm just wondering why not invest a little bit more heavy handedly at a time when the opportunity seems so right? Toby Williams: Yes, I think, we feel like we've rightsized our investments across go-to-market against the opportunity that we have. And the change in the target, I mean, if you look at where we closed last year, I think, we were at 21.6% from a sales and marketing perspective, that's basically at the top end of the range that we have adjusted to. So I wouldn't make more of that than is actually reflected in the data. So I think we have a pretty consistent approach from a go-to-marketing spend perspective. We've talked about being able to drive more productivity there, but I don't think we're underinvesting in what we see as a significant opportunity. I think, we are appropriately invested in it. We're looking for productivity and efficiency, but we're also looking for delivery. And so I feel really good about the productivity of that team throughout the course of '25, and we've been in a great spot as the fastest-growing HCM provider. And I think that's what looks -- that's what we have in front of us, too. And I think we're invested to be able to produce that. Operator: And our next question comes from Jacob Smith of Guggenheim Securities. Jacob Cody Smith: I want to ask another about the broker channel and Paylocity's right to win new referral business, especially in situations where brokers book may have previously referred a lot of business to an acquired competitor. We understand this is a very competitive landscape with large public and private companies all leaning in pretty heavily into the channel, all going after the same opportunity. But most of them compete directly with brokers, as you guys point out, whereas Paylocity does not. Can you talk about what you're doing both at the leadership level with brokers in terms of strategic alignment and at the micro level with individual producers to deepen vendor trust and buy-in to win new referral business that might be up for grabs. And also, is there any way to frame the benefit you've seen so far from any disruption in the channel? That would be helpful. Steven Beauchamp: Yes, sure. I think, as you indicated, it is a key part of our go-to-market motion has been even prior to going public. And I think as you also indicated, a lot of this happens at the field level. So these are individual relationships between our salespeople who are interacting with the brokers in their offices, going out on calls together, sharing leads and getting referrals and those referrals obviously get translated into new business sales. I think, the other thing I would say is we consistently have been above the 25%. We don't give the exact specific number, but I think, we've given you the color that we've been excited about the momentum in the broker channel, and that has definitely been a contributor to our overperformance, both in the back half of FY '25 and into FY '26. So no change to the strategy. It's really the same strategy. We also have relationships with the biggest brokers at a corporate level, and those are enabling factors. And so when you've got a little bit less competition out there, we certainly see that as an opportunity. We're going after that opportunity, and we think that has been a contributor to the strong start this fiscal year. Operator: I show no further questions at this time. I'd like to turn it back to Toby Williams for closing remarks. Toby Williams: Yes. I just want to thank everybody for their interest in Paylocity. Thanks for your time tonight. And certainly, a large thank you to all of our employees who helped make Q1 great. Thank you again. Have a good night. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect.
Kazumi Tamaki: Let us get started. Welcome to the earnings briefing of AGC Inc. for the third quarter of fiscal year 2025. I'm Kazumi Tamaki, General Manager, Corporate Communications and Investor Relations, serving as moderator. Today's attendees are Shinji Miyaji, Executive Vice President, Executive Officer and CFO; and Tomoyuki Shiokawa, Executive Officer, General Manager of Finance and Control Division. We will first have CFO Miyaji, provide an overview of the financial results for the third quarter, followed by a Q&A session. We are planning to finish at 3:45 p.m. Your cooperation is appreciated. Without further ado, I ask CFO, Miyaji, to start his presentation. Shinji Miyaji: Thank you. This is Shinji Miyaji, the CFO. Please turn to Page 3. The highlights. Net sales for the first 9 months totaled JPY 1,512.1 billion, down JPY 22.1 billion year-on-year. Positives included an improved product mix and pricing policies for automotive glass, increased shipments and pricing policies for Performance Chemicals and pricing policies for architectural glass in Europe and the Americas, while negatives included a PVC price decline, decreased shipments of EUV photo blanks and European architectural glass and the impact of last year's Russian business transfer. Operating profit was JPY 94.8 billion, up JPY 0.8 billion on effects of profit improvement measures in displays and others despite the adverse impact of the aforementioned factors as well as higher raw materials and fuel costs. Net income attributable to the owners of the parent was up JPY 145.9 billion at JPY 39.5 billion due to the aforementioned positive factors and the nonrecurrence of last year's loss on sale of shares related to the Russian business transfer and large impairment losses in biopharmaceutical CDMO. Operating profit for the third quarter exceeded JPY 40 billion for the first time in 3 years since Q2 of 2022, following profit improvement measures such as pricing policies for European architectural glass and automotive glass. Full year outlook remains unchanged from that announced in August. Page 6. Net sales and operating profit were as explained earlier. Profit before tax included profit increasing factors mentioned earlier in relation to the net income attributable to the owners of the parent as well as impairment losses and foreign exchange losses in biopharmaceutical CDMO during Q2. Page 7. By segment, Architectural Glass, Electronics and Chemicals saw a decrease in the sales and profit. Automotive posted higher sales and profit. Life Science posted lower sales but improved profit. Page 8. I will explain the factors behind year-on-year variance in operating profit. Sales volume, prices, product mix resulted in a positive impact of JPY 10.9 billion. While there was a decline in the selling price of PVC and in shipments of semiconductor-related materials and architectural glass in Europe, there were positive effects from improvements in the product mix and pricing policies for automotive glass and for architectural glass in Europe and the U.S. in Performance Chemicals. Raw material prices differences resulted in a JPY 8.1 billion decrease and cost and other differences, a JPY 2 billion decrease. As a result, operating profit increased by JPY 0.8 billion to JPY 94.8 billion. Page 9, please. Next, balance sheet. The total assets amounted to JPY 2,874.2 billion, down JPY 15.5 billion from the end of last year. The D/E ratio was 0.42x. Please turn to Page 10. This is the cash flow statement. Operating cash flow was JPY 164.7 billion. Investment cash flow, negative JPY 126.4 billion. Consequently, free cash flow was JPY 38.4 billion. Page 11, please. I will now explain CapEx, depreciation and R&D expenses. CapEx totaled JPY 174.1 billion, depreciation amounted to JPY 132.6 billion, and R&D expenses of JPY 44.1 billion. Major capital investment projects are listed as shown. Next, I'll move to the segment-by-segment presentation. Please turn to Page 13. First, Architectural Glass segment. Sales were JPY 320.8 billion; operating profit, JPY 10 billion. In Asia, sales decreased by JPY 3.8 billion to JPY 109.7 billion due to lower prices in Indonesia and other regions, coupled with reduced shipments. In Europe and Americas, sales decreased by JPY 5.2 billion to JPY 209.2 billion due to lower shipments in Europe and transfer of Russian business in February of the previous year. The effects of our pricing policy began contributing from the second quarter onward. Operating profit decreased by JPY 4 billion due to the revenue decline factors that I mentioned earlier and rising raw material and fuel costs. Asia accounted for about 30% of operating profit, while Europe and Americas, about 70%. Please turn to Page 14. Automotive segment sales increased by JPY 10.6 billion to JPY 385.6 billion, and operating profit increased by JPY 12 billion to JPY 23.4 billion. Shipments decreased in Europe, but increased in Japan. To counter rising raw material and fuel prices and manufacturing costs, we implemented structural reforms and productivity and product mix improvements and pricing strategies. Please turn to Page 15. The Electronics segment sales reached JPY 259.7 billion; operating profit, JPY 36 billion. The Display segment saw sales increase by JPY 4 billion to JPY 136.2 billion, driven by higher shipments of LCD glass substrate. The Electronics Materials segment experienced a JPY 11.1 billion decrease in sales to JPY 122.2 billion due to lower shipments of EUV mask blanks, compounded by the impact of yen's appreciation. As a result, operating profit decreased by JPY 400 million. In operating profit, 70% was represented by electronic materials and 30% by displays. Please turn to Page 16. Next, Chemicals. Net sales, JPY 431.3 billion and operating profit, JPY 39.7 billion. Essential chemicals sales were down JPY 20 billion at JPY 284.6 billion on a declining prices of PVC. Sales in Performance Chemicals, up JPY 11.4 billion at JPY 143.6 billion on increased shipments and higher prices of fluorine-related products for semiconductors and transport applications. Profit breakdown was Essential Chemicals, about 30%; Performance Chemicals around 70%. Page 17. Life Science. Net sales, JPY 96.1 billion and operating loss of JPY 16.2 billion. Sales were down despite increased shipments on expanded biopharmaceutical CDMO capacity due to the nonrecurrence of last year's onetime revenue from the contract project settlements and production issues at the Boulder site. Despite effective fixed cost reductions in biopharmaceutical CDMO, profit improvement was only JPY 0.5 billion, seriously affected by aforementioned revenue-reducing factors. Page 18. Strategic Businesses. Net sales were down JPY 2.2 billion at JPY 363.3 billion year-on-year. Despite growth in Performance Chemicals and Mobility, affected by a temporary slowdown in electronic shipments and the nonrecurrence of onetime revenue from contract project settlements in Life Science. Operating profit was down JPY 7.2 billion at JPY 40.7 billion, strongly affected by declining electronics shipments. Page 20. The full year forecast remains unchanged from August. Page 21. No changes to the full year forecast by segment either. Page 22. Comparing the fourth quarter forecast to the third quarter by segment, Architectural glass expects increased shipments in Japan with the demand increasing for renovation to energy-saving glass. Asia also expects increased shipments on a recovering demand. South America expects shipments to remain strong. Europe expects flat shipments quarter-on-quarter affected by the continued weak economy. In automotive, shipments to increase in Japan, but decrease in Europe and the Americas. We'll continue working on pricing policies and structural reforms. In electronics, display expects a slight decrease in shipments of LCD glass substrates. Electronic Materials expects shipments of semiconductor-related materials to be flat quarter-on-quarter. Optoelectronics expects decreased shipments due to the entry into the adjustment period. Page 23. Next, chemicals. Essential Chemicals. Although regular facility maintenance is planned in Southeast Asia, shipments are expected to increase driven by a gradual startup of the expanded facility in Thailand. Performance Chemicals. Shipments of fluorine-related products for semiconductors and transportation applications are expected to remain firm. Next, Life Sciences. Contract sales for small molecule pharmaceuticals and agrochemical CDMO are expected to increase. For biopharmaceutical CDMO, the loss is expected to narrow due to sales increase at a site in Denmark and the structural reform of the Colorado sites. Turn to Page 24, please. There are no changes to the full year outlook for strategic businesses. Page 25. There are also no changes to the full year outlook for CapEx, depreciation and R&D expenses. Please turn to Page 26. With regard to shareholder returns, the dividend forecast remains unchanged as a stable dividend policy targeting at a DOE of about 3% remain unchanged. Please turn to Page 28. I will now explain the 2 organizational changes announced today together with the earnings results. So let me go over the details. The first is one aimed at improving the profitability of the Chemicals segment. As shown on the left of the slide, the chlor-alkali business was previously categorized as essential chemicals, while the business centered on fluorine-related products was categorized as Performance Chemicals. Starting from January 2026, next year, the entire chemical chain in Japan from upstream electrolysis to downstream performance chemicals products will be integrated into a single SBU, strategic business unit, in order to optimize the overall business and improve profitability. That is shown on the right of the slide at the bottom. The essential chemicals business in South Asia, on the other hand, will become an independent SBU, strategic business unit to accelerate its profitability improvement. So going forward, from next year onward, the subsegment structure for the Chemicals segment in our earnings announcements will also align with this organizational change. Now please turn to Page 29. The second organizational change is to accelerate productivity innovation. As you can see in this diagram, up until now, the Information Systems division handled IT infrastructure development, while the digital and innovation promotion division focused on business process innovation using digital technologies. And these functioned as separate entities collaborating on digital initiatives. Now as you can see in this diagram, as a superstructure, we are establishing a new digital and innovation management division to oversee these functions. As you can see on the right bottom corner, our company has been selected as a DX stock fifth time 4 years in a row, and our DX initiatives have been rated highly externally as one of the most advanced companies. In this regard, through its organizational reform, we will pursue synergies and strategies and technologies and human resources. Furthermore, we will advance digital solutions as business innovation under a unified digital strategy to enhance corporate value and strengthen competitiveness further. That concludes my presentation. Thank you for your attention. Kazumi Tamaki: We will now take questions. If you wish to ask questions, please push the Q&A button and type in your questions. We will first go over the questions we received in advance. The first question. The actual results for the third quarter, how it compared to the projected results. Miyaji would respond. Shinji Miyaji: For the third quarter, sales on par with our projection for operating profit, a bit stronger than our expectation. That is overall for the company by segment, the situation was as follows. First, architectural glass sales or slightly lower, but operating profit was slightly higher than projection. Especially since the second quarter, in the -- in Europe and the Americas, policy -- pricing policies and cost reductions measures have proven to be effective. As a result, operating profit was better than our projections. For automotive, sales and operating profit were both better than our projection for sales. Improvement in product mix based on our strategy of volume to value, we saw effect. And we also implemented prices, reflecting that. And this strategy proved to be effective. And as a result, both sales and operating profit were better than our projection. Electronics, overall, sales were slightly better than projection, whereas for operating profit, slightly lower than our projection. For sales, some did better than others. But for operating profit, in particular, in display, we saw a temporary cost increase, and we had some impacts in foreign currency with higher Asian currencies. So as a result, operating profit was slightly lower than our projection. For chemicals, sales were slightly lower than our projection. Operating profit, slightly better. Especially in operating profit, Essential Chemicals and Performance Chemicals, both saw the effect of cost improvements, resulting in slightly better results than expectation. Life Science sales slightly lower, operating profit on par with our projection. For sales in small molecule pharmaceuticals, sales were not that exciting. But for operating profit, both biopharmaceuticals and small molecule pharmaceuticals were on line with our projections. Kazumi Tamaki: Next question. Earlier, you talked about outlook for the fourth quarter qualitatively. But once again, if you compare this to the third quarter, how do you expect the fourth quarter to play out? Can you give us more details? That was the question. Shinji Miyaji: So for the fourth quarter outlook, in terms of sales revenue, those will be on par with the third quarter probably. But in terms of operating profit compared to third quarter, we are going to see a decline probably. So that's the overall outlook. By segment, as I said earlier, for architectural glass, both sales and operating profit will be in line with the third quarter. In our view and for Japan and Asia, demand is expected to increase. But in Europe and others. Because of seasonality partially, there will be a decline. So overall, both sales and profit will be in line with the third quarter. As for automotive business, in U.S. and Europe in the fourth quarter, because of seasonality, we're expecting a decline. There is going to be increase in shipment in Japan, but because of the shipment decline in Europe and Americas, we are going to see a decline in both revenue and profit. As for Electronics, sales are expected to be as the same as the third quarter, but we're going to see a decline in profit. As for electronic materials, in terms of sales, especially after electronics materials are going to -- has already passed the peak in shipments. So in the fourth quarter, we are expected to see some decline. And as for LCD glass substrate, the demand is a bit weaker compared to third quarter. So operating profit will be affected by that decline. And operating profit is going well in Opto electronics, but the display, but for -- this cannot cover the electronic material decline in profit. And as for Chemicals, we are going to see increase in revenue but decline in profit. Especially in Thailand, there will be a production facility that will come online. And so there will be shipment increase. And as for fluorine products, in the fourth quarter, demand is a bit stronger. So we're expecting the sales to increase. But as for operating profit, in essential chemicals, there will be scheduled maintenance -- turnaround maintenance, and there is going to be a slight dip. So there is going to be a decrease in profit. And Life Science, we're expecting increase in both revenue and profit. In terms of sales, the sales are expected to increase in the sites in Copenhagen and operating profit will also increase accordingly. And fixed cost in sites in Colorado will improve. And so costs will be declined. The full-scale effect will be from the next fiscal year, but there will be a slight effect that will be already materialized in the fourth quarter. Kazumi Tamaki: The next question for EUV mask blanks on quarter-on-quarter or year-on-year basis. What is the situation, is the question. And compared to the plan, how were the situation in the third quarter? Shinji Miyaji: Here again, not much change in our stories. In 2020, we saw a big growth in this business. But this year, rather in 2024, we saw a big growth in this business. But for this year, due to the demand situation for our main clients, we expect the shipments to decrease. For 2026 onward, we expect sales to increase -- start to increase again. But as far as this year is concerned, not very exciting. We don't disclose the season-by-season changes, but the overall story remains unchanged. In Taiwan and others, our clients there, and we are continuing to expand our customer base, and we are seeing the effects of that. Kazumi Tamaki: This, once again, EUV mask blanks question. In major customers, there are various news headlines that are being heard. So compared to 3 months before, is there any change in your outlook for demand? That was the question. Shinji Miyaji: So EV manufacturers, as you know, all those that you already know. And in each in those manufacturers, there is various capital policies that are announced and there's subsidy provided by the government. So basically, this has been favorite -- favorable for us. And there is also a lot of news and in-house production is going to start up in foundries first. And so the demand that we initially assumed is now coming to materialize. So there are slightly less concern with a little bit of less visual thinking. Kazumi Tamaki: Next question. Also on EUV mask blanks. Other than your main customer, how is your market share increasing. And what about the situation of certification in state-of-the-art areas, including 2-nanometer? Shinji Miyaji: It's very difficult to give you the details. But regarding our market share, other than our main customers, we have yet to see a rapid increase in our market share. 2 nanometer, 1.4 nanometer, we are developing those to be certified. We will continue our efforts in these areas, and we are seeing the effect to a certain degree. For this year, with this factor in mind, sales are not growing that rapidly either. So starting next year, we would like to supply to new customers as well as increased supplies to existing customers. Kazumi Tamaki: Next question. With regard to image sensor glass filters, was there any entry by competitors? And from the next fiscal year onward, what will be your outlook for shipments, inclusive of the competitive landscape. That was the question. Shinji Miyaji: So for glass filter for image sensors, there are a lot of different manufacturers that have been around. And we are targeting at super high-end products or customers that are producing those products. Those are the main customers. So in that sense, whether there are competitors or not, well, there are many competitors in image sensors, but as for super high-end segment, there is very limited competition. So that has not changed. But I'm not saying that there's no competitor whatsoever. So we keep providing cutting-edge products to lead and get ahead of the pack and to secure the dominant position. And that exclusive strong position has not changed. Kazumi Tamaki: Moving on to Life Science. What is the effect of the sale of the Colorado sites? Where are you on that? And once the sales materialize, what impact would it have on your results? Shinji Miyaji: The Colorado site sales, we are working towards that. But so far, there is nothing that we can make any announcement on. Quite a number of companies are showing interest in this site itself. So we will continue to pursue early sale. But this is November already. So it seems not very likely that we will have the sale complete by the end of this year, meaning it's going to be next year that is a more likely scenario. Kazumi Tamaki: Next question is for biopharmaceutical business. Can you explain the status by site? Shinji Miyaji: By site. Well, what is easiest to understand is Colorado. It is going to be closed and the redundancies have been announced. Headcounts declined. And the cost is expected to decline further to the end of this year, and this is going to be a contributor for the next fiscal year. That will be easiest to understand. As for Seattle, in the past, there were some production disruptions, but major -- many of those have been resolved. So in terms of production, there's much less concern now. So we are now striving to obtain demand or orders, and we are seeing some results, and there is an obvious increase in inquiries. But as I've been saying all along, it takes time to move to the full-scale production. So the full-scale recovery is not expected until 2027. So overall, what we can say is that in Europe, in Copenhagen, we have increased the production capacity and there were some problems that we faced, but those have been now resolved. So in terms of manufacturing products, there is no concern. So we have to get orders, win orders and produce products. We are totally focused on that now. And as for animal cells, that is how we are. But in Heidelberg microbes and the Milan genetic sales, they are all performing quite well. So there's no concern and apprehension and things are going well. So animal cells have to be restructured, and we have to increase the capacity utilization, and we're striving for that. And the order taking is increasing steadily. But when it comes to really solid performance, we have to wait until 2027. Kazumi Tamaki: The next question is for Life Science business overall. Sales is behind and operating profit is on track it appears compared to the full year forecast. Is the demand tracking behind your projection? If that's the case, why is it that profit is doing well. Shinji Miyaji: Well, we can't really say that profit is doing well. But so far, we've been able to do what we have been planning to do, assuming to do. Up to third quarter, the first 9 months for small molecule pharmaceuticals, slightly below our projection. But this is a real seasonal business, lots of sales in the fourth quarter, so we're not concerned. So overall, we are seeing steady progress, both for small molecule and biopharmaceuticals. So next year is going to be very important. As for the Life Science business as a whole, if you look at the third quarter actual results, cost and other contributors turn out to be negative on a year-on-year basis. So was there any particular onetime factor like withdrawal costs. So what is the breakdown of this item. So in comparison to the third quarter last year, in 2024 third quarter, there was a onetime revenue I think this was cancellation fee. There was a onetime revenue in quite some amount. So there's no such thing that was a big factor. Kazumi Tamaki: The next question is about the Boulder sites. The production issues continued, but how about the third quarter. Did you continue to see the production issues in the third quarter? Shinji Miyaji: For our Boulder sites operation, since we decided to discontinue our operation there, the third quarter is already preparing for that. So it's not really production issues. It's just that preparation for the business withdrawal took place during this period. Kazumi Tamaki: The next question is about Chemicals segment. Essential Chemicals and Performance Chemicals, both seems to have improved in profitability. What was the factor behind this? Shinji Miyaji: Well, yes, this is about a comparison to the last fiscal year, right? So in comparison to the previous year, is it the question. The question is about the comparison. So improvement, is it from the second quarter in what comparison to what, I'm not sure. But this was a question that was pre-received. So there is no specification about the time period. So as compared to the second quarter, I would guess, on an annual basis, there's a decline in profit. So probably profitability has increased from the second quarter. So in comparison to second quarter, so what has improved? Well, more or less, Essential Chemicals improved more, especially outside of Japan, shipments have increased and cost has declined. Cost was reduced in the Essential Chemicals, both in Japan and overseas. As for Performance Chemicals, cost has decreased. In Japan, essentials and performance chemicals, utility charges have declined. But as compared to the second quarter, profits have increased. Kazumi Tamaki: Next question is on Essential Chemicals. The capacity increase in Thailand, what is the current status? By the end of the year, you expect full capacity operation. Does that remain unchanged? Shinji Miyaji: Yes, we have started the operation, and we expect full capacity operation at the year-end. So things are proceeding as planned. And the impact is, as explained earlier, for this year, profit-wise, no contribution, but steady ramp-up. Kazumi Tamaki: Next question is about Chemicals segment. From next year, there's going to be organizational change. What is the purpose behind this once again? Shinji Miyaji: Well, the same slide is now shown here. So previously, our subsegments were divided as shown on the left, but this will be changed to what is shown on the right. So we start with electrolysis and with electrolysis, chlorine and caustic soda are generated and using chlorine as a feedstock, chlorine and other Performance Chemicals products are produced. And the whole thing is called chemical chain. And in Japan in the upstream, the chlor-alkali business. And in the downstream, there's Performance Chemicals products, and they belong to different business headquarters, business units. So it's not about optimization of chains, but it's about optimization of business units. So they are byproducts to each other. So if you look at the Japanese chemical chain as a whole, you can further -- there's further room for more optimization. So we have changed our gear to have optimization of the total chain. So rather than upstream and downstreams looked at separately, we look at volume of caustic soda and chlorine and optimize them in the whole chemical chain. And Essential Chemicals, Southeast Asia will be separated out because they had been a totally independent business separate from Japanese essential chemicals from the beginning, but they were in the same SBU with the Japanese Essential Chemicals, but Southeast Asia business is self-complete. So as a strategic business unit, it became independent and profitability improvement initiative that is underway has to be accelerated in this regard. Kazumi Tamaki: Next question for automotive. The situation in the third quarter. 3 months ago, you were expecting a decline in revenue and profit from Q2 to Q3. The actual was a double-digit growth in profit. What were the differences? Shinji Miyaji: So we're talking about quarter-on-quarter. It's not double-digit increase. The profit increase from Q2 was JPY 0.8 billion, I think. For automotive, in the second quarter, JPY 7.4 billion, up to JPY 8.3 billion in the third quarter. So JPY 900 million or JPY 0.9 billion. So it's not really double digit. But, especially in Japan and Asia, we continue to see strong business. That's one big factor. And North America is recovering somewhat. So combined -- those 2 factors combined was better than our projection. And therefore, Q3 was better than Q2, but not a big jump. Kazumi Tamaki: We are running out of time. So this will be the last question. So for architectural glass, in Europe, demand has been sluggish, but prices seems to have increased significantly. So what was the factor for this? Was there any supply capacity decline? And also, you haven't seen signs for bottoming out in Asian market. Can you tell us your outlook for demand in Asia? Shinji Miyaji: So there's a question about Europe and Asia. As for Europe, last year, we have to go back to the end of last year. There was a severe winter weather and gas prices surged. And we have not been able to recover on that immediately from the gas prices and the spread has worsened significantly because of that late catch-up. So the gas increase or cost increase passed on to the product price has been implemented, and that result has been reflected in the second quarter onward. On the other hand, in order to increase price, you have to look at the capacity. And so our company and whole industry, including our company, has taken some supply reduction. And from the second quarter onward, there were some effects from maintenance of prices. So as you know, the European economy has been quite weak, so we cannot expect too much from the demand increase, but prices are expected to be maintained at a relatively higher level. On the other hand, for Asia, demand is not strong, especially in Thailand, industrial structure is not that favorable. So it's a bit difficult. In Indonesia, there is going to be a gradual recovery. But compared to the past, there's an industrial structural issue that still remains. And so in terms of architectural glass, the profit improvement in Southeast Asia is a challenge for us. Kazumi Tamaki: It is now time, so we're going to end the Q&A session here. For the answers, we couldn't respond, the IR personnel will come back to you later. If you have any further questions, please call us in Japanese at 03-3218-5096, that is for questions in Japanese. And if you wish to communicate in English, please send to us at this address and please fill out the survey sheets that you will see after you leave. Thank you very much. Have a good day.
Unknown Executive: Good morning, everyone. Welcome to our third quarter of 2025 Results Conference Call. First, let me introduce our management. We have our former beloved CEO, Khun Somchai. Somchai Lertsutiwong: [Foreign Language] Unknown Executive: Our newly appointed CEO, Khun Pratthana. Pratthana Leelapanang: [Foreign Language] Unknown Executive: Our CFO, Khun Tee. Tee Seeumpornroj: [Foreign Language] Unknown Executive: We have Chief Enterprise Business, Khun Phupa. Phupa Akavipat: [Foreign Language] Unknown Executive: We also have Chief Retail Business, Khun Prapat. Prapat Siangjan: [Foreign Language] Unknown Executive: Khun Nattiya and myself will be briefing you the results and running this session. So at this moment, allow me to officially welcome Khun Pratthana, our new Chief Executive Officer, following the transition from Khun Somchai, who has successfully led AIS for the past decade through multiple transformation milestones. Khun Somchai has been with AIS close to 30 years, and holding CEO position for the past 11 years. Now let us hear from Khun Somchai, as he would like to share a few words with this community. Somchai Lertsutiwong: Good morning, investors and analysts. I would like to take this opportunity to thank all of you that support me all the time. For me is a really great time here. It have been the pleasure me to serving as a CEO for the past 11 years. I will miss the -- missing with all of you, but I never miss the Roadshow. Even if you still invite me, I am willing to go with Pratthana, and I will be by your side and follow up and push Pratthana to make more and more return to -- off you. Okay. For me, I view hard list leadership to Khun Pratthana, who you'll know well. And I feel confident as we will continue to go with greater vision and energy. I hope the investor analysts will continue to support AIS under the next chapter of leadership under Khun Pratthana. Thank you very much. We hope to see you in any Roadshow that you invite me. Thank you very much. Unknown Executive: Thank you Khun Somchai for your kind words. We truly will miss you, and we hope that we can invite to the roadshow. Before we begin the quarterly session, let me introduce the new office chart. While we now have Khun Pratthana as our new CEO. Khun Pratthana also has been with AIS close to 30 years. Before this position, we are familiar with his role as Chief Consumer Business, taking care of mobile service, and then he was promoted to Deputy CEO, Chief Operating Officer, next to CEO position. Under Khun Pratthana, we have 2 Deputy CEOs, and now 7 business units responsible by C levels reporting to him. At this moment Khun Pratthana will be acting as Mobile Business unit head, while Khun Tee is acting as Broadband Business unit head. The company is in the process of succession plan. Now let us hear a few words from Khun Pratthana. Pratthana Leelapanang: Very good morning to the -- everyone here in the conference call, to all analysts. I've been honored that the company appointed me as the new leader of the team. Under Khun Somchai leadership, AIS has evolved from mobile network operator into a fully, I would like to use the word, integrated digital service providers. And we have set -- we believe that AIS under leadership of Khun Somchai have set a new benchmark for multiple times, including this quarter for the industry. I'm very committed to build upon the strong foundations of AIS, and to drive AIS together with the whole team to a very new era whereby digital and AI infrastructures will play a very pivotal role for country capabilities in the digital economies era. AIS team as a whole is looking forward to work hard internally and with partners across industry to deliver exceptional experience for the customer and exceptional values for our every customer. With the comprehensive sets, our product service across 5G, broadband, enterprise solutions, retail, entertainment and about to come digital financial services. Again, I'm truly honored, and we are very committed to bringing the best for Thailand and society sustainably. Thank you very much. Unknown Executive: Thank you very much for your notes, and we now expect to hear more from him in subsequent events. Now let me begin with a short brief and then going directly into Q&A. At this time, you may also reserve to ask the question through the chat box. Please kindly put your name and your corporate name. In the third quarter, AIS continued posting solid results with core service revenue continued growing, supporting by strong connectivity and content proposition, despite a challenging economic situation. Mobile remained resilient, focusing on 5G and driving more values to uplift ARPU alongside content engagement. Broadband delivered another strong quarter with continued focus on quality subscribers, innovative products and premium bundles beyond broadband. Enterprise momentum remains solid, driven by EDS & Cloud, while we will continue to drive data center growth through our [Technical Difficulty]. The retail business grow uncertain retail strategy in product mix, stock management and sales capability. Profitability was strong from efficient cost control and lower spectrum costs. Looking at the first 9 months of 2025, AIS delivered a quality across all key metrics. Our EBITDA margin remained strong at 55% total revenue with ROIC at 15%. The net debt to EBITDA was at 1.9x, underscoring a very solid financial position and a low cost of borrowing. Overall, AIS continued to outperform with quality growth in expanding our business beyond connectivity and efficient capital management. We expect to continue delivering strong returns to shareholder. While we are anticipating that this investment community will be interested on the impact from 2100 megahertz NT contract expiry and the recent auction cost savings. We have placed an illustration showing the accounting impact in both MD&A and our conference call slides, where you can download through our website. Further questions regarding specifically on this, please reach out to IR team after this session. And this is the end of a short brief, and we'll start with the Q&A session now. Unknown Executive: [Operator Instructions] And we have Ranjan from JPM. Ranjan Sharma: First of all, all the best Khun Somchai. I wish you all the best, and it's been a great leadership of AIS under you, and all the best to Khun Pratthana, look forward to the same execution under you as well. So with that, I can come to my question. Like Khun Pratthana, can you help us understand your key objectives and KPIs as we look to lead the organization and also how you think about capital allocation as well. Pratthana Leelapanang: So the key objective and KPI of the organizations is to bring forward the growth for a cross business, integrating mobile broadband, enterprise, entertainment, retail, and digital financial service to come. So we truly believe that AIS can play more roles in the AI and digital infrastructure, bringing values to the countries so that we set forward ourselves to go there. Ranjan Sharma: Can I just follow up on the capital allocation side as well, I mean, given that you're generating such strong free cash flows now, how you look to use the excess capital? Tee Seeumpornroj: Sorry. We didn't hear you clearly. Are you asking about the excess -- excess cash? Ranjan Sharma: Yes. Given your strong free cash flow generation of the business, how you think about capital allocation going forward? Tee Seeumpornroj: Okay. Yes. I think in the end, first and foremost, every time this, then -- it's dividend, right? So I think we committed to pay a high dividend payout ratio. That's to be expected from our shareholders in a way. But apart from that, I think we are preparing -- it's actually good that we have excess capital right now because looking forward we see a lot of growth path that we can take. Khun Pratthana mentioned a bit about growing in a few directions, enterprise, infrastructure, also mobile and broadband as well. We still believe there's room to grow. So I think you may see that we may come back with a bit more investment over the next few years and also in preparation for the spectrum auction that we anticipated to happen in the next year or 2. I think that will be a certain requirement to put the money back to work and hopefully to grow the business again. Unknown Executive: We have Piyush from HSBC. Piyush Choudhary: First of all, all the best, Khun Somchai, and congrats Khun Pratthana on the new role, and wish you the best. I have few questions. Firstly, if you can discuss about the macro environment in Thailand. And how do you see the kind of growth outlook in both mobile and fixed broadband, the ARPU outlook as well? Second question is your 9-month performance has been really strong. So why guidance has been kept unchanged. Are you expecting kind of any headwinds in the fourth quarter on the cost side? And thirdly, if I may ask, there was a sharp decline in admin and other expenses of 21% year-on-year, what drove it and the outlook for the same? Pratthana Leelapanang: Allow me to address the first one in the macro environment. Thailand is now still, I would say, under the period of recovering. Especially the last quarter, we start to see a bit more positive in economy recovery. We believe towards the end of the year and next year will be still under the phase of recovery. In any way, we do not see a negative side, but positive sign. For mobile, broadband and telecom in Thailand, it's very clear that the market is really move on focusing on value creation rather than hyper competition. And you also see from us and our competitors on that particular focus, so the profitability has been brought back to the industry, and we both are competing to bring value for customers. In terms of outlook, when we think about how things would grow, I believe that the digital services based on both mobile, broadband, enterprise, we play a very important role to add values. So we do expect a positive side of it continue on. On the guidance, we do not expect the surprise for the last quarter. And this is now about to end the quarter. We do not have a plan also to revise it. That's what I want to say. Unknown Executive: On your last question about admin side. In admin, we also booked performance-related item. That's basically the bonus. So there's accrual in particular quarter, especially last quarter and some adjustment in this quarter as well. Next, on the top three, we have a high base. If you recall, last year, we mentioned that we booked the accrual performance base in Q3 for Q2 and Q1 as well. So we started the year in 2024 with a very conservative outlook. And we had a very low admin expense in first and second quarter last year. So in third quarter, we accrue more performance bonus, and therefore, it was a high base. Piyush Choudhary: Right. Third quarter number is a normalized number. There is no reversal of any provisions, right, in this? Unknown Executive: It's not that big of an item. So you may -- some look at the third quarter onward. If no further questions from Piyush, we have Thitithep from KKPS. Thitithep Nophaket: Okay. I have 3 questions. Number one on the mobile phone revenue gap between [indiscernible], we have seen quite a substantial gap in the past 2 or 3 quarters. May I have your view on why the CapEx is, because when I look at the price band of 2 companies, they are almost identical and the U.S. went the gap to continue in the next few quarters as the first question. The second 1 may have your view on the CapEx outlook for 2026 and possibly 2027? Because right now our 5G network already covered in 95% of the population. And the third 1 right now, people are using the 5G package is already 35%, 36% of user subscriber base. Do you expect that my pension has to continue? And what would be the peak, can it lead to 100% in the next few years? Those are all the figures. Pratthana Leelapanang: Allow me to address the first one. In terms of mobile revenue gaps, I would say we look inwards rather than outward. We have been very focusing on the customer needs, acquiring the right segment of a customer on the quality basis. So that has been helping as to improve the mobile revenue as well as improve the customer experiment along the way. Because you might remember when we talk about unlimited low plan and all of those is continue to be tapered off. So that has helped improve the ARPU and revenue. On the other side of competition, I think they were also putting forward that attempt as well, depending on the speed of each company. But I do see a positive trend of both competing on building on values. Whether the gap is wider remain to be seen, we don't know. But we will continue on focusing on what we are doing, bringing our quality and value to mobile services. So I think that's number one. On number two, in terms of investment for network, we will continue on making sure that we strengthen our network services with the proper CapEx to fund that particular experience. For the past year, 1.5 years, the CapEx has been on the low side simply because we are pre-investing in 5G, and the capacity is enough. We have seen the continued ongoing of traffic for both mobile and broadband. That would require us to make sure that we invest profitably to lead in the customer experience continue on. So that you can expect that we will fund that in 2026, '27 onward. On your last question regarding 5G, now we are at about 30-plus percent of penetrations. We do believe that 5G penetration can go to 70%, 80%, 90%, not so far away from now. Everyone would need to use it, and we are confident that it will grow. So I think there are a lot more room for AIS to build on that piece. Unknown Executive: Now we have from Khun Pisut from KS. Pisut Ngamvijitvong: Yes. First of all, congratulation to your good results, Khun Somchai for your retirement. Hopefully, you have a good time with your baby, and also Khun Pratthana. Somchai Lertsutiwong: I will quote your suggestion for my daughter. Thank you very much. Pisut Ngamvijitvong: [indiscernible] Unknown Executive: [Foreign Language] Pisut Ngamvijitvong: My first question is about your [ C-Band ]. If you look at your ARPU, it went up from 120 to 150. I mean, 120 before the market consolidation to 150 in this quarter. And prepaying revenue has gone up nicely. Do you think this is -- what is the right proportion of mix between prepaid and postpaid level because you see that the prepaid revenue mix has been going up as well. And we have seen the 2 steps when you reset the price for [indiscernible] 2024 and also over the... Unknown Executive: [Foreign Language] Pisut Ngamvijitvong: My question is about prepaid revenue. Basically, it went up quite okay. My question is that how far your prepaid ARPU can go up further? And what is -- what do you think -- what is the mix for the level in the prepaid and postpaid? Pratthana Leelapanang: Okay. On prepaid, I would like to put the perspective of prepaid and postpaid announced that they could be so cut, it very much like the method of payment. People subscribe monthly subscription in prepaid, and they do pay mainly subscription very large segment ten or millions of customer paying subscription for data in a monthly basis. So I would say that very close to postpaid in some way and the way they pay for it is through the bank account, bank application and so on. So it's a mixture now of how they want to use packages and the way of payment among pre and post. Prepaid has been continuing on recover from past 4, 5 year, whereby there are a huge amount of customers, and many of those have multiple SIM and some SIM are inactive. When the country strengthened the personal identification or those number has been disappeared for the market in millions. So the number of prepaid and overall shrink a bit for the past 3 years. And at the same time, the market recover from hypercompetition or overly provide unlimited data. So that has helped prepaid ARPU to continue on. We do believe that both prepaid and postpaid ARPU will highly depend on the needs of customers to use data. And we do expect that the data demand will continue on growing year-on-year. So that's what I believe it would be. On the prepaid alone ARPU, we still think there are room because the penetration of 5G will continue on growing for both postpaid and prepaid. So that you can expect that you'll see a continuation of it. Pisut Ngamvijitvong: My second question is about your network CapEx. Your 9 months network CapEx seems below your full year guidance quite a bit. But you'll keep the guidance unchanged. You may not want to change the [indiscernible] EBITDA, but in terms of the network CapEx, do you think it is possible for you to understand what do you target to spend for this year? And this means that we will help the free cash flow to make more aggressive presettlements for this year and next year. Pratthana Leelapanang: Allow me to address this one. We are very committed to network qualities. Supporting our customers, it will be on schedule on our plan. There are many of work in progress that may not immediately reflect in Q3, but that's on plan. Pisut Ngamvijitvong: My last question is about -- on the liquidity front, the NBTC has been trying to enforce some of the market package to serve to help us -- I mean, the cost of living of the people. I think first thing that about to find out. And also what I heard from the industry is that it's about to revisit the selling rate for voice and data not spotting that what's happening next year is about 3.5 gigahertz plan that could be option in 2027. Could you please give some comments on these 3 things on the [indiscernible] front? Pratthana Leelapanang: On the attempt of the regulators, we see as a very positive trend that the government do see a very strong value of digital services, and it will be part of every one, as well as the government service through that digital services. That's why mobile and broadband has been on the highlighted how the government will support tie to have access to all of those in a very economical way. What we have been providing AIS and the industry is a very competitive telecom services, and we are the third from the lowest price in the world in terms of price per gigabyte or even broadband in service. So we see a very good trend. Even though it looked like -- there will be more imposed, and we will work with regulators to bring the best for the consumers. So that's what I would say. And the cost structure itself also is unavoidable anyway that we have continue on cost structure of spectrum network investment and many more. It will continue on to be in next year, the new spectrum comes, it will be more. But with the economical of scale, and the technologies, we believe that we will bring in value continue on with -- even with those structures. Unknown Executive: Next we have Khun Wasu from Maybank. Wasu Mattanapotchanart: I'm Wasu from Maybank. I have three questions. So the first 1 is about the admin expense. Can we expect the admin expense to be relatively stable Q-on-Q in the fourth quarter? Or alternatively, can we use the number that we saw in Q3 as the base going forward. So that's the first question. The second question is about the marketing expense. So I'm aware that 4Q is usually the high expense for the marketing expense. But for this year, in particular, is it reasonable to assume that the marketing expense will drop year-on-year because of the more earning period that we are seeing this year. So that's the second question. And the final question is about the CapEx trend over the long term. Given that Khun Pratthana just mentioned that the data usage is rising. And also to -- just completed the network consolidation process last month. So should we expect AIS to increase the network CapEx in 2026 and 2027 to maintain the network quality leadership going forward. Unknown Executive: On admin side, it may be difficult to gauge where the numbers will land. However, in third quarter, because there are some adjustments on both the staff-related and IT rationalization. So likelihood is fourth quarter, it could be higher on the admin side. Marketing wise, yes, it's morning period. However, we also do have plans on certain marketing campaigns also relative to the content engagement. Normally, it's a high season. So difficult to say what the number will be, but we expect that we will continue to try to manage the marketing campaigns as properly. CapEx trend in the future. So maybe just remind you a bit that 2, 3 years back, if you recall, we did invest quite heavily on the 700 megahertz for 5G. So that also gave us quite a lot of capacity over the last few years. As we are moving forward, we also -- as Khun Pratthana mentioned, we want to ensure that we lead in the network quality leadership and customer experience, including some new features of the network that we want to build upon. So the tendency is we are looking at the higher trend of the CapEx versus this year. Next we have Arthur from Citibank. Arthur Pineda: Firstly, all the best to Khun Somchai and congrats to Khun Pratthana for taking the hot seat. Several questions, please. Firstly, you mentioned digital and AI services as a key focus area. How should we see this from an investment and CapEx standpoint? Are you, for instance, looking to invest more in additional data center capacities outside of the JV with GULF or things like GP as a service? I'm just wondering how this impacts CapEx and earnings volatility going forward? Second question I had is with regard to mobile. AIS has been gaining market share over the last 2 quarters. What do you think it's been doing differently, both of you seem to be quite rational and focus on quality subscribers. I'm just wondering what's driving that gap? Is this mainly because of the churn related to their network outage? And has that started to change into the fourth quarter? Pratthana Leelapanang: The first one regarding AI and digital infrastructure. We are pursuing with the joint venture structure with GULF into AIS, as well as [ GSA ], I believe we have also released information regarding the joint investment with GULF on that. We do see a very strong demand and needs of investing in AI infrastructures. That would also related to GPU and AI factories that later on, you probably will see -- allow me to not go into detail today, but that will be past and passive of our plan to go for very strong demand. It will be in form of the joint ventures with partners and maybe more that to be released later. That's the first one. The second one regarding mobile. We are very focused on quality, supporting existing customer and quality acquisitions. We did not change our strategy at all for the past 24 months. And I think it is the right strategy to make sure that customers have the best product, and we hope to continue on. The competitors some way somehow moving in the same direction. And I believe that we also see a very positive trend later as well. Arthur Pineda: So if you could -- just allow me ask another question. I'm just wondering about pricing for the mobile services. Consolidation has happened 2 years ago. We've not really seen any notable changes for pricing in the industry even with inflation and all. I'm just wondering the outlook for 2026, do you expect this to remain static and the strategy will just remain on upselling and bundling? Or is there room for prices to finally move? Pratthana Leelapanang: The whole mobile base is beyond $90 million, and all of those are all in different price plans. The pricing in the market for new acquisition has been improved in the ways that the unsustainable price plan has been eliminated or continue on to be improved in terms of value offering. With that, on the surface, we may not see the price hike, but you have -- if you look closer, you will see the elimination of those unsustainable plan. That's the whole fundamental of it. And with the base and a new customer coming in, we see the demand to use more data continue on. And that gives us opportunity to offer them individually with the proper packages for the upsell and cross sales. And that's also, again, has helped improve our revenue and profitabilities. And we see that one continue on rather than price hike. Unknown Executive: We have Ranjan to follow up. Ranjan Sharma: I have my follow-up question. Thank you for giving me the opportunity. It's actually coming from an investor. So I want to ask them on your behalf. Can you give more clarity on future CapEx and how that's going to evolve? And how are you going to allocate that between mobile, broadband, data centers, digital banks and the other initiatives that you might have. So the question is around the total CapEx spending in the coming periods and how it is going to be allocated between the different businesses -- existing and new business. Tee Seeumpornroj: I think, you're asking for the future plan that we are still working with the shareholders and the Board. But in terms of the trend and direction, as I think when Nattiya mentioned the past 2 years, I think we minimize the spending on CapEx because we invested earlier when we expanded 5G. The next 2 years, what we'll do, as Khun Pratthana mentioned as well is, we will try to come back to make sure we have the best network in the market. You see the trend of data usage still going up. So we want to make sure that we have enough capacity to serve the customers. In terms of how we separate that? I think it's hard to say because mobile broadband is easy. I think you can project that they can use certain percentage to revenue. We have more customers, we have more usage in our network. So that we need to invest a bit more there. Also, when we acquired TTB, we also didn't spend a lot in terms of CapEx for network on the broadband side. After 2 years and it's time to actually go back and start to make sure we have enough thought to expand the service again. But when you rope in data center and other big ticket infrastructure, that sometimes take a bit of time to build up. And also, we're going to invest when we also get some security on future cash flow. So we can tally the numbers out, but I think that us get that plan finalized with the Board, and we give guidance next year. But whatever we spend on data center or even the AI infrastructure, it will need to link to certain anchor demand that we feel secure with that number because it's a JV, so it won't show up as part of the CapEx of even to guide, but maybe in terms of investment that we're going to put into the JV, we're still working at all those formulas. And hopefully, when we do guidance for next year, then we can give you a bit more clarity on that. Unknown Executive: We have Nuttapop from Thanachart. Nuttapop Prasitsuksant: I think since you have reclaimed #1 market share in mobile again, so right now maybe looking for the new revenue stream. So may I start the first question on Enterprise Business that we see a lot of new investment in AI data center globally. Do you see an uptick or like accelerating demand for big corporate or even small corporate in Thailand to take up this kind of like -- to basically to propel your Enterprise Business, that's number one. Or do you think Thailand need some, I don't know, 3, 5 years like time before that to grow? Second one is on the product sales also. We have seen a big improvement in terms of margin. But I think over the past few years, sales revenue or like broadband sales revenue is quite stable. So can we expect more of the margin improvement or the sales improvement to boost that portion later? Because I think you have to do a lot of the renovation of your branches, of your service points, can we hope for the growth on that? And lastly, Khun Pratthana, do you think that -- are you still happy with these four pillars, if I'm not wrong, to drive AIS further? Or do you think to get the new revenue stream or to move the company further? Do you expect another pillar to be added going forward? Pratthana Leelapanang: Allow me to take the first question about the enterprise and the uptake on the AI and data center. We still see the strong demand from the enterprise customer, the big customer, including the hyperscaler that coming to Thailand. We still see around 18% to 20% market growth and strong demand on that one. If you're talking about how they adopt the AI, I think all the enterprise customers are talking about AI demanding more on the network infrastructure because the AI also required to download and upload more. We see business from the hyperscaler who invested and expand in the data center in Thailand, that I think the information I could share. Tee Seeumpornroj: From the sales side, the first 9 months that we performed is about 13% growth comparing to last year. So that is the, I think, is driven by the apples that -- what we are actually a lot in September. And in terms of the margins, the contribution margin is growing about 7.5% is about 8% comparing to last year. So that is -- I'm going to keep momentum -- of this momentum until the year-end. For the sales side, I think we're going to achieve more than double digit for the year-end also for the -- that is my perspective in terms of the sales. Okay. For the expected margin improvement, we're going to improve about, maybe 10% comparing to last year also in year 2025 comparing 2024. What we are going to achieve is -- the first one we are going to focus on the product, which is the Apple, which is the highest season of the fourth quarter of AI retail. The second one, we're keeping on the renovations, which is -- we're going to have more 20 locations that we're going to renew it to make the atmosphere and also the occurrence of the store. We're going to focus on our own brand, which is [ Laem ]. I think when you get the sample last time, and I think we get, in terms of the sales a bit growing, and I think the market is improving also on that one. But last but very important is about the financing focus, which is the -- how to make the people come to the store and easy to buy. I think that is going to work firstly with the bank and nonbank. I think those are the four focus for detail. And yes, of course, the last very important that we're going to introduce -- actually, we are on the trial phase is about the omnichannel. Once you go to the retail store, and you cannot find the model or the color that you want, from now on, you can order and you can pay at your store, you get the point of the AIS point, and then we ship to your house within the certain days that we are going to focus on this one. Pratthana Leelapanang: And the last one regarding the growth pillars. I'd like to address in a way to reflect markets and the stage of Thailand. In mobile, our #1 core pillar. Once again, we are only at 30-plus percent in 5G penetrations. There is a lot more room for us to better serve customers in the deeper penetration of 5G. In other countries, go beyond 50%, 60%, 70% already. And that pillar is still very strong for us to do more work, to serve customers and grow the company in mobile pillars. The second one, broadband. The broadband, fundamentally every home will need broadband in the future. Thailand is at about 50% household -- living household penetration of broadband, and we do see room for us to grow. As Khun Tee mentioned earlier that we make sure that our investment will support that strongly to get every whole broadband available. And thirdly, a very important pillar is the enterprise, which every enterprise in the future would be digitalized. We're just starting the journey of enterprise in term of enterprise telecommunication solutions as well as the digital infrastructure, AI infrastructure for the future enterprise as well as the digital government. So those are 3 fundamental pillars that I believe did continue on to be very important for us to make sure that we meet the demand and provide the best product and services. And on top of that now, is entertainment, retail, digital financing are coming on top to serve the customer. With these 3 plus 3 pillars are our key pillars to move forward. There will be more to come and later on when the times can be released the information. Unknown Executive: We have Izzati from Macquarie. Izzati Hakim: I have a question on the AI infrastructure. So I just wanted to get a sense in terms of the competitive landscape, especially when it comes to the DC to DC connections, the terrestrial fiber wholesale part of the business, which I believe is topped under your EDS segment. So with the hyperscalers coming in Thailand and also in ASEAN in a big way, how has that changed in terms of negotiating with these key clients of yours? And are we seeing any competitive pressures coming from smaller private companies trying to provide similar services in terms of connectivity. Just want to get your thoughts on that. Pratthana Leelapanang: Allow me to take these questions. About the AI and infrastructure, actually, the way that we see is relating to the data center business and also the software on top of that. We have the strong, let's say, the partnership and strong position on the pricing point on the electric city as well. I mean, when we build the data center that normally we would have the anchor customer or some secure customer before we build and those customers come to us because of the TCO and mostly coming from the cost of electricity that we can manage the price. And then -- that is a key issue that I want to share. The second one about the DCI, I mean the data center cross-connect interconnectivity. We have the solid foundation that is ready to serve. The upcoming demand of the data center, as we see now, we have around 40 -- this is roughly number of the data center around Thailand. And we see the growth around 20% or the demand of around up to 1 gig in the near future. So our infrastructure on that 1 is ready. And when you talk about the EDS, we also have the feature that we call the sale network management, which allow the customer who are in the data center managed network by themselves and then increase our time to market also the service quality to our customer. I think -- our competitors, we don't see the significant competitiveness or the price point fighting on that space a lot. I mean, it may be -- it is because of the -- we have very big infrastructure to serve the demand already. And instead of seeing the competitors, we see them as a partner because we partner with them, we have the model to go to market and expand our adoption to the partner as well. That is our strategy to do this year and next year. Unknown Executive: We have Khun Supachai's question from the chat box. So the first question is, can you explain the slower year-on-year growth in Enterprise revenue in the third quarter compared to the first half? What is the trend in the fourth quarter? Pratthana Leelapanang: Actually, the reason that we see -- even though the slower on that one is very limited and very minimum. The explanation is about the Prompt Pay that we have on the order. We are working on to recover that one. I think that's a short answer for that question. Unknown Executive: What is the trend in fourth quarter? Pratthana Leelapanang: I think we will be able to catch up the expectation from the shareholder on the enterprise revenue. Unknown Executive: The second question goes to retail, and that's from [indiscernible]. What is the recent development in retail business after introducing your house spend being up. What is the feedback on this brand, particularly any new initiative to share? Tee Seeumpornroj: Okay. We launched on July this year, and I see the growth until today is about 56% growth comparing to the first launching. So we're going to complete maybe $15 million. This is -- you see from the number, it's not that much comparing to the other revenue that we have, but anyway, the margin of the level on the house branding is extremely high comparing to what we are actually selling in the store. So that is the first milestone that we actually. The second one is we're going to increase in terms of the SKU, the number of the linkage. So we're going to add up another three more items, which is related to the iPhone 17, this is going to boost up sales of iPhone 17 also, so that is our own brand. And the third one is, we're going to sales in more channel. We just start selling in our own location, which is populated by the AIS, but we go in to expand to the partners, [indiscernible], so that is the link up in the summary. And like I said before, so the online sales in our own channel going to be one of our focus. The omnichannel, once you go to online, you can shop online, you can go to offline, you can go online also. So that is the three things in short that we are going to focus differently comparing to last quarter. Unknown Executive: Third question, what would be a big change Khun Pratthana would like to bring to AIS in the next 3 to 5 years? Pratthana Leelapanang: First of all, I must say that we -- under Khun Somchai leadership, we have set the industry benchmark bringing company into a very strong integrated digital service providers. Number one is not changed, but to build on the strength and the fundamental asset that we have on integrated digital service providers. And number two, as I mentioned earlier at the beginning that we are very clear that in the digital and AI infrastructure era, AIS could play a very important role serving the countries, bringing a pivotal point of these capability, product and services to the country and to every customer, and we do intend to do so. Unknown Executive: On the side note, he asked me to also -- big congrats to Khun Pratthana and thank you Khun Somchai for your leadership and support. I am learning a lot from watching you lead. I wish you a happy retirement. That's from [indiscernible]. Next we have Khun Pisut from KS, again. Pisut Ngamvijitvong: Yes. Thank you for the follow-up questions. The first one is on many revenue grew 5% versus the GDP growth, 2% plus minus, even below. I remember that Khun Somchai management used to mention that the mobile growth will be similar to the GDP growth and this is much better than what you have said before. So next year, GDP growth would be not much different from this year or even slower. And Khun Pratthana come in recently imply some confidence that AIS will outgrow the mobile [indiscernible] with the GDP effective next year. This my interpretation scores. What do you have idea on this one? Pratthana Leelapanang: Currently, we are entering into the phase that everyone, every business do require to use digital services to even leave or do what. I think it's fundamental that digital infrastructure fund the growth of the countries. So we do hope, next year GDP would be better than what you said. We do really hope for that. But once again, the 5G broadband enterprise, we have started a lot, but there are a lot more things to do. So in mobile, in particular, as mentioned, 5G is just 30% penetration, and we expect to be more. So I would say that it will be ongoing, hopefully, I can say, growth and development of customer behavior as we start to see growth coming back and new application will come in, I'm very positive about that. Pisut Ngamvijitvong: And my next question is, with your revenue keep growing, right, and your CapEx will be higher in the [indiscernible] but your CapEx from sales or CapEx intensity would be stable or even lower. Am I on the right direction on this one? Tee Seeumpornroj: I think you should look at the long term compared to the past, not compared to just this year or last year. I think the -- if you'd go back a little bit higher than this past 2 years, but it won't be as high as when we start expanding the 5G. I think the reason for that is, as mentioned, we want to modernize our network as well, and also prepare for new growth. So that's something that we need to put some of the money upfront so that we can grow the business more than just the current mobile broadband services. But as I mentioned, percent to sales, it won't -- you can look at that as a benchmark. It varies within those range. Unknown Executive: Next we have Khun Minling. She leaves us questions in the chat box. Can you compare 2,100 megahertz, which will expire in 2027 with 3,500 megahertz that -- which one you prefer. And if you can get 3,500 megahertz before 2027, will 2,100 megahertz still be needed? Pratthana Leelapanang: 2,100 megahertz is on Schedule 2 reoptions as is expired. And NBTC and the country are looking at our spectrum bands whether it make available in public for auctions. We cannot say right now, in particular, as Khun Somchai always mentioned that we look at every spectrum both individually and collectively, value combined. So we see later when NBTC and now which one is available, we will be participating. The 2,100 megahertz is a fundamental band for our network and competitor network, for sure. 3,500 megahertz would be new to the industry previously source of in between telecom and television satellites. We believe that the schedule of 3,500 megahertz will be parts and parts of the whole thing related to satellite television as well. We cannot say whether it's going to be available sooner than scheduled, it remain to be seen, but we will consider it individually. There will be more spectrum as well that NBTC might put it for auction. So we will look at everyone, as mentioned. Unknown Executive: And the last question from [indiscernible] from the chat box. First, congratulations on your results. I have two questions. First, could you share how the ARPU momentum looks for the mobile and home internet business in October? Second, what is your revenue guidance for the fourth quarter? And what positive factors are you expecting to support it? Pratthana Leelapanang: So we see good trend. The government has been supportive of countries to recover. For the past few weeks, the stipulation program also help every businesses. And even though it's not direct to us, we see a very positive trend ongoing for mobile. I think for the fourth quarter on the broadband side, I think we will still see the positive trend continue. But given normally the last month, we won't get to sell a lot anyway. So I think we still expect a good result. But in the end, it's also depending on the competition in the market. After we announced our result and also our competitor announced the result and I think both sides will go back and try to revise the SIG so that still the unknown factor that can impact the performance towards the last 2 months, yes. Unknown Executive: We would like the last questions from Piyush, follow-up from HSBC. Piyush Choudhary: I have two questions. Firstly, on home broadband. Could you share what drove kind of the ARPU quarter-on-quarter by 2%? And what other initiatives company is undertaking to continue this ARPU growth in home broadband? Secondly, on the mobile side, 5G subscriber penetration is still hovering around 34%. So what is the limiting factor? What initiatives like company could take to further improve this penetration? If you can share the split of 5G subs between prepaid and postpaid? Tee Seeumpornroj: I think on the broadband ARPU, okay, the strategy for sure is, right now, we try to offer a higher-quality broadband service to the higher segment. The more we can get the people who have money to spend to subscribe a better service than it's better for us. We are not looking at increasing ARPU across the board. Normally, we will have new product and services launching in the last quarter of the year as well. But this year, we refrain from that because we are doing the IT migration of the system. So the new product service is going to come out probably early next year. And that will be the continued effort in trying to lifting the ARPU up. We're looking at increasing a number of services that we have with existing customers as well. That hopefully will continue to fill the ARPU growth for 1 to 2, 3 more years. Pratthana Leelapanang: For mobile 5G, the growth of 5G is going along with the 5G device penetration in the markets. Thailand markets are not under the highly subsidy markets, customers purchase their phone individually rather than highly subsidized to fund the growth of 5G. So the key factor is 5G device penetration and 5G device injection to Thailand. We see a positive trend of more and more model continue on being a better offering of 5G model bit by bit. 4G and 3G, I would say, 4G mostly is still widely available at very economical price. So it will take a bit of time as well for 5G to bring down into those level of price, but we see a positive trend. To really support customer, as our Retail, Khun Prapat mentioned, our footprints, our service direct to customer would be able to help AIS to support customer into the 5G era. We continue on seeing a very strong trend of customer adopting better phone with financial services that we, together with our partner, provide later on next year would be also from ourselves supporting customer as a part of the plan, and that would be the engines that we will do a better job for our customer. Unknown Executive: To support on this, we also see 5G handsets growing at 30% year-on-year. If you look at 5G package subscription growing at 36%, so they are growing hand in hand. So there are no further questions and our time -- sorry -- and our time is up. And therefore, thank you, everyone, for participating and see you in the next meeting.
Operator: Ladies and gentlemen, thank you for standing by. My name is Abby, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Revolve Group Third Quarter 2025 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Erik Randerson, Senior Vice President of Investor Relations. You may begin. Erik Randerson: Good afternoon, everyone, and thanks for joining us to discuss Revolve's third quarter 2025 results. Before we begin, I'd like to mention that we have posted a presentation containing Q3 2025 financial highlights to our Investor Relations website located at investors.revolve.com. I'd also like to remind you that this conference call will include forward-looking statements, including statements related to our future growth, our inventory balance, our key priorities and business initiatives, industry trends, the impact of tariffs and our mitigation efforts, our marketing events and their expected impact, our physical retail stores and our outlook for net sales, gross margin, operating expenses and effective tax rate. These statements are subject to various risks, uncertainties and assumptions that could cause our actual results to differ materially from these statements, including the risks mentioned in this afternoon's press release as well as other risks and uncertainties disclosed under the caption Risk Factors and elsewhere in our filings with the Securities and Exchange Commission, including, without limitation, our annual report on Form 10-K for the year ended December 31, 2024, and our subsequent quarterly reports on Form 10-Q, all of which can be found on our website at investors.revolve.com. We undertake no obligation to revise or update any forward-looking statements or information, except as required by law. During our call today, we will also reference certain non-GAAP financial information, including adjusted EBITDA and free cash flow. We use non-GAAP measures in some of our financial discussions as we believe they provide valuable insights on our operational performance and underlying operating results. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information presented and prepared in accordance with GAAP, and our non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliations of non-GAAP measures to the most directly comparable GAAP measures as well as the definitions of each measure, their limitations and our rationale for using them can be found in this afternoon's press release and in our SEC filings. Joining me on the call today are our Co-Founders and Co-CEOs, Mike Karanikolas and Michael Mente; as well as Jesse Timmermans, our CFO. Following our prepared remarks, we'll open the call for your questions. With that, I'll turn it over to Mike. Michael Mente: Hello, everyone, and thanks for joining us today. We had a very solid third quarter, highlighted by exceptional gross margin performance that led to a 45% increase year-over-year in adjusted EBITDA to $25 million, our highest ever for a third quarter. Particularly in the current tariff environment, I am extremely pleased by our nearly 350 basis point increase in gross margin in Q3 that puts us on track to expand our gross margin and adjusted EBITDA margin in the full year 2025 for the second straight year. On the other hand, we delivered net sales growth of only 4% in the third quarter, which is lower than the recent trend line and certainly lower than the growth rate we believe we are capable of achieving on an ongoing basis. It's important to note that in comparison to the third quarter of 2024, this year, we pulled back meaningfully on certain promotions. While the shift in our approach added to an already tough net sales comparison in Q3, it also contributed to our gross profit dollars increasing by nearly 3x the rate of net sales growth in the third quarter. Beyond the numbers, I'm thrilled by our progress in developing our longer-term investments that we believe create a strong foundation for profitable growth for years to come, including owned brand expansion that was a key contributor to our Q3 results. With that as an introduction, I will step back and provide a brief recap of our Q3 results before reviewing the progress on our longer-term initiatives. Starting with Q3 results. Net sales increased 4% year-over-year, driven by domestic and international net sales increases of 4% and 6% year-over-year, respectively. By segment, REVOLVE net sales increased 5% and FWRD net sales increased 3% year-over-year. To illustrate the tougher comparison we faced in the third quarter, our revenue growth rate on a 2-year stacked basis in Q3 was the highest we have achieved in more than 2 years. Our outstanding gross margin performance was the most powerful driver of upside in the third quarter and mostly flowed through to the bottom line. Despite meaningful tariff pressures, we delivered a consolidated gross margin of 54.6%, an increase of nearly 3.5 points year-over-year, significantly outperforming our guidance. Our ability to meaningfully expand our gross margin and operating margin year-over-year in the face of these tariff headwinds and broad-based input cost pressures demonstrates our team's agility, execution and operating excellence. Shifting to our bottom line results. Our operating discipline enabled us to achieve a 45% increase in adjusted EBITDA year-over-year, handily outpacing our net sales growth. Importantly, we have now delivered strong bottom line performance for nearly 2 years, making great progress improving our margins. For the first 9 months of 2025, our adjusted EBITDA has increased 32% year-over-year, building on our huge gains in the full year 2024 when our adjusted EBITDA increased 60% year-over-year. And our business continues to generate meaningful cash flow, reinforcing our track record of delivering consistent profitability and cash flow. During the first 9 months of 2025, our free cash flows have more than tripled, increasing our cash position by $63 million or 25% year-over-year. Our strong balance sheet and cash flow create a key competitive advantage within a fashion e-commerce landscape marked by frequent bankruptcies and other failures in recent years. Now I'll conclude by recapping our progress on key priorities and growth drivers that we are very excited about. We continue to invest in and build on several promising initiatives that we believe will play a key role in shareholder value creation over the long term. First, we continue to invest in marketing efforts to expand our brand awareness, grow our customer base and strengthen our connection with the next-generation consumer. We had an active and impactful third quarter for our brand building, featuring marketing activations at Fashion Weeks in Paris, New York and Aspen; the experiential pop-up experiences we hosted in Nashville and SoHo; and more that Michael will talk about in his remarks. Longer term, we are also excited about the potential for physical retail to meaningfully expand our brand awareness and serve as an efficient new channel for customer acquisition. Second, we continue to successfully expand our international penetration. The Middle East and Europe were standouts in the third quarter, partially offset by continued challenges in certain Asian regions. The momentum of our REVOLVE segment business in Mainland China remains very strong, however, with net sales increasing more than 50% year-over-year. We are particularly excited about the launch of our first-ever owned brand collaboration made specifically for customers in the China market. The launch was supported by a live stream event attended by over 40,000 viewers, creating local demand for the collection that outperformed some of our most successful owned brand collaborations from the U.S. This innovation further illustrates our exciting potential for international growth over the long term. Third, we have continued to expand our assortment to attract new customers and gain a greater share of consumer spending among our loyal existing customers. On a combined basis, sales of beauty, men's and home products increased by a healthy double-digit percentage year-over-year in the third quarter. Notable brand additions in recent quarters have elevated our merchandise assortments in key areas outside of our historical core, further broadening consumer awareness and interest. As just one example, we expect net sales of our highly sought-after beauty advent calendar to increase approximately 40% year-over-year in the 2025 holiday season as our incredible offering and powerful marketing engine have created viral excitement on social media and in press outlets, including Vogue, ELLE, Cosmopolitan, Marie Claire, Allure and more. Finally, we are continuing to leverage AI technology to drive growth and efficiency initiatives across the company, touching nearly every facet of our operations. One innovative use case that is already driving results is deploying AI technology within our owned brands design process to deliver cost efficiencies and shortened development cycles. We are increasingly leveraging AI in the creative design process to produce renderings of owned brand products with a variety of different materials, finishes, colors and silhouettes. This is a huge advance because the AI imagery instantly allows our design and buying teams to visualize how products will look in different configurations before they commit to building the product without having to produce multiple physical samples, thereby accelerating the time frame between the initial design concept and ultimately going live on the site. We are also leveraging AI to automate back-office functions to drive efficiency. For instance, we are in the process of transitioning our accounts payable workflow from a historically manual and cumbersome process to an intelligent and primarily automated AI-driven system. Developed internally by our data science team, our AI technology now automatically ingests payment invoices for routine bill processing, significantly increasing efficiency and elevating the productivity of our team members. To wrap up, I want to take a moment to thank my Revolve colleagues for your focus and execution that enabled us to deliver very solid results in the third quarter while simultaneously moving the ball forward on exciting longer-term initiatives. Our leadership team is energized by the many opportunities ahead that we believe will accelerate our market share gains. We are successfully navigating ongoing macro uncertainty from a position of strength, bolstered by our data-driven mindset and culture, operational excellence, powerful brands and very strong financial foundation. The building momentum in our key growth and efficiency initiatives reinforces my confidence in our ability to drive profitable growth in the years ahead. Now over to Michael. Michael Karanikolas: Hello, everyone. I am very pleased with our financial performance this quarter, particularly our strong bottom line performance. Despite delivering only 4% top line growth, we were able to deliver record adjusted EBITDA for any third quarter. Through the first 9 months of 2025, adjusted EBITDA increased 32%, and our free cash flow has more than tripled year-over-year. Most impressive are the drivers of our gross margin expansion. Despite facing significant tariff exposure, gross margin has meaningfully outperformed our expectations, validating the competitive advantages of our data-driven merchandising that is at the center of everything we do. Even more exciting is that with our strong financial foundation, we are investing in growth initiatives that we believe will be impactful drivers in further strengthening our brands and accelerating our overall growth potential. With that as an introduction, I will focus my remarks on some of the strategic areas we are investing in and where we see a great deal of opportunity: Brand investments; opportunities in the dynamic luxury industry; expansion of owned brands; and physical retail development. First, brand building. The quarter got off to an exciting start with REVOLVE Summer in the Hamptons, followed by an incredible experience in Ibiza that inspired our engaged community on social media. In September, we turned up the brand heat with trips to Nashville to launch a limited time pop-up retail experience in partnership with Cotton Inc. and to New York, Paris and Aspen for experiential Fashion Week events that excited and delighted our high-value clients with preferred access. Our engagement metrics in the third quarter illustrate the impact of our brand-building investments. We generated a triple-digit increase year-over-year in consumer views on our TikTok and YouTube channels while delivering increased marketing efficiency year-over-year in the third quarter. As a company with deep Los Angeles roots, I couldn't be more excited about the multiyear partnership we recently announced with the Los Angeles Lakers. The cultural intersection of professional sports and fashion influence is more powerful than ever, creating authentic opportunities for us to engage with the huge audience following the storied Lakers franchise in real life and on social channels. As a pioneer in embracing social media to drive favorable brand awareness, it is exciting to consider that the Los Angeles Lakers have one of the largest social media followings and the highest social media engagement per post in all of U.S. professional sports teams. With the NBA tipping off its season recently, our collaboration has already come to life through immersive experiences in arena signage, engagement with VIPs and influencers and co-branded content across the Lakers social media channels. Second, FWRD and the competitive environment in luxury. The operating environment in luxury continues to be extremely dynamic, creating opportunity for our FWRD business. In fact, the challenges facing our competitors accelerated in the third quarter, highlighted by 2 large luxury e-commerce retailers filing for bankruptcy protection or the international equivalent in August. Adding to the industry malaise, luxury brands, large and small, have been frustrated by extended payment terms from a prominent luxury department store chain in the U.S., which has been reducing investment amidst declining sales and significant debt obligations. We continue to view these challenges within the luxury sector as an exciting opportunity for REVOLVE and FWRD to remain on offense and invest in market share capture, supported by our consistent profitability and cash flow generation that sets us apart. Not only are we excited about the opportunity, our FWRD segment results demonstrate that our investments are working as evidenced by continued top line growth and a 37% year-over-year increase in gross profit dollars in the third quarter, an expansion of more than 11 points of gross margin. It was our best FWRD segment gross margin since the post-COVID boom more than 3 years ago. And luxury brands are increasingly recognizing FWRD as a clear winner in the space for the long term. On the heels of the impactful brand wins discussed last quarter, we were thrilled to launch the iconic luxury brand, Dries Van Noten, on FWRD in late September. The Dries Fall collection has performed incredibly well in the early going. The FWRD team is having many productive discussions with brands, including receiving initial inventory commitments from a coveted brand that we have been courting for over a decade. Third, owned brands, where our momentum has continued to build. In fact, our owned brand penetration of REVOLVE segment net sales increased year-over-year for the third consecutive quarter in Q3. These gains contributed to our much higher-than-expected gross margin as our owned brands generate considerably higher gross margins than third-party brands. Even while navigating the highly uncertain tariff landscape with agility, our team has done an amazing job in delivering owned brand styles that resonate with our customers, resulting in continued improvement in underlying performance metrics year-over-year. Building on our future opportunities, we are very excited to launch the SRG brand with fashion icon Sofia Richie Grainge exclusively on REVOLVE and FWRD. Sofia's timeless and sophisticated signature style creates a strategic expansion of our owned brand portfolio that has driven a ton of favorable awareness in press and social channels, truly resonating with her vast audience of 11 million Instagram followers. In fact, in its first week, the SRG collection achieved the highest sales volume for any owned brand collaboration launch in our history. Sofia shared that REVOLVE was the perfect partner to fulfill her lifelong dream of launching her own brand, citing the strength of our platform, our community engagement and expertise in helping bring her product vision to life, reaching a wide audience of engaged consumers. And there is more to come. We have been investing in an incredible pipeline of new owned brand initiatives on tap to launch in the months ahead. Our strong owned brand metrics in recent quarters gives us increased confidence in these investments. Finally, physical retail. We continue to be very excited about the opportunity in physical retail. Over the last 20 years, we have built a very powerful brand with meaningful scale that we can now leverage into the very significant physical retail market that is largely untapped by our brands. The physical retail market is not only significant in size, representing more than 60% of global retail spend on apparel and footwear, but is also very synergistic with our owned brands and has the ingredients to be even more profitable than our core online business. One of the key drivers of Revolve's growth opportunity is the expansion of our active customer base. Our strong brand, differentiated merchandising and incredible service proposition have created attractive customer loyalty online that we believe can translate to physical retail. We believe giving consumers the opportunity to engage with us online and in-store further enhances our value proposition, particularly among the younger demographic of customers who embrace the opportunity to touch and feel products during in-person shopping experiences as well as shopping through online channels. Finally, we are very excited about the opportunity for our owned brands within physical retail over the long term. In our Aspen store, great work by our store merchandising team has increased the owned brand mix of REVOLVE segment net sales to levels that are now significantly higher than our owned brand penetration for e-commerce sales. The physical retail opportunity, our powerful brands and our entrepreneurial culture have enabled us to attract talent with deep industry experience in recent months to further strengthen our retail muscle and go-to-market strategy. Our team is guiding our investments in systems and processes to ensure that we are positioned for success, particularly headed into the upcoming opening of our Los Angeles store at The Grove. Concurrent with putting the finishing touches on our magnificent retail destination in Los Angeles, we are engaging in opportunistic discussions with Tier 1 landlords in key markets on our short list. We are laying the groundwork now to ensure we will be in a position to move quickly if and when a compelling opportunity should arise in the geographic areas we are most focused on pursuing for the next phase. Wrapping up, at a time when the dynamic operating environment has forced key competitors to dial back investment, our strong financial foundation gives us an opportunity to aggressively invest in the many exciting initiatives that we believe will continue to drive profitable growth for many years to come. Now I will turn it over to Jesse for a discussion of the financials. Jesse Timmermans: Thanks, Michael, and hello, everyone. I am pleased with our third quarter results, particularly on the bottom line, highlighted by the record adjusted EBITDA for any third quarter that drove more than 2 points of expansion in our adjusted EBITDA margin year-over-year. I'll start by recapping our third quarter results and then close with updates on recent trends in the business and guidance for the balance of the year. Starting with the third quarter results. Net sales were $296 million, a year-over-year increase of 4%. REVOLVE segment net sales increased 5% and FWRD segment net sales increased 3% year-over-year in the third quarter. By territory, domestic net sales increased 4%, and international net sales increased 6% year-over-year. Active customers, a trailing 12-month measure, increased 5% year-over-year. Total orders placed were $2.3 million, an increase of 5% year-over-year. Average order value was $306, an increase of 1% year-over-year, an improvement from the modest decline reported in the first half of 2025. Partially offsetting the increase in orders placed and AOV was a slight increase in our return rate year-over-year. Consolidated gross margin was 54.6%, an increase of 347 basis points year-over-year, an exceptional result that materially exceeded our guidance range. Key contributors to our margin upside were much shallower markdowns on our markdown product that benefited from our data-driven innovations within our markdown algorithms, a higher percentage of full price sales and higher margins on these sales and continuing growth in the mix of our owned brands as a percentage of REVOLVE segment net sales. We are also very pleased with our tariff mitigation thus far, which illustrates our team's agility, execution and operating excellence. Now moving on to operating expenses. Fulfillment costs were 3.3% of net sales, an increase of 5 basis points year-over-year that primarily reflects the slight increase in our return rate. Selling and distribution cost efficiency was 17.5% of net sales, in line with our guidance. The increase of 56 basis points year-over-year was driven by higher shipping costs and the higher return rate. Our marketing investment represented 13.7% of net sales, a decrease of 28 basis points year-over-year, driven by efficiency in our marketing investments across both digital performance and brand marketing. General and administrative costs were $38.6 million, an increase of 107 basis points year-over-year as a percentage of net sales. The decreased efficiency year-over-year as a percentage of net sales primarily reflects our increased investment in strategic growth initiatives and a $1 million increase in nonroutine costs year-over-year. The increase in net sales, combined with the significant expansion of our gross margin, helped us to achieve outstanding growth in operating profitability. Our GAAP income from operations increased 47% year-over-year in the third quarter. Adjusted EBITDA was $25 million, a year-over-year increase of 45% and our highest ever adjusted EBITDA result for a third quarter. Adjusted EBITDA margin was 8.6%, an increase of 239 basis points year-over-year and our highest quarterly margin in more than 3 years. Net income also increased meaningfully to $21 million or $0.29 per diluted share compared to $0.15 per diluted share in the third quarter of 2024. The third quarter of 2025 included a gain equivalent to $0.05 per share from an insurance recovery related to a previously disclosed shipment theft that occurred in 2024. Moving on to the balance sheet and cash flow statement. We again delivered increased cash flows that further strengthened our balance sheet. In the third quarter, our operating cash flow and free cash flow increased 31% and 7% year-over-year, respectively. For the 9 months ended September 30, free cash flow was $59 million, a year-over-year increase of $43 million or 265% compared to the 9-month year-to-date period in 2024. Inventory dynamics remain healthy as net sales growth year-over-year outpaced inventory growth by 5 points. Inventory at September 30, 2025, was $239 million, a decrease of 1% year-over-year. As of September 30, 2025, cash and cash equivalents were $315 million, an increase of $5 million during the quarter and growth of $63 million or 25% year-over-year, and we continue to have no debt. Now a brief update on tariffs. The tariff landscape continues to be very fluid and unpredictable. Nonetheless, our cross-functional team continues to make excellent progress on tariff mitigation. Through a variety of strategies discussed on previous calls, we mitigated the significant majority of our tariff exposure in the third quarter. At a time when many companies in our industry are facing significant gross margin pressure, our ability to expand gross margins year-over-year in 2025 further illustrates our competitive advantages of data-driven merchandising and inventory management. Now let me update you on some recent trends in the business since the third quarter ended and provide some direction on our cost structure to help in your modeling of the business. Starting from the top, our net sales in the month of October increased by a mid-single-digit percentage year-over-year against a more challenging prior year comparison than we faced in the third quarter. Now before we get into guidance, let me caveat that our outlook is based on the current status of tariffs as of today, November 4, 2025, and our estimate of the impact of potential mitigating activities that are currently underway. Our outlook for gross margin is especially susceptible to variability given the uncertainty surrounding the timing and level of tariffs in effect as well as the timing and magnitude of our mitigation efforts. With that, let's discuss our updated guidance for gross margin, which includes our best estimate for the impact of tariffs, net of our mitigation efforts. We expect gross margin in the fourth quarter of 2025 of between 53.1% and 53.6%, which at the midpoint implies an increase of approximately 80 basis points year-over-year. For the full year 2025, we now expect gross margin of approximately 53.5%, a meaningful increase from our prior guidance. The new guidance implies a margin increase of roughly 100 basis points year-over-year. Fulfillment. We expect fulfillment as a percentage of net sales of approximately 3.3% for the fourth quarter of 2025 and approximately 3.2% for the full year 2025 at the high end of our prior guidance range. Selling and distribution. We expect selling and distribution costs as a percentage of net sales of approximately 17.6% for the fourth quarter of 2025 and approximately 17.3% for the full year 2025. Embedded in our assumptions is that our return rate in the fourth quarter will remain higher year-over-year, consistent with the third quarter. Marketing. We expect our marketing investment to be approximately 15% of net sales in the fourth quarter of 2025 and approximately 14.6% of net sales for the full year 2025, a slight decrease from our prior guidance. Looking ahead to 2026, we have some exciting marketing investments planned to support the growth initiatives we have been investing in and expect to launch in 2026. General and Administrative. We expect G&A expense of approximately $38.7 million in the fourth quarter of 2025 and approximately $153.5 million for the full year 2025 in the range of our prior full year guidance. The implied decrease in G&A costs year-over-year in Q4 is primarily due to the fourth quarter of 2024, including $2.7 million of nonroutine and transaction costs that we do not expect to reoccur this year. And lastly, we now expect our effective tax rate to be between 25% and 26% in the fourth quarter and 27% to 28% for the full year 2025. To recap, we delivered very solid third quarter results, further strengthening our financial foundation that truly stands out compared to many in our industry. Even in what continues to be an uncertain environment, our healthy cash flow and rock-solid balance sheet enable us to continue to invest in exciting long-term initiatives such as international expansion, owned brands and physical retail that we believe position us to achieve profitable growth for the years to come. Now we'll open it up for your questions. Operator: [Operator Instructions] Our first question comes from the line of Rick Patel with Raymond James. Rakesh Patel: Congrats on strong results. I'd like to double-click on gross margin. So is there any way to size the benefit that you realized from the improved markdown algorithm? I know it was a benefit in the second quarter, and it sounds like the benefit accelerated in Q3. So I'm curious how that happened as you deploy it to more regions, more banners, et cetera? And how do we think about the durability of this improvement, not just in Q4 but beyond? Jesse Timmermans: Yes. Thanks, Rick. We were super happy with the gross margin result this quarter. And to your point, the largest impact was that markdown margin optimization to our optimizing that markdown algorithm. So that was by far and away the biggest driver. And we did see that start in Q2 and that accelerated into Q3. It was across both FWRD and REVOLVE. And then we also had that shift in promotional strategy that we talked about, and that was another key contributor to the gross margin expansion leading to that 11% increase in gross profit dollars. But not to be lost on the fact that also full price mix increased and the margin on those full price sales increased as well. So really pleased with the core margin result even outside of that markdown and promotional shift. And then finally, a positive impact from the expansion in owned brand mix on the REVOLVE segment. So really pleased with the cadence there. And SRG just launched, so expect to see good things coming out of that in the future. So I think to your point on sustainability, we feel good about where we're at and then also the health of the inventory and more owned brand launches to come. Rakesh Patel: Great. And I just had a follow-up on the quarter-to-date trends. October up mid-single digits. Are the drivers of October consistent with the trends that you saw in the second quarter? A lot of companies are calling out consumers buying closer to need. So I'm just curious if you see the potential for that growth rate to accelerate as you start entering the holiday season. Jesse Timmermans: Yes. Yes, we'll see. October at mid-single digits, I don't know, I won't say we're pleased with that, but we're encouraged that it's at mid-single digits on tougher comps than we faced in the third quarter. And that mid-single digits, it puts October close to a 20% 2-year stack. So call it a double-digit CAGR or close to it. So I think encouraging, but we'll have to see how the quarter plays out. And it's always a little bit volatile in the holiday season. And comps do get a little bit tougher. If you recall last year, we had said that October was up low double digits, and we closed at plus 14%. So we have that to deal with as well. Operator: Our next question comes from the line of Oliver Chen with TD Cowen. Oliver Chen: Mark, Mike and Jesse, great results. Jesse, yes, you had a great last year fourth quarter. That comparison is tougher. What do you think about average order value trends? And also any complexion in terms of like what you're seeing in October with price points or categories? I'm just concerned about the tough compare, but you keep on executing so well. The return rate is also a tough compare as well. And then as you think more broadly physically, you're an expert at digitally enabling A/B testing, test read and react inventory management and also thinking about the speed at which you innovate. So how might you take these digital capabilities physical? It's a different ball game to a certain extent in terms of speed and scaling that. I was curious about your conceptual thoughts too, as that's clearly a big opportunity. Jesse Timmermans: Yes. Thanks, Oliver. I'll take the first one and then kick it over to Mike. On the composition of October, similar to the third quarter, international outpaced domestic. On AOV, we'd expect to continue to see a slight increase in AOV in part due to the price increases. I think we had mentioned last quarter that we are seeing on the new product price increases of, call it, mid- to high single digits, and that's approaching double-digit range as we head into Q4. Not all that will hit this kind of -- it starts to have an increasing impact as inventory rolls in. And then, of course, depending on mix between REVOLVE and FWRD and then the category mix as well. We saw, again, that men's, beauty, home at double digit versus apparel at 7% and then dresses at 3%. So there was a slight offset to the AOV increases due to product mix. But again, to answer your question, I expect to see a slight increase in that AOV as we look ahead. Michael Karanikolas: And with regards to physical, I completely agree that we are experts in e-commerce, but we're early in the game in physical commerce. So we're super excited and hyper focused, investing a lot of time building teams, resources, processes. Literally just yesterday, I met with the team and was -- I encourage them to be very experimental and iterative. We have a vast, vast e-commerce store. But of course, our physical stores will be focused. So there will be a lot of experimentation, a lot of measuring and management and ultimately long-term optimization. We've seen great progress with Aspen, building from the learnings as well as trying new things and our internal numbers are very, very encouraging. And we recognize that it is a long journey ahead for us to be experts, but I think we're culturally built for this. Operator: Our next question comes from the line of Matt Koranda with ROTH Capital. Matt Koranda: I guess 2 for me. First one, I guess with the larger luxury players you talked about showing signs of stress, surprised you aren't seeing maybe just a little bit better growth out of FWRD in the third quarter. So maybe could you unpack sort of where you saw benefits and maybe where you're still seeing some headwinds in that business and when we expect the competitive environment to be more of a benefit for you guys going forward there? Michael Mente: Yes. So we were actually extremely encouraged by the FWRD results. And I focus not on the top line number for FWRD but on the gross profit growth for FWRD, which was absolutely incredible. And so we made a decision to focus on margin and get the margins on FWRD back up to where we want them to be over the mid- to longer term and had huge increases in gross profit. And so I think it was a very favorable environment for us. And going forward, we hope and expect to drive both large gross profit increases as well as more sizable revenue increases. Matt Koranda: Okay. All right. That makes sense. And then just on the... Michael Karanikolas: Just to add a little bit to that -- sorry, just one thing to add is that, of course, these very, very weak competitors still have a lot of inventory for previous seasons. But as we go season to season with a lack of new deliveries, we're quite optimistic that we will accelerate and gain share as the lack of refresh in our competitors is quite obvious and more customers coming to us. Matt Koranda: Okay. All right. That's very helpful. And then maybe for Jesse on the gross margin guidance. I guess just why the step down in the fourth quarter sequentially? It sounds like most of the wins are at your back there with more owned brand launches. You still have the benefit of the markdown algo. Maybe just why the slight step down that you're embedding there? Jesse Timmermans: Yes. I think a little bit of it will be mix. And then I think as that markdown algorithm starts to season itself and then also 3Q had the biggest benefit from those promotional shifts that we talked about. So we'll see how it goes, but still optimistic even with that 4Q step down with the full year being 100 basis points higher than last year. Operator: Our next question comes from the line of Michael Binetti with Evercore. Michael Binetti: I guess just if I look at the marketing, you kind of lowered the -- you came in a little lower than you were thinking for the quarter and you lowered the outlook for the year a little bit. Any reason to cut it back while sales are decelerating a little bit after July and into the ongoing tough compares? And I guess as you look at fourth quarter, how much of it is already -- how much of the marketing budget has already been deployed that we see reflected in the October numbers that you gave us, Jesse, relative to what's still on the come ahead? I could imagine maybe there's some pretty impactful marketing as you guys look to the growth. And then just one on AOV. I think you said third quarter like-for-likes were up mid or maybe even approaching high single digits and AOV was up 1. So it seems like the category mix down is maybe low to mid-single digits. And then the like-for-likes, you said approach, I think, double digits in the fourth quarter. Is the mix down effect similar on AOV in the fourth quarter? Or any moving parts there that we can think about as we try to triangulate around the AOV? Jesse Timmermans: Yes. I think we need to see -- sorry, I'll start with the last question. I think we need to see how the mix plays out in Q4, but that definitely was the offset to the price increases was that mix shift across categories. And then also a little bit of REVOLVE FWRD mix shift with REVOLVE outpacing the higher price point FWRD. Michael Karanikolas: Yes. And on the marketing side, I can speak to the budget high level and then Michael can speak maybe to some more specific elements, including to the extent we can reveal anything upcoming. So from a budget standpoint, we actually did find good opportunities and spend a bit more aggressively on the performance marketing side. But there were some shifts on the brand marketing budget due to timing of events and kind of other factors there that led us to come in a little bit under. So with brand marketing, it's always very timing-driven and opportunity driven in terms of where the spend comes in, in a given quarter. So that's why we saw that spend in Q3. And again, we're very happy with the results, huge margin gains, double-digit gross profit gains. So we felt like we didn't need to press the marketing budget further than was necessary. Michael Mente: And quickly to note that in Q4, we do have something exciting coming up. So we can't wait to share. I think we're maybe just about a month away. So super excited there. The one thing, though, that we found is that if we choose store locations well, we don't have to market as aggressively. There's -- we're putting our stores where we know our customers already are. So there will be some, of course, activation for store opening, but it won't be on the scale that you'll expect from us on the digital basis on a global scale. But we do have something exciting cooking this quarter as well as a lot in 2026 that we're very excited to share with you guys. Michael Binetti: Okay. If I could sneak one more in on the international business. It's getting close to maybe be in 1/4 of the business or so maybe next year, pretty material. I know you've added a lot to the customer experience and some logistics there. Can you speak to where you are today on the contribution margin from a sale in international versus U.S.? Is that gap closing today? And is there much opportunity to improve that? Jesse Timmermans: Yes. Yes. The gap is fairly tight there. Shipping, of course, is much higher internationally, but there's other puts and takes like a lower return rate. So still very healthy contribution margin. But to your point, there's always opportunity. The team does a great job at continuing to optimize last-mile shipping channels and also the customer experience and localizing things even more to get better rates across those variable line items. And then a good example, maybe just a very finite example, but that would be that owned brand collaboration that we did in China where the product is produced there, you don't ship it to the U.S. and then ship it back. So excited to see more of that to come. Operator: Our next question comes from the line of Janine Stichter with BTIG. Janine Hoffman Stichter: Congratulations on the good quarter. I wanted to go back to the owned brand improvement a little bit. Can you help us contextualize what the year-over-year increase looks like in Q3 versus Q2? And then maybe just put into context where the owned brand penetration sits now versus historical and how you see that unfolding over the next few quarters as we get the benefits of SRG and it sounds like some other launches in the pipeline. Jesse Timmermans: Yes. Thanks, Janine. We don't get too specific on the quarterly dynamics around owned brand growth or mix. Obviously, it grew faster than the overall business given that increase in the penetration. Last year, we were about 20% of mix, and we've seen good increases in the last couple of quarters. So expect to see an increase there this year, not as much as we would expect to see into next year given that SRG just launched and we have some other exciting things coming up. So we do expect to see a pretty good clip of increased mix there in the coming quarters. Operator: Our next question comes from the line of Anna Andreeva with Piper Sandler. Anna Andreeva: Great. Congrats. Nice results. We wanted to follow up on higher returns. Could you just elaborate on that a bit more? Was that seen across any specific categories? And what's driving higher returns again in the fourth quarter? Do you guys think there's still an opportunity for improvement as we look into next year? And then just as a follow-up, so looking at the category performance that you disclosed in the Q, it looks like the handbags, shoes and accessories is what slowed to negative low singles. Can you just elaborate more on that? What's driving that? And do you expect that category to bounce back here in the fourth quarter? Michael Karanikolas: Yes. So speaking to return rates in Q3 and some of the increases we saw there, I'd say there are a couple of factors. There's a little bit of mix shift, and you mentioned some negative mix shift in what typically are lower return rate categories. We also started to see some of the higher AURs with Q3 new product flow in. And generally, there's a bit of an inverse relationship on return rate and I should say a direct relationship on return rate and price. And then the last thing is we did see -- some of our marketing channels, we started to see them kind of stand out in terms of unusually high increases in return rates on some of those channels. And so that's something that we're diving into and we hope is an opportunity to kind of correct what's going on with those channels. Looking into Q4, of course, the comp is even tougher, and there's going to be continued focus on margin and some more price increases going in there. So we think it's going to be a tough compare in Q4. But looking forward beyond Q4, we definitely have things in the pipeline that we're working on that hopefully can continue to drive those longer-term reductions in return rates that we saw over the past year, and we're hopeful we can get some more of them. Jesse Timmermans: Yes. And then on the handbag, shoes, accessories, that mix skews higher on FWRD and REVOLVE, and on FWRD is where we saw more of the impact from that promotional shift in the markdown algorithm. So that is a piece of it, and we would expect that to rebound in the quarters ahead. Anna Andreeva: That makes a lot of sense. Can I just follow up? The markdown optimization tool sounds pretty exciting and early days of that. Can you guys just talk about how that should manifest as we go through next year, it just sounds like there could be some nice upside from that. Jesse Timmermans: Yes. Yes, we're very pleased with the optimization there and a very healthy inventory balance. So that sets us up well as we head into 2026. Now we will face the comps as we enter kind of that midpoint of 2026 when we started to layer in that shift in the markdown or that optimization in the markdown algorithm in 2025. So I wouldn't expect to see such massive year-over-year improvements on that, but a good steady baseline on margin. And great to see FWRD at nearly 45% margin, and our target has been to get that consistently in the 40s. So to be in the mid-40s, really encouraging. And on top of a healthy inventory balance, we feel good about where we're positioned there. Operator: Our next question comes from the line of Nathan Feather with Morgan Stanley. Kavya Narayanan: This is Kavya Narayanan on for Nathan Feather. Really impressive EBITDA performance. Given the success in tariff mitigation throughout the third quarter at current rates, are you expecting tariffs to be an incremental headwind into the fourth quarter or 2026? Jesse Timmermans: Yes. No, we're very pleased with the mitigation efforts by the team. They've been working really hard on this. So it's really good to see that margin result come through this quarter. I wouldn't say we're expecting any incremental headwinds with all the mitigation efforts. And then also China has come down to an incremental 30% from what was 145% at some time in Q2. And that has the potential, we'll see if it actually goes through, but to come down from an incremental 30 to an incremental 20 as they cut that APA kind of fentanyl tariff from 20 to 10. So I think if anything, hopefully, and potentially a net benefit from where we stand today. And then we mentioned it on previous calls, some of the mitigation efforts that we've implemented have the potential to actually increase margin over the long term. So we could see some benefit in the out quarters. Operator: Our next question comes from the line of Jay Sole with UBS. Jay Sole: Mike, I think you mentioned in the FWRD business, you've managed it to drive gross margin and maybe somewhat at the expense of sales. Can you just talk about the REVOLVE business, how you manage that? Did you also sort of look to drive more gross margin in the quarter? And if so, sort of can you describe the thinking behind that strategy? Michael Karanikolas: Yes, 100%. So in both businesses, there was a decision to focus more on driving margin versus sales growth. Obviously, we want to deliver both, and we fell short of where we'd like to be on the sales side. But overall, we're really pleased with the combination of the efforts and again, resulting in double-digit gross margin gains. And on REVOLVE, we saw really nice gross margin gains as well. But again, some of that does come in a little bit of sales expense. Jay Sole: And it sounds like you feel like on the FWRD side that when you reset the gross margin higher by adjusting promotions and adjusting price. And it sounds like you feel like that's a sustainable level where once you get to that point, you take a sales impact, but then going forward, you can maintain that level and grow sales on top. Is that how you think about it? Or am I sort of reading into it too much? Michael Karanikolas: Yes. No, no, that's certainly the hope and the expectation. Now FWRD is always going to be a bit more volatile business than REVOLVE in terms of the quarter-to-quarter gross margin. And so it's not necessarily going to be a straight path, but we feel like this is a great step towards where we want to be, and it's our absolute expectation that we want to stay here and average these levels over the mid- to longer term. And so that's what we're focused on. Jay Sole: Got it. And if I could just ask one more about your owned brands. Is there -- is the opportunity that you see based at all on some merchandising angle where maybe some of your partners, your third-party brands aren't sort of creating products in certain categories where you know your consumer wants something where you can fulfill that need with your owned brands. What is it about what you can do with private label that maybe you're not getting from the other brands? If you could elaborate on that a little bit, that would be helpful. Michael Mente: Yes, it's ranging. Sometimes we find product that we can't find from our third-party brands, and we will create it ourselves. Sometimes we see that certain zones are very, very interesting and our customer loves it, and they want more. So we'll pursue that as well. The other ability on the owned brand side is to combine our design and manufacturing with our incredible brand building and marketing capabilities. So that has been very, very, very fruitful. We've seen incredible short term, near term and LTV numbers from our owned brands as well. So it is a huge, huge and powerful lever that the team has been really focused for quarter in, quarter out for many, many years to deliver the improved results quarter after quarter and very excited about the path ahead. There's a lot cooking right now, exciting new launch in Q4 and a lot to come in 2026. Operator: Our next question comes from the line of Peter McGoldrick with Stifel. Peter McGoldrick: I was curious on the state of the consumer. It seems you struck a balance between markdowns despite macro volatility. So I was hoping you could help us think about the health of your core consumer in the U.S. And then if there's anything to add about any of the international markets or new consumer behavior to add to that? Michael Karanikolas: Yes. So we think the health of the consumer is still generally good from the numbers that we're seeing. We are seeing certainly like some pockets of weakness and strength. So generally, we were a bit stronger with some of the higher income segments this quarter and the lower income, a little bit of weakness, but nothing dramatic. Some regional differences, the government shutdown in the surrounding areas there, D.C., Maryland, Virginia, like a little bit of weakness there. But in general, the consumer still feels still feel strong, but it does feel like we're in an environment where there's risk that, that changes or drops off. But so far, we're continuing to see decent signs from the consumer. Peter McGoldrick: That's good to hear. Go ahead, Jesse. Jesse Timmermans: Yes, I was going to follow up on your international question. I think we talked about it in the prepared remarks that kind of the standouts were Europe, Middle East, Africa and within Europe, strong results out of Germany, Netherlands, Switzerland, countries like that. So really encouraged by that. And then we mentioned that China as well the Mainland China, up 50% on REVOLVE. So really pleased with the progress on the REVOLVE side of the business in China. Peter McGoldrick: Appreciate that. And then I did want to follow up on Jay's question and the answer where you pointed to the balance between managing growth and margin. I was curious if there's a permanent shift in the strategy for which you approach the business or if this is sort of a onetime item? Michael Karanikolas: Yes. No, there's not a permanent shift in the strategy. Quarter-to-quarter, depending on where we see the opportunities, things might shift a bit, and this was certainly a more dramatic move this quarter. But it's still our goal and focus to drive double-digit plus top line gains while improving margins, particularly net EBITDA margins over time and getting those back into the double-digit range. And so the dynamics just play out a bit different in the current quarter where we saw a lot more of the gains on the margin side. Operator: [Operator Instructions] Our next question comes from the line of Mary Sport with Bank of America. Mary Sport: Could you provide an update on how your beauty category is performing and how you're thinking about that opportunity moving forward? And then I guess, how much of that customer do you expect to be new versus an existing customer? Michael Mente: Yes. Beauty is quite strong. Yes, performing at double-digit growth rates. We try not to disclose too much detail there, but very optimistic there. It is very, very early in our journey there, where our selection is starting to get very exciting, and we're leaning into further developments in the business, most notably the customer experience online as well as beginning to finally aggressively market. So early stages, great progress, a long road map ahead. And long term, we think that this could be a very, very, very significant portion of our business. Operator: We have no further questions at this time. I will now turn the call back to management for closing remarks. Michael Mente: Thanks for joining us today. And most importantly, thank you to the team for the excellent execution this quarter. The profitability numbers and cash flow numbers are something we all should be very, very proud of. We always preach that in challenging environment, breaths lots of opportunity, and it's clear that we're ready for this opportunity this quarter and the quarters ahead. Very excited to join you guys in 3 months from now and show you where we're up to. Operator: Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to Glanbia Third Quarter 2025 Interim Management Statement Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Mr. Liam Hennigan, Group Secretary and Head of Investor Relations. Thank you. Please go ahead, sir. Liam Hennigan: Thank you. Good morning, and welcome to the Glanbia Q3 2025 Interim Management Statement Call. During today's call, the directors may make forward-looking statements. These statements have been made by the directors in good faith based on the information available to them up to the time of their approval of this interim management statement. Due to the inherent uncertainties, including both economic and business risk factors underlying such forward-looking information, actual results may differ materially from those expressed or implied by these statements. The directors undertake no obligation to update any forward-looking statements made on today's call, whether as a result of new information, future events or otherwise. I'm now going to hand the call over to Hugh McGuire, CEO of Glanbia plc. Hugh McGuire: Thank you, Liam. Good morning, everyone, and welcome to the Glanbia Quarter 3 2025 Interim Management Statement Call and Presentation. On today's call, I will provide an overview of our performance for the first 9 months of the year. And I'm joined by my colleague, Mark Garvey, who will cover the financials and outlook. At the end of the presentation, we will be very happy to take your questions. Overall, quarter 3 year-to-date performance for the group was ahead of our expectations. Group revenue increased by 3.3% with strong performances in our Performance Nutrition and Health & Nutrition segments in the third quarter and continued good growth in our Dairy Nutrition segment. In Performance Nutrition, like-for-like revenue increased by 2.5% year-to-date, excluding the impact of SlimFast and Body & Fit. We continue to see strong consumer demand with double-digit volume growth in the third quarter in our priority growth brands, Optimum Nutrition and Isopure. In Health & Nutrition, we continue to see good momentum with strong demand from end-use markets with like-for-like revenue growth of 6.1% year-to-date. And in Dairy Nutrition, we saw strong volume growth across proteins and cheese and an increase in pricing driven by protein solutions. We continue to make good progress on our group-wide transformation program to simplify our business and drive efficiencies across our new operating model, supporting the next phase of growth. We've completed the sale of non-core brands Body & Fit and SlimFast in our Performance Nutrition division, and we acquired Sweetmix within our Health & Nutrition division. We'll continue to focus on shareholder returns by leveraging our strong cash flow and, in the year-to-date, we repurchased and canceled over 15 million Glanbia shares at a cost of EUR 197 million, which represented an average purchase price of EUR 13.10. I'm pleased to say that based on the continued momentum within our Performance Nutrition segment, we are upgrading our like-for-like revenue guidance for the full year to 3% to 4%, excluding the impact of SlimFast and Body & Fit. And we now expect full year adjusted earnings per share to be at the upper end of our full year guidance range of $1.30 to $1.33. We look forward to meeting investors and analysts at our Capital Markets Day in London on the 19th of November, where we will have an opportunity to delve more into the growth strategy for the group and associated financial targets. Performance Nutrition delivered a better-than-expected performance during the period with like-for-like revenue increasing by 2.5% excluding the impact of SlimFast and Body & Fit, which have now been sold. In the third quarter, we delivered a sequential improvement growing like-for-like revenue by double digits excluding the impact of disposed brands. Year-to-date, the volume performance was driven predominantly by strong category growth with good growth in food, drug, mass and e-commerce channels in both the U.S. and international markets, somewhat offset by lower revenue in the club and specialty channels in the U.S. and a reduction in margin diluted promotions. We continue to scale our international business, which delivered strong like-for-like growth of 8.8% year-to-date excluding SlimFast and Body & Fit, particularly in Asia Pacific. Pricing was broadly in line with expectations with a marginally negative year-over-year impact as a result of tactical price changes, primarily relating to higher-margin products in energy category, which are delivering a strong volume uplift. We continue to navigate ongoing elevated whey prices driven by strong category demand and have responded to this inflation by increasing prices in our international markets in the first quarter of the year. Pricing in the U.S. market comes into effect in the fourth quarter. We continue to expect approximately 15% to 20% of new whey protein isolate supply from the back end of 2025 and through 2026. In terms of brand performance, Optimum Nutrition, our largest brand at 68% of Performance Nutrition revenue, delivered like-for-like revenue growth of 4.6% and U.S. consumption growth of 8.8%. We saw strong double-digit growth in the U.S. food drug mass channel, growing ahead of the category, and continued strong growth in the online channel. We continue to grow our household penetration and expand the brand's distribution. We have a world-leading portfolio of high-quality products within the Optimum Nutrition and Isopure brands, and we continue to focus on innovation and education. We've launched a number of products this year, such as Optimum Nutrition Pro Quench, Clear Whey Collagen, and new products across our creative platform, plus the extension of our Isopure proposition into gut health and immune system support. And we're seeing good growth in our non-whey innovation products for both brands. Our education effort continues to pace, including the Optimum Insiders event we hosted at the McLaren Technology Center, the launch of the Optimum Nutrition Academy program in the U.S. and the continued rollout of Coach Optimum, our AI-powered virtual coach into new markets. Our healthy lifestyle portfolio delivered like-for-like revenue growth of 2.6% and U.S. consumption growth of 6.8%. Our priority growth lifestyle brand, Isopure, continues to enjoy strong growth across all our channels. We introduced a new look and formula for Isopure, improving brand visibility and flavor, and we also launched our new creative campaign, More of What Matters, driving continued growth in household penetration and TDP. We're continuing to roll out and market test of our new ready-to-drink innovation, Isopure Protein Water. As stated already, due to the momentum in the third quarter, which we see continuing in the fourth quarter, we are pleased to upgrade our full year like-for-like revenue guidance to 3% to 4% growth excluding the impact of SlimFast and Body & Fit. Turning to our Health & Nutrition segment, which comprises the premix solutions and flavors platforms and focuses on priority high-growth end-use markets such as vitamin, minerals and supplements, active lifestyle nutrition and functional beverages. This segment delivered a strong performance in the year-to-date, delivering like-for-like revenue growth of 6.1%. This was driven by a 6.9% increase in volume and a 0.8% decrease in price. Total revenue increased by 11.5% as a result of a 7.6% increase from the acquisitions of Flavor Producers and Sweetmix, somewhat offset by a decrease of negative 2.2% as a result of the impact of the 53rd week in the prior year. We are pleased with the strong performance in the quarter, which was driven by good growth across BMS and functional beverage markets, and we continue to see good broad-based demand with strong growth particularly in EMEA and Asia Pacific. Pricing was slightly negative as a result of certain pass-through pricing to customers. During the third quarter, we completed the acquisition of Sweetmix, a high-quality Brazil-based nutritional premix and ingredient solutions business, which will allow continued expansion in the Latin America region. We'll continue to invest in innovation and new capabilities and are building out our new powder flavor capability with planned capital investment in Flavor's spray drying that allow us to capture additional opportunities across our broader B2B customer base. In terms of guidance, we are reiterating our full year guidance of mid-single-digit like-for-like revenue growth in 2025, which will be predominantly volume led and is currently tracking towards the upper end of the range. Dairy Nutrition combines our U.S. cheese and dairy protein portfolios and is largely one integrated manufacturing footprint with a high supply and operational interdependency and is also the route to market for our joint venture supply of whey and cheese ingredients. This business provides a scale leadership position in dairy as a leading producer of whey protein isolate and the #1 producer of American-style cheddar cheese. In the year-to-date, like-for-like revenue increased by 6.1%, driven by a 3.5% increase in volume and a 2.6% increase in price. Total revenue increased by 3.2% as a result of a negative 2.9% decrease from the impact of the 53rd week in the prior year. The volume increase was seen across cheese and protein solutions with strong whey protein demand, particularly targeting the high protein ready-to-eat category. And we continue to see good demand for colostrum targeting gut health and immunity. Pricing increase was largely driven by favorable dairy market pricing in the first half of the year with strong protein markets in particular. Broader dairy market pricing turned negative during the third quarter. For full year '25, we'll continue to expect profit growth across Dairy Nutrition and our joint venture combined. And with that, I will hand over to Mark. Mark Garvey: Thank you, and good morning to everyone on the call. The group has a strong balance sheet and, at the end of the third quarter, net debt was just under $719 million. We have committed facilities of approximately $1.4 billion with an average maturity of 3 years. At year-end, we expect net debt to adjusted EBITDA to be approximately 1.25x. The acquisition of Sweetmix in Brazil closed in August for $41 million. The disposals of SlimFast U.S., SlimFast U.K. and Body & Fit have now been completed as of September 22, October 20 and October 31, respectively. Prior to completion, these businesses have generated approximately $105 million of revenue in 2025. Total consideration for these transactions including working capital transferred was approximately $63 million, of which $14 million has been deferred up to 15 months. Following these transactions, a further charge of approximately $30 million is expected to be taken related to the sale of the SlimFast brand, which will be confirmed with our annual accounts. Capital expenditure, both strategic and business sustaining initiatives for the year, is expected to be between $80 million and $90 million with investments primarily related to ongoing capacity enhancements, business integrations and IT investments to drive further efficiencies in operations. During the first 9 months of the year, the group repurchased approximately EUR 197 million worth of ordinary shares via our share buyback program, which equated to over 15 million Glanbia shares at an average purchase price of EUR 13.10. Shares repurchase represents over 5% of the weighted average number of ordinary shares and issue at the beginning of the year. Approximately EUR 103 million in dividends were also returned to shareholders this year, in line with our dividend payout ratio of 25% to 35% of adjusted earnings per share. We look forward to the opportunity to review our capital allocation framework with you at our upcoming Capital Markets Day on the 19th of November. Now let me turn to outlook and, firstly, revenue growth. We are pleased to upgrade Performance Nutrition revenue growth expectations. We now expect Performance Nutrition like-for-like revenue growth excluding SlimFast and Body & Fit to be 3% to 4%, previously 2% to 3%. We continue to see strong growth in the category, which is supporting growth in the second half alongside distribution gains and planned innovation. Providing further confidence in the third quarter, we saw a strong sequential improvement, particularly in our Optimum Nutrition brand, which increased like-for-like revenue by 14.3% in the quarter. Health & Nutrition delivered a good performance year-to-date across premix solutions and flavors platforms, while we continue to expect like-for-like mid-single-digit revenue growth for the full year, the business is currently tracking towards the upper end of this range. Moving on then to earnings expectations. In Performance Nutrition, we continued to navigate elevated whey costs, and we have now procured our whey needs through the first half of 2026 with whey costs remaining elevated due to strong end market demand. As previously discussed, we have line of sight to approximately 15% to 20% of new whey protein isolate supply coming to market late 2025 through 2026, which has been somewhat delayed from expectations earlier in the year. We have implemented pricing in our international markets in Q2 and in the Americas in Q4, and we anticipate further pricing actions in 2026 as demand for protein is expected to remain strong. Performance Nutrition EBITDA margins are tracking towards the lower end of the 13% to 14% guided range for the full year as we manage some dissynergies for the remainder of the year related to the disposals I've mentioned earlier. Health & Nutrition EBITDA margins are expected to be between 18% and 19% for the year. Dairy Nutrition delivered a strong performance year-to-date on the back of good volume growth in protein solutions and strong dairy market pricing in the first half of the year. We continue to expect profitability growth across Dairy Nutrition and our joint venture operations combined, as previously guided. Operating cash flow conversion is expected to be over 80% for the year. And finally, we are also pleased to update adjusted earnings per share expectations to the upper end of the previously guided range of $1.30 to $1.33. And with that, I will turn it back to Hugh. Hugh McGuire: Thanks, Mark. Just to close, I'd like to reinforce our conviction that Glanbia remains well positioned for growth. In terms of our focus, we're pleased to upgrade our revenue guidance in our Performance Nutrition division today as we're seeing improved trends with strong growth in the category. We also continue to see strong customer demand in our Health & Nutrition and Dairy Nutrition segments. We continue to execute initiatives as part of our group-wide transformation program across our four pillars, simplifying our organization and delivering efficiencies for the next phase of growth. We are navigating high-end whey prices carefully with a number of initiatives ongoing to address this. We continue to invest in key talent and capabilities to drive growth across our great portfolio of Better Nutrition brands and ingredients that operate in exciting categories with market-leading positions in high-growth end-use markets. We are focused on delivering long-term growth and shareholder value. And with that, I would like to hand it over to the operator for questions. Operator: [Operator Instructions] We will now take our first question from the line of Alex Sloane from Barclays. Alexander Sloane: The first one, actually just to dig in a little bit on the impressive acceleration in Optimum Nutrition in quarter 3. You've given some stats that show that obviously some of that has been driven by new distribution, but actually there's been also a strong healthy uptick in consumption growth in the U.S. So just wondering sort of kind of slightly at odds with what we're hearing on the kind of broader U.S. consumer. So what do you think is driving that and how sustainable you see that with kind of potentially more pricing as you alluded to come? And the second one, in terms of the margin outlook, obviously, thanks for the color there in terms of tracking towards the lower end of that 13% to 14%. As we think about 2026 and the moving parts, I mean, it sounds like that whey costs are maybe slightly more elevated. How should we be thinking -- it's early days, but how should we be thinking about '26 margin outlook for PN in this environment? Hugh McGuire: Alex, Hugh here. I'll let Mark take the margin question and maybe I'll address the acceleration in ON. I suppose first thing I'd say, look, very happy with consumption in the quarter and performance across our priority growth brands. A mixture of reasons, I think we're seeing very strong growth across our protein and creatine categories. Certainly, strong category growth in powders and ON, and Isopure continue to take share. We're seeing strong growth in international as well, as you'll see in the numbers, and some new distribution wins in the quarter in the U.S., particularly and no longer lapping the kind of private label impact that we spoke about earlier on in the year and then a little bit of innovation. But I think happy that majority is velocity with a little bit of distribution in there. So overall performance is very strong. I think what I'd say as well is, look, protein is a mega trend. We're seeing good demand for powders. They're the highest quality, the cleanest ingredients, the most versatile and they have a low cost per serve. So we're seeing the powder category growth rates accelerate. So overall very happy with that. In terms of pricing, we've called it out. We priced earlier on in the year in international markets. We saw a little bit of elasticity. But once the market competitors reactive, we're not seeing that elasticity now. We're back into volume growth. I think for North America, given the timing with elasticity, we're not expecting significant elasticity at this point in time. Price increases go live this week. Consumption is strong. Our consumers are highly engaged in the category. It's an affordable product. So would be positive about outlook as we go into quarter 4 and into 2026. Mark Garvey: Alex, just on your margin question, yes, you're right, we did say it's going to be towards the lower end of the range, primarily because of the sales that we just announced. We have some dissynergies we have to manage through, and we'll manage through those into early '26. So I'm not overly concerned about them. We'll sort of manage through that. You're right, it's early days for '26 at this point, and we'll obviously talk a lot more about this when we get to our full year results. But I would say at this point, look, we're very comfortable with the revenue momentum we're seeing, and we probably expect to see that now coming into '26. And overall, I would expect to see EBITDA and margin progression into '26. We have acquired our whey now for the first half. We had said you might recall the last call, we acquired whey for the first quarter. And I said that price is pretty much in line with the second half '25. Now that we acquired the first half, it's marginally higher than the second half of '25. We are putting price increases through in North America. They're done now, and that will be coming through in market. And I expect as we see whey continue to be elevated, we'll probably putting more price increases through next year to be determined in terms of timing. There will also be a margin benefit, obviously, for the Body & Fit and SlimFast sale. That will help us into next year, and some of our transformation work will help as well. And as we sort of look to increase more marketing as well, all in all, I still expect to see margin progression from '25 to '26. Operator: We will now take the next question from the line of Patrick Higgins from Goodbody. Patrick Higgins: Maybe just focusing on Health & Nutrition, obviously, another really strong print in terms of volumes there. Obviously, at the time of the H1, you were expecting maybe a little bit of a slowdown just on possible tariff pull-through in Q2. Was that perhaps a touch conservative on your part? Or did you just see a kind of uplift in terms of the EMEA and Asia Pacific markets that offset that? And clearly really strong given the broader consumer trends we're seeing across the U.S., but globally. So interested to hear your kind of comments on what's underpinning that kind of end market demand. And that's on the volume piece. And then on the pricing side, could you maybe just talk us through some of the pricing dynamics in that division and expectations into Q4? I know there was some tariff kind of costs that you might have to pass through at some point. Should we expect that in Q4? Hugh McGuire: Yes. Patrick, I speak to kind of overall volumes and Mark will speak to price. I think in H1, we probably were being a little bit cautious. We were still coming through a significant tariff turbulence, I suppose, is the best way to put it. So we weren't quite clear on the impact, particularly between China and the U.S. Pleasing to see good growth across all of our end-use markets, but particularly in our international markets, as we've called out. And I think what you're seeing here is this is a smaller part of our overall portfolio, but we're leveraging our broader B2B base and benefiting from the trends that we see in Performance Nutrition overall. So very happy with quarter 3 performance in H&N. Mark Garvey: Yes. On the pricing dynamic, Patrick, there are some tariff impacts, but there's also some commodity pass-through impacts as well. So to the extent that certain prices of materials have come back, we will actually pass those through. So that tends to be how that flows through in the pricing. I think for the fourth quarter, we're expecting the pricing negativity to be a bit better actually than what you saw in the third quarter. So overall, for the year, probably less than 1% negative on price, I would say, for the year, expecting a reasonably good quarter as well on the volume side, and that's why we say we're tracking towards the upper end of our mid-single-digit range now. I'm pleased to see that as we come to the end of the year. Operator: Our next question comes from the line of David Roux from Morgan Stanley. David Roux: Just a couple from my side. Mark, so just to clarify on your comments around whey costs. So as you mentioned, Q1, you had indicated your sort of covered whey costs were sort of flat versus last year. Can you just confirm your comments on how that looks for prices covered to H1? Did you say it was higher versus last year overall? And then -- so then just my second question on Optimum Nutrition. The implied guidance on like-for-like for Performance Nutrition into Q4 implies quite a marked slowdown. Could you maybe just comment on how Optimum Nutrition has performed over basically the first part of Q4? And has it kind of seen a marked slowdown from Q3 as implied by your Performance Nutrition guidance? Mark Garvey: So on the whey cost, David, so as I said at the last call, we have procured through the first quarter, and those costs were in line with the second half '25. As we procured in the second quarter, whey cost went up a little bit. So we're going to look at the first half of '26, they are marginally ahead of the second half of '25. So a little bit higher, and that's why if you look at pricing, that's part of dynamic for us into next year as well. Hugh McGuire: Yes. Maybe just to add as well, David, I think when we spoke to you in August, we would have actually seen whey come off its peak. But what we've seen as we went into September and then specifically at October, we saw prices increase again, all driven by demand. Demand is very strong. You can see that from our own numbers as well. We haven't changed our view on the additional supply coming onstream next year. In fact, we're starting to see that come in now, but demand is very strong. So as Mark said, pricing is done this year. We are now starting to evaluate pricing for kind of late spring, early summer next year as well. But overall, fundamentally, it's all driven by strong demand. In terms of second question on ON, look, probably it's a little bit of conservatism. Consumption remains strong and, answer to your specific question, we're happy with consumption as we go to quarter 4. But you always have -- we ship to a lot of markets all over the world, and we always have a little bit of inventory movement as we go into the back end of the year getting ready for New Year, new you. David Roux: And sorry, just a follow-up on the whey costs. So is the covered position through 1H of next year, would that be inflationary or deflationary versus the prior year? Mark Garvey: It will be inflationary. Operator: Our next question comes from the line of Nicola Tang from BNP Paribas Exane. Ming Tang: First, maybe just to come back on the H&N business again. You talked about this broad-based strength across end markets. Could you give a little bit more color on are you outperforming your end markets? Or are you just exposed to end markets which are growing particularly well? And the second question is -- congrats on all the non-core divestments that you managed to close in Q3. I remember when you announced those non-core divestments, the wording was quite open with respect to continuing broader portfolio assessment and you continue to look at potential further divestments. Do you see scope for further non-core divestments in the near future? Hugh McGuire: Nicola, yes, I think what I'd say, I think you answered it. Look, we're doing well in the end markets that we supply into vitamin and minerals function and beverage and active lifestyle nutrition, so quite similar to our consumer goods business as well. So we're seeing a lot of those similar trends. I think I said it earlier on as well, we're leveraging our broad-based B2B customer base right now particularly with our Flavor acquisition, we have a natural and organic liquid flavor business. We're building our natural and organic powder flavor business as well. That's very much on trend also. And then we're also leveraging our broader protein capability through Dairy Nutrition as well, where we're doing a lot of flavor and fortification work combined with protein. So overall, benefiting from the good trends we see across the broader Glanbia Group. I think, look, what I'd say is the non-core investments, we'll always keep that under review. We're very much focused on driving our priority growth brands within PN. We have a nice portfolio as well, but decisions will all be made in terms of priority investments. And we'll give a little bit more color on our growth drivers at our Capital Markets Day in a couple of weeks' time. Operator: [Operator Instructions] We will now take our next question from the line of Damian McNeela from Deutsche Numis. Damian McNeela: Two questions from me, please. Firstly, can you just provide a little bit more color on the sort of the U.S. category growth? I think you pointed to both protein and creatine has been good components of the growth. But can you sort of talk about whether it's split or weighted to one versus the other there, please. And then just I think at the time of the interims, you talked about longer-term discussions about incremental whey coming to the market beyond '26, '27, '28. Is there any sort of update that you can provide on those conversations, given the sort of continued demand for whey that we see coming through from the U.S., please? Hugh McGuire: Damian, yes, what I'd say is both categories are growing very strongly, both protein and creatine, and not just in the U.S., I think we're seeing that globally as well. So with very strong growth for Optimum Nutrition creatine, and we have a multitude of products across that portfolio now as well with new flavors and new formats being launched. And we're seeing good growth in protein. And what I can say is, look, we've clearly seen the ready-to-mix powder protein category accelerate in the U.S., of course, in 2025. And we're benefiting from that. Our powders -- like we manufacture. We have the largest brand. We manufacture the highest quality. All our manufacturing is in-house with the cleanest ingredients. And powders are versatile. And look, I have no direct data that would say that consumers are switching or moving across formats, let's say. I wouldn't conclude that, but we do have the lowest cost per serve. I think we spoke to you before about making sure that we had the right price pack architecture, the right opening price points. And an example, one of our online customers were seeing very strong demand for the smaller price points. And particularly for our new customers over 80% of customers buying that size of Optimal Nutrition are new to our brand, which is really interesting for us. So overall, I think generally, we're in good demand spaces. In terms of incremental, yes, actually, we have approved capacity for one of our own facilities in the U.S., where we would put it in additional capacity for whey protein isolate for 2027. And one of our local partners here in Europe actually will be announcing additional capacity actually next week as well. So we're working across '26, '27 and into '28 because these investments take time to plan, time to build. But certainly, all of our suppliers are interested in putting in more capacity. Operator: Our next question comes from the line of Karel Zoete from Kepler Cheuvreux. Karel Zoete: I have a question with regards to channel dynamics in the U.S. because it's been, of course, some discussions out about the club channel last year and then the contract loss. What are you seeing across U.S. channels? And then within club, is private label still gaining share? Hugh McGuire: Yes. I think we've called it out specifically. Actually, for our brands, where we're seeing the greatest growth right now is across food, drug, mass and e-commerce channels. Very, very strong double-digit growth across both. Club channel continues to be very important, the broader club channel. We've had some nice wins across -- there's a number of customers who do the club channel. So we've had some nice wins in that broader club channel base. And within private label, the impact on our business from private label that we spoke about earlier on in the year, that has stabilized now and we're happy with ON performance. Operator: [Operator Instructions] Our next question comes from the line of Cathal Kenny from Davy. Cathal Kenny: Firstly, back to the category growth in Q3. What's your best guess for the powders category growth in North America? That's my first question. Second question then is Isopure. Obviously, a very strong Q3, backing up a very good volume growth in Q2. Can you dial in to some of the drivers of that? I know you gave some headline commentary on velocity, distribution, but would be interested lean into the Isopure performance a little bit more. They are my two questions. Hugh McGuire: Yes. It's hard to call -- look we don't get data for some of the channels in the U.S. So it's hard to call overall growth. But what we've certainly seen in food, drug, mass channels where we do get data, that is publicly available, that we have seen growth accelerate from flat to low single digit now into the teens, low teens. So good category growth overall and which ON and Isopure outperforming that category growth. We see good growth within our e-commerce channel as well. So demand generally for powder has certainly accelerated in the U.S. over the course of 2025. Now how long that will continue, that's always hard to call. But certainly, the demand currently is good and we don't see any signs that, that demand will come off as we head into 2026. In terms of Isopure, probably velocity for ON certainly is the key driver, also a little bit of distribution, a little bit of innovation for Isopure. Primarily, it will be significantly more distribution that's coming off a much lower distribution base, much lower household penetration numbers as well. So significant growth in household penetration and point of distribution. But also some nice new innovation as well that we're launching. So for all -- for both our priority growth brands, it's strong velocity, some nice new distribution wins and nice innovation coming into the category. Cathal Kenny: Just a quick follow-up on the pricing point. Are you saying that you expect lower levels of elasticity around this price increase you're now taking in North America? Hugh McGuire: Yes. I think what we've traditionally said, Cathal, is we sometimes talk about elasticity of, one, it tends to come out at around 0.8 from prior experiences. But that doesn't last that long because normally, it's once the entire -- we're the first to move on price, and the category will tend to react. We saw that earlier on in the year in international. The volume growth is back now. I think demand is so strong at the moment that this pricing is well expected. And I think generally, for consumers, it's an inflationary environment in the U.S. But also as we said before, our consumer demand is strong. They're highly engaged in the category. The consumer demand tends to be resilient, and we're in a great format in terms of cost per serve. So it's hard one to call. We're also coming into New Year and new you. So while you won't have much promo effect between now and the end of the year, quarter 1 is obviously a big promotional calendar period for the entire industry. So by the time everything settles, you're kind of coming out into quarter 2 next year. So at this stage, we're not actually expecting significant elasticity. Operator: I'm showing no further questions. Thank you all very much for your questions. I'll now turn the conference back to the CEO, Mr. Hugh McGuire, for his closing comments. Hugh McGuire: Thank you very much. Look, just to close, very pleased with the strong performance in the third quarter. Glanbia remains well positioned for growth. We're moving at pace to deliver on our strategic ambition, and I look forward to speaking more about this at our Capital Markets Day on the 19th of November. Thank you. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect your lines.
Operator: Welcome to the Third Quarter 2025 Arista Networks Financial Results Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded and will be available for replay from the Investor Relations section on the Arista website following this call. Mr. Rudolph Araujo, Arista's Head of Investor Advocacy. You may begin. Rudolph Araujo: Thank you, Christa. Good afternoon, everyone, and thank you for joining us. With me on today's call are Jayshree Ullal, Arista Networks' Chairperson and Chief Executive Officer; and Chantelle Breithaupt, Arista's Chief Financial Officer. This afternoon, Arista Networks issued a press release announcing the results for the fiscal third quarter ending September 30, 2025. If you want a copy of the release, you can access it online on our website. During the course of this conference call, Arista Networks management will make forward-looking statements, including those relating to our financial outlook for the fourth quarter of the 2025 fiscal year longer-term business model and financial outlook for 2026 and beyond, our total addressable market and strategy for addressing these market opportunities including AI, customer demand trends, tariffs and trade restrictions, supply chain constraints, component costs, manufacturing output, inventory management and inflationary pressures on our business, lead times, product innovation, working capital optimization and the benefits of acquisitions which are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically in our most recent Form 10-Q and Form 10-K and which could cause actual results to differ materially from those anticipated by these statements. These forward-looking statements apply as of today and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call. This analysis of our Q3 results and our guidance for Q4 2025 is based on non-GAAP and excludes all noncash stock-based compensation impacts, certain acquisition required charges and other nonrecurring items. A full reconciliation of our selected GAAP to non-GAAP results is provided in our earnings release. With that, I will turn the call over to Jayshree. Jayshree Ullal: Thank you, everyone, for joining us this afternoon on our third quarter 2025 earnings call. Arista continues to drive its 19th consecutive record quarter of growth in this AI era. We achieved almost $2.31 billion this quarter with software and services contributing approximately 18.7% of revenue. Our non-GAAP gross margin of 65.2% was influenced by favorable mix and inventory benefits. Americas was strong at almost 80% and international at approximately 20%. On September 11 at our Analyst Day, we showcased both networking for AI and AI for networking with our continued momentum across our data-driven network platforms. Unlike many others, our Etherlink portfolio highlights our accelerated networking approach, bringing a single point of network control for zero-touch automation, trusted security, traffic engineering and telemetry to dramatically improve compute and GPU utilization. Superior AI networks from Arista improves the performance of AI accelerators. Of course, we interoperate with NVIDIA, the worldwide market leader in GPUs, but we also recognize our responsibility to create a broad and open ecosystem, including AMD, Anthropic, [ Arm ], Broadcom, OpenAI, Pure Storage and [ VAST Data ] to name a few, and build that modern AI stack of the 21st century. This stack includes the trio of compute, memory storage and a solid network foundation to run training and inference models. Our stated goal of $1.5 billion AI aggregate for 2025, comprising of both back end and front end is well underway. We are now committed to $2.75 billion out of our new target of $10.65 billion in revenue, representing 20% revenue growth in 2026. We are experiencing momentum across cloud and AI titans, neo cloud providers and the campus enterprise. The demand and scale of AI build-outs is clearly unprecedented, as we look to move data faster across multiplanar networks. People and leadership are key to our success. And to that end, we announced Todd Nightingale as our President and Chief Operating Officer last quarter. This time, we want to celebrate the promotion of Ken Duda, our President and Chief Technology Officer, not only of engineering, but our top AI and cloud segment of customers as well. Ken, as many of you know, has been a champion of architecture, innovation and culture since founding Arista over 20 years ago. Ken, would you like to say a few words? Kenneth Duda: Thanks, Jayshree. I would like to -- one of the best things about working at Arista is getting to build some of the most ambitious networks ever built, ultra-low latency trading networks, global scale cloud networks and most recently multi-petabit AI networks. Our success in AI has many sources, the sheer power and performance of our hardware platforms, our innovations in fabric architecture, our AI-focused telemetry and provisioning automation, our reputation for the highest quality software and our leadership in the Ultra Ethernet Consortium, the UEC, and our work in Ethernet Scale Up Networking or ESUN. And most importantly, the way we partner with the world's largest AI companies. Partnership has been key to our success over and over at Arista and the AI revolution is no exception. In addition to being a lot of fun, these partnerships benefit our company, both through the sheer revenue opportunity, but also in providing us with the opportunity to learn and innovate at the edge of what's possible. We can then apply what we've learned to bring solutions to the broader networking market, helping a much larger and more diverse customer base, build the most advanced and reliable infrastructure in the industry. For example, our Etherlink distributed switch fabric powers some of the largest AI fabrics in the world. It's also an excellent underlay for data centers of all sorts, providing a full run rate fabric with no hotspots at petabit scale for all workloads, including AI. Etherlink speeds are going from 800 gigabits today to 1.6 terabits in the near future while leveraging our EOS operating system and our NetDI diagnostics infrastructure for top hardware and software reliability. Arista AVA or Autonomous Virtual Assist, uses AI to help our customers design, build and operate their networks. AVA draws on both our internal knowledge base and also on the customers' data stored in NetDL, Arista's network data lake plus AVA has agentic capabilities to help troubleshoot proactively. Our other recent innovations include SWAG, Switch Aggregation Technology, that provides the features of campus stacking along with fault containment and in-service software upgrades for maximum uptime. By running a common EOS and common NetDI platform across so many use cases, we are able to maintain alignment between our different market segments, leveraging central engineering investments efficiently as we pursue cloud, enterprise and AI markets simultaneously. I am so grateful for the opportunity to lead the Arista engineering and cloud teams in an era with so many exciting opportunities. Jayshree Ullal: Thank you, Ken, and congratulations on a fantastic 21-year career, a very well-deserved promotion at Arista. You have always built the always-on resilient leaf-spine architecture, both now for networking for AI workloads, and AVA to bring AI to networking. At Oracle AI World, Ken was invited to formally announce our collaboration with Oracle Acceleron. This builds upon a decade of partnership with Oracle, starting with our Exadata migration from InfiniBand to Ethernet for AI networks to RoCE, RDMA over converged Ethernet, and now multiplanar networking across cloud AI for on-time job completion in gigawatt scale AI data centers. As part of our Leadership 2.0, we have built and focused a cloud and AI mission and organization, now led by industry veteran, Tyson Lamoreaux, reporting to Ken and Hugh. I am so delighted to formally welcome Tyson to Arista. Tyson, if you guys know him well, built the first cloud network for Amazon AWS in the 2000 era and pioneered the first AI network for a stealth sovereign AI company the last couple of years. Tyson, you've had a busy few weeks here. Tell us more. Tyson Lamoreaux: Thank you, Jayshree, and thanks for the question. It's really incredible to have joined the team at a time where Arista is building so much momentum. Spending time with customers has been a top priority for me since coming on board. And I've been so impressed with how strong these partnerships are, both with our long-standing titans and with our emerging customers. We're deeply engaged with them on next-gen architectures for their cloud networks, front end, back end, scale up, scale out and scale across. I mean, really everywhere. It's translating to a ton of wins, and I got to say it's a lot more than I anticipated before I got here. I really love our continuing commitment to open standards and innovation like ESUN and UEC and of course, the practical here, now and always problems that we're addressing by building the hardware systems, software, everything that delivers exceptional power efficiency, reliability, density, visibility and manageability for our customers. I think my background as a builder and operator are really well suited to helping the team anticipate customer needs and delivering the right products for them. I guess the last thing I'd highlight is the culture. I mean it's just tremendous. The customer focus, commitment to quality, innovation and operational excellence are a top notch here and have made me feel right at home. Thanks, Jayshree. Back to you. Jayshree Ullal: Thank you, Tyson, and welcome home. With Tyson's credentials and a track record, Arista is really poised to address multiple facets of the cloud and AI innovation at a system-wide level converging silicon, hardware, software, cables, optics and racks as an overall platform. At the Optical Compute Conference, OCP, Arista unveiled its first Ethernet for Scale-Up Networks or ESUN specification, along with important 12 industry experts. While we began with 4 co-founders, we are now supporting and increasing to more people so that we can build the right interoperable scale-up standard. While there's always white noise, Arista also continues to clarify our role in white box and how we will continue to coexist like we always have the past decade or more. The concept is clear. It's all about good, better and best, where in some simple use cases, a commodity white box is good enough. Yet in other cases, customers seek the value of better Arista blue boxes with state-of-the-art hardware with built-in NetDI for signal integrity, physical, passive, active component and troubleshooting management. The best is, of course, the Arista branded EOS platform for the ultimate superiority. We find ourselves amid an undeniable and explosive AI megatrend. As AI models and tokens grow in size and complexity, Arista is driving network scale of AI XPUs, handling the power and performance Basically, the tokens must translate to terawatts, teraflops and terabits. We are experiencing a golden era networking with an increasing TAM now of over $100 billion in forthcoming years. Our centers of data strategy ranging from client to branch to campus to data and now cloud and AI centers is a very consistent mission for the company. We will continue to invest in our customers, our leaders, our partners and certainly most of all, our innovative technology. And with that, Chantelle, I'd like to hand it to you as our CFO, for financial specifics. Chantelle Breithaupt: Thank you, Jayshree. It is great to see the broadening of the AI ecosystem, and I am excited for Arista to be an innovative [ unit ]. Turning now to Q3 performance. Total revenues were $2.3 billion, up 27.5% year-over-year, above our guidance of $2.5 billion. This was supported by strong growth across all of our product sectors. International revenues for the quarter came in at $468.3 million or 20.2% of total revenue, down from 21.8% in the prior quarter. The overall gross margin in Q3 was 65.2%, above our guidance of 64%, down from 65.6% last quarter and up from 64.6% in the prior year quarter. The year-over-year gross margin improvement was primarily driven by strength in the enterprise segment. Operating expenses for the quarter were $383.3 million or 16.6% of revenue, up from last quarter at $370.6 million. R&D spending came in at $251.4 million or 10.9% of revenue, up from $243.3 million in the last quarter. Sales and marketing expense was $109.5 million or 4.7% of revenue compared to $105.3 million last quarter. Both quarter-over-quarter dollar increases were driven by additional headcount, inclusive of the VeloCloud acquisition. Our G&A costs came in at $22.4 million or 1% of revenue, up from last quarter at $22 million. Our operating income for the quarter was $1.12 billion, landing at 48.6% of revenue. Other income and expense for the quarter was a favorable $98.9 million, and our effective tax rate was 21.2%. This resulted in net income for the quarter of $962.3 million or 41.7% of revenue. Our diluted share number was 1.277 billion shares, resulting in a diluted earnings per share number for the quarter of $0.75, up 25% from the prior year. Now on to the balance sheet. Cash, cash equivalents and investments ended the quarter at $10.1 billion. Of the $1.5 billion repurchase program approved in May 2025, $1.4 billion remains available for repurchase in future quarters. The actual timing and amount of future repurchases will be dependent on market and business conditions, stock price and other factors. Now let's move next to operating cash performance for the third quarter. We generated approximately $1.3 billion of cash from operations in the period, reflecting a strong business model performance. DSOs came in at 59 days, down from 67 days in Q2, driven by billing linearity. Inventory turns were 1.4x, flat to last quarter. Inventory increased to $2.2 billion in the quarter, up from $2.1 billion in the prior period. Most of this increase is due to higher evaluation inventory, indicating uptake of our new products and new use cases. Our purchase commitments and inventory at the end of the quarter totaled $7 billion, up from $5.7 billion at the end of Q2. We will continue to have some variability in future quarters as a reflection of the combination of demand for our new products and the lead times from our key suppliers. Our total deferred revenue balance was $4.7 billion, up from $4.1 billion in Q2. As of Q3, the majority of the deferred revenue balance is product related. Our product deferred revenue increased approximately $625 million versus last quarter. We remain in a period of ramping our new products, winning new customers and expanding new use cases, including AI. These trends have resulted in increased customer-specific acceptance clauses and an increase in the volatility of our product deferred revenue balances. As mentioned in prior quarters, the deferred balance can move significantly on a quarterly basis, independent of underlying business drivers. Accounts payable days was 55 days, down from 65 days in Q2, reflecting the timing of inventory receipts and payments. Capital expenditures for the quarter were $30.1 million. In October 2024, we began our initial construction work to build expanded facilities in Santa Clara, and we expect to incur approximately $100 million in CapEx during fiscal year 2025 for this project. Q3 delivered a strong performance, underscoring our strategic progress. This continues to give us confidence for the remainder of FY '25 and through FY '26. But let's first start with our outlook for Q4. Revenue of $2.3 billion to $2.4 billion with continued growth expected across our cloud, AI, enterprise and providers markets. Gross margin in the range of 62% to 63%, inclusive of possible known tariff scenarios, operating margin of approximately 47% to 48%. Our effective tax rate is expected to be approximately 21.5% with approximately 1.281 billion diluted shares. Incorporating this Q4 outlook, our guidance for FY '25 is as follows: full year revenue growth of approximately 26% to 27% or $8.87 billion at the midpoint. We are on track to deliver between $750 million and $800 million for our campus segment and our AI center target of at least $1.5 billion. For gross margin, the outlook is approximately 64%, inclusive of possible known tariff scenarios. We anticipate operating margin of roughly 48%, demonstrating Arista's strong operational execution and scalable business model. Our outlook for FY '26 presented at our September Analyst Day remains relatively unchanged. Full year revenue growth of approximately 20%, now at a higher dollar amount of $10.65 billion, inclusive of both a campus target of $1.25 billion and an AI center target of $2.75 billion. For gross margin, a range is expected of approximately 62% to 64%, driven by customer mix. And for operating margin, an outlook of approximately 43% to 45%, allowing for investments in relation to achieving the strategic goals of Arista. In closing, the momentum continues. The breadth and depth of our customer interactions have never been stronger nor more exciting. In true Arista style, we remain pragmatic, yet are aware of the potential over the next few years. I wish to extend a warm welcome to Tyson. We are thrilled that you have joined our team, and congratulations to Ken on the well-deserved promotion. I will now turn the call back to Rudy for Q&A. Rudolph Araujo: Thank you, Chantelle. We will now move into the Q&A portion of the Arista earnings call. To allow for greater participation, I'd like to request that everyone please limit themselves to a single question. Thank you for your understanding. Christa, please take it away. . Operator: [Operator Instructions] Your first question comes from the line of Tal Liani with Bank of America. Tal Liani: I want to ask about the sequential or the guidance, and it's more fundamental question, but I'll back it up with numbers. If you look at last year, the growth was very consistent kind of the last 3 quarters of the year, the sequential growth rate is between 6.5%, 7.5%. When you look at this year, you started with 10% growth in 2Q, and it goes to 5% and now only 1.6%. So there is deceleration. And the question is, what is the underlying -- what are the underlying drivers for the deceleration? What do we need to take from it for next year? What does it mean? And should we be concerned about the growth going forward? Jayshree Ullal: Thanks, Tal. First of all, to answer your last line, there is no concern on our demand. I think the shipments and the revenue follows based on our supplies. So if we're able to make the shipments, then the revenue, as you saw in Q2 went right -- blew past any of our guidance, right? However, there are times we can't ship everything despite the demand. And so you're accordingly seeing that. I wouldn't read too much into the quarterly variances. But I would say we feel -- we have never felt more strongly about the demand aspect of this reflected in the continued commitment to 20% growth, even though the number keeps increasing from 8.75% to now 8.87. So no change in demand, some variation in shipments. Operator: Your next question comes from the line of Aaron Rakers with Wells Fargo. Aaron Rakers: I'll stick to kind of the model as well. I'm curious, when I look at the gross margin guidance for this quarter, I think it was 62% to 63%. I guess if we were to assume that your services' gross margin stays consistent at 81%, 82%, it would seem to imply that product gross margin falls below 60%. So I guess the question is, can you unpack the gross margin drivers in this quarter in terms of the guidance? How much is tariff related? Or is there other dynamics to consider? And does that change kind of the expectation as we look forward? Jayshree Ullal: Okay. Sure, Aaron. First of all, I think you're overestimating our services and software margins, but be that as it may. We do have a mix of product margin where it's significantly below 60% with our cloud and AI titans driving the volume and higher obviously, for the enterprise customers. The average of which, together with services is yielding that number. So when the mix tilts heavily towards the cloud and AI, you can expect some pressure on our gross margins. But overall, I think we managed it very well the manufacturing team, now led by Todd does a fantastic job here. So again, the discipline and mix plays well together, but I don't think it's any change from prior years where when we have a heavy mix of AI and cloud, we feel it in our gross margins. Chantelle Breithaupt: Yes. The only thing I would add to that is I wouldn't miss into the last part of your question that it insinuates or offers a new model going into next year. This is a normal part of our mix conversation and well within the guide that you've seen us perform at these levels before. Operator: Your next question comes from the line of Michael Ng with Goldman Sachs. Michael Ng: Thank you for the question. I was wondering if you could just talk about Arista's positioning as we move into more full rack solutions. Is this going to be more of a partnership model? How do you think about addressing this, I say, growing convergence between compute and networking? Jayshree Ullal: Michael, that's a very good question. First of all, as you heard in Analyst Day, Andy Bechtolsheim is personally driving along with the hardware team a significant number of these racks. I think at any given time, we have 5 to 7 projects with different accelerator options Obviously, NVIDIA is the gold standard today, but we can see 4 or 5 accelerators emerging in the next couple of years. Arista is being sought to bring all aspects, the cabling, the co-packaging, the power, the cooling as well as the connection to different XPU cartridges, if you may, as the network platform of choice in many of these cases. So we are involved in a lot of early designs. I think a lot of these designs will materialize as the standards for Ethernet are getting stronger and stronger. We now have a UEC spec. You heard me talk about the Scale-Up Ethernet spec for ESUN where we can bring different work streams onto the same Ethernet headers, transport headers, data link layer, et cetera. So I think a lot of this will be underway in 2026 and really emerge in 2027 as Scale-Up Ethernet becomes a more important part of that. In terms of how we will gain more recognition of revenue, some of this will be not the classic OEM model. There may be more the blue box JDM model where we work with them on IP and have reference designs and offer them capabilities well beyond the network. And -- but many of them will also entail selling the network as is in these racks. Operator: Your next question comes from the line of Atif Malik with Citi. Atif Malik: Jayshree, in your prepared remarks, you mentioned large language model providers like OpenAI, Anthropic, and they have announced partnerships with your cloud titans. Can you share with us who is driving the decision-making on networking hardware on these announcements? And just your commentary on your share being stable within the circle of your cloud titan? Jayshree Ullal: Yes. So to answer your last question, first, I think our share is strong. We always, as you know, coexist with 2 other types of competitors. One is the bundling strategy with NVIDIA and the other is the white box. So we have not seen any significant changes in share up or down at the moment, it's stable. Having said that, it's also a massive market. And we think rising tide rises all boats and this boat is feeling pretty good. Now specific to who makes the decision, it's really a combination. We intimately work with the software and LLM players because they certainly guide the design but we also work with the cloud titans, and it's a shared responsibility between both of them and where the responsibility for procuring the large data centers and the power and the location and the cooling is clearly done by our cloud Titans, but the specifications are exactly what's required on the scale up, scale out network is done by the partners like OpenAI and Anthropic. So it's really a joint decision. Operator: Your next question comes from the line of Samik Chatterjee with JPMorgan. Samik Chatterjee: Jayshree, maybe just going back to your earlier response to another question, you mentioned some variability in shipments at a customer level, maybe driving some of the lumpiness quarter-to-quarter. Just curious, you had talked about previously the Tier 1 customers you're engaged with progressing to their cluster sizes, 100,000 and more. Like how -- has there been any change relative to those plans that are driving the deceleration here in terms of the fourth quarter guide? Or what is sort of behind the variability that you're seeing in terms of shipment? Is it supply driven at all? Any color on that front? Jayshree Ullal: Yes. Yes. Samik, I would say it's largely supply driven. As you know, all 4 are doing well on the 100,000 mark. 3 have already crossed it. The fourth one, I don't know if they'll cross it by end of the year or next year, but they're getting there. So we're feeling pretty good on our large GPU deployments. At the same time, the variability I was stating is demand is greater than our ability to ship. Lead times on many of our components, including standard memory and chips and merchant silicon and everything, it's nothing like 2022, but they have very long lead times ranging from 38 to 52 weeks. So we are coping with that. And you can see Chantelle is leaning in and making greater and greater purchase commitments, we wouldn't do that without demand. Operator: Your next question comes from the line of Amit Daryanani with Evercore ISI. Amit Daryanani: I guess my question, I think folks are kind of trying to ask around this a bit is the growth rate you've had in the last 3, 4 quarters of high 20%, call it, you sort of implying that will decelerate just -- not just in December, but also in '26, I think, at this point, right, high 20% growth goes to low 20%. Maybe just talk about what is driving that kind of deceleration? Because certainly, if you look at things like your purchase commitment, and your deferred product growth, it would almost imply things can accelerate, not decelerate in the out quarters. So just what's driving that deceleration in the out quarters would be helpful to understand. Jayshree Ullal: Okay, Amit, but I don't like the word deceleration. We're talking about big, big numbers here, guys. And I'm committing to double-digit 20% and above percentage, don't call it deceleration, call it, variability across quarters, and demand is great. I just don't know whether it will land in '26 or '27. Chantelle Breithaupt: Yes. The only other thing I'd add to this just generally is a topic is that when you think about that the large AI use cases are acceptance clauses, it really comes down to that coming together and the timing of that. That doesn't follow a seasonality model. That's also for... Jayshree Ullal: Good point. It lands when it lands. That is a very good point that Chantelle is making that in the cloud, we started having predictability of how they landed and how they got constructed. In AI, it's taking longer. Operator: Your next question comes from the line of David Vogt with UBS. David Vogt: So I'm going to ask this question at the risk of Jayshree yelling at me. So -- when we think about your '26 outlook that you just raised, which we didn't expect you to raise this early in the cycle, if I just take what you're doing with regards to the AI-centric opportunity, campus and [ Velo ]. It doesn't leave a lot of room for growth in the core business outside of AI and campus. Maybe can you speak to what you're seeing in that particular market and how we should think about that progressing through 2026? Chantelle Breithaupt: Okay. Well, just -- I'll say something as Jayshree to figure out which tone she wants to answer there. But I think that -- the part that I would take a look at, again, I go back to kind of how we started it early '25, maybe even '24. Part of our style is to not assume 100% of everything hits to get to a number, and we'd like to leave ourselves with some optionality. And so we're putting some goals for ourselves with the AI. We're putting goals for ourselves with campus. It doesn't mean we're not focused on the rest. But I don't think it's the right approach to assume everything is going to be 100% and leave ourselves exposed, and we'll continue to update as we see it right, Jayshree. Jayshree Ullal: Yes, absolutely. And so yelling isn't the tone I'd like to attribute it to, excitement maybe, your enthusiasm is the one I'd like you to think about, which is clearly, AI and campus is going to grow and do great guns for us as it should because they are 2 very large TAMs. Whether it is Ken and Tyson driving the AI and cloud TAM or whether it's Todd Nightingale driving the campus and these 2 are going to grow substantially in double digits, right? So to your point, it doesn't leave the core business with a lot of opportunity. But that's not to say it may be flattish, it may be grow. It's to say that our customers are putting more attention there and that the existing business, which is already on very large numbers, will have lesser growth. We don't yet know if it's flattish or single digit or whether more will go to AI. We frankly can't predict the mix this early in the game on 2026, but we think we're in for a great ride in 2026. Operator: Your next question comes from the line of Ben Reitzes with Melius Research. Benjamin Reitzes: I appreciate you clarifying some of those earlier questions, more on the long-term side, Jayshree. I think there was an earlier question around OpenAI and Anthropic and just some of these larger builds with the private companies that obviously are becoming hyperscalers. Maybe without naming names or whatnot, I just wanted to hear about your confidence on being able to participate in some of these builds that are affiliated with some of your cloud titans. And do you think you'll get a lot of this growth? Is there anything that's changing or evolving that gives you more or less confidence as we end the year here in '25? Jayshree Ullal: Yes, that's a really good question, Ben, and thank you for that thoughtful question. Until now, majority of how we've measured our AI success through our cloud and AI titans has been number of GPUs and how much are they installing and can we verify that the Ethernet network works. The majority of it to date has been scale out. First, I want to reflect that there are 3 big use cases sitting in front of us, scale up, scale out and scale across. Arista's participation to date has largely been in scale-out. So we've got 2 major use cases in addition to augmenting this, and that's what makes the Etherlink portfolio that Ken described so eloquently so beautiful. Now how are these being built? Clearly, they're being driven by large language models, tokens transformers, inference use cases, you name it all. So the influence is clearly coming from these players you named. But the way they are driving the infrastructure, and I can't keep track of the gigawatts myself, it's 10 gigawatts here, 10 there, 30 there. It's adding up to a lot. But I can just tell you, no matter what it is, Arista has been looked at as a very important and relevant participant, especially right now in the scale-out and scale across. We will participate in the scale up. It will take a little longer. Today, it is largely a set of proprietary technologies like NVLink or PCIe, and I think that will happen more in '27. So that to say that as we get now confident about exceeding our $10 billion goal next year, we're looking at our next goal of $15 billion in the next few years. And I think AI will be a very large part of it, and so will be the companies you mentioned. Operator: Your next question comes from the line of Tim Long with Barclays. Timothy Long: Appreciate the question here. Jayshree, maybe if we could just dig a little bit. You mentioned blue box a few times here kind of in that middle portion of the good, better, best. Two-parter. One, could you talk a little bit about kind of the economic model margins or anything like that, that we should expect as blue box maybe becomes a bigger part of the mix over time? And second, can you talk a little bit about where we would expect to see these type of deployments? I'm assuming something like scale up might be, as you described, a little bit more simple and not need the full EOS. But from either a customer or a use case standpoint, where would you expect Arista to be most successful with blue box deployment? Jayshree Ullal: Yes. Thank you, Tim. That's a good -- those are a good set of questions. I think I mentioned at the Analyst Day, we're already quickly seeing success. I'll give you one example, where they were just not getting their white box to work. These are AI mission-critical workloads. And we're seeing a neo-cloud come right in with, in this case, non-NVIDIA GPUs, in fact, where they're looking to deploy Arista with its excellent hardware. And at first, they wanted to do an open NOS, but now they are adopting a hybrid strategy where it's not only an open NOS, but Ken's EOS is coming to shine in its full glory in this use case. So in this case, I think it's a Blue Box to start with, but it's quickly going into a hybrid state of blue and branded EOS box. The economics on that is not too different from our cloud and AI titans, generally speaking, although there will be scenarios, like you rightly mentioned, hasn't yet come to play. But as we go to significant scale-up volume, we expect more margin and economic capability coming together. In other words, the volume of these things will be larger, the pressure on margins will be greater. So -- but we will carefully have a mix of scale up, scale out and scale across to not affect the overall margins, but definitely take our fair share in that. So hopefully, I answered your question on both. Operator: Our next question comes from the line of Meta Marshall with Morgan Stanley. Meta Marshall: Maybe a question for you, Jayshree. Just on -- I know you guys aren't breaking out kind of front end and back end anymore. But just as more inference kind of use cases are getting built out, just what are you seeing in terms of just like how the front-end network upgrades are happening maybe versus where your expectations were a year ago? Jayshree Ullal: Yes. Thank you. I think a year or maybe even 2 years ago, Meta, I may have told you this, we were literally outside looking in at all these back-end networks that were largely being constructed by -- with InfiniBand. We've seen a sea change, particularly this year, where obviously, more and more times, we're being invited to construct their 800-gig, last year was more 400 gig. And I think next year will be a combination of [ 8 and 1.60 ] on the back end. The back end is putting pressure on the front end, which is why it's getting more and more difficult for us to say, okay, what's the back-end number that natively connects to GPUs and what is the front end. But we know of concrete cases in our cloud titans, where not only is it putting pressure on the AI number, but they're having to go and upgrade their cloud infrastructure to deal with it. That part is happening in a small sort of way, but what's happening in a big sort of way is the back and front are coalescing and converging more. And it's really becoming hard to tell, and it's probably [ 6 of 1 and 1/2 dozen ] of the other. Kenneth Duda: I'd just like to point out that we're seeing that Arista, I think, is the only successful vendor outside of China selling both front end and back end. And this is where our engineering alignment is so important because we can offer the customer a consistent solution across their entire infrastructure. I think this is a unique differentiator that will really help us succeed as these networks become more and more mainstream. Operator: Your next question comes from the line of Karl Ackerman with BNP Paribas. Karl Ackerman: How should we think about your market opportunity between disaggregated scheduled fabrics versus nonscheduled fabrics, which appear to be used in the largest AI accelerator clusters at one of your largest customers. I mean you, in fact, happen to be the only networking switch vendor who offers both networking topologies. And I'm curious if other data center operators seek to adopt your DSF architecture given the congestion-free advantages it offers. Jayshree Ullal: Well, I think you hit on it, and Ken hit on it, too, so I'd like him to answer part of the question. But look, we're not religious. We jointly developed the DSF architecture with one of our leading cloud titans, Meta. And we've been selling the nonscheduled fabric for a very long time. So we've never been religious about this. And both are doing very, very well at our cloud titans and specifically the one we co-developed with. Kenneth Duda: That's exactly right. We've had both architectures in massive production scale for, I think, 15 years now. And we'll continue to offer this range of choice to our customers, offering them their choice between the highest value fabric with deep buffers, no hotspots, congestion-free, loss-free or an unscheduled fabric, which is maybe lower cost, but also can be more difficult to operate. And they both run the same software. So it gives the customer a range of options and a consistent operating model. Operator: Your next question comes from the line of Simon Leopold with Raymond James. Simon Leopold: I wanted to come back to the topic around the blue box, which you've talked about quite a bit at the analyst meeting. So I appreciate it's not new. But what I don't quite think I understand is how it may be evolving or changing in that it sounds like there's a broader base of customers that may be employing it and that this is a factor that's in your 2026 margin guidance. Could you elaborate on what you're assuming blue box trends are in 2026? Jayshree Ullal: I think the blue box trends in 2026 will continue to remain with a handful of customers who know how to -- who have the operational skill to deal with it. So think of that as largely our specialty cloud providers or titan. It's not going to be mainstream. So single-digit customers probably, maybe 10, maybe 20, but it's not going to be hundreds, number one, because they really have to have the operational excellence to take our NetDI and our hardware and build upon it and put their open NOS or whatever, right? So -- however, in that scenario, you are right to point out that because we may not have the EOS layer, we will take a lower margin on that. And that's factored into our 2026 guide and mix. And we think the combination of the blue box and the EOS branded box, if I can call it that, will continue to help us thrive with a profitable and high-growing business. Operator: Your next question comes from the line of James Fish with Piper Sandler. James Fish: Just on that topic of blue box shockingly, maybe not just 2026, but what do you see in terms of the mix regarding the adoption curve as to what percentage of the business could actually represent over not just next year, but 3, 5 years from now? And you guys mentioned the convergence of front end and back end. Does that take away from kind of your advantage of where you sit today, though, if that line starts to blur a little bit more and allows competition to enter? Jayshree Ullal: Yes, please go ahead. Kenneth Duda: In terms of the front end and back-end converging, this is purely advantageous to us because the front end requires a massive number of features. It's incredibly mission-critical and supports a whole variety of applications, not just the straightforward if demanding communication patterns of the AI back end. So we see that the -- our ability to tackle both of them effectively is a significant source of strength and a real differentiator and something that's not easy for competitors to replicate. If you look at NVIDIA, for example, the sales volume is small in the front end and Cisco is small in the back end. And so I think we'll see that kind of convergence being beneficial to us. Jayshree Ullal: Yes. Thank you, Ken. And on the blue box, I'm not sure we model 3 to 5 years. But if I had to venture what I think the evolution of the blue box will be, I think it will be more significant in the scale-up use cases where there's a higher dependency on the strength of our hardware and our NetDI capability and a lower requirement for software. So don't know yet what that will be. I think it will be high in units, low in dollars kind of things. So the mix may still be small, but it will actually be incremental since that's not a use case we do today. Operator: Your next question comes from the line of Antoine Chkaiban with New Street Research. Antoine Chkaiban: I'd like to ask about the UEC. So can you maybe tell us about the progress that the consortium is making, whether the different voices are aligned and what milestones investors should be looking out for going forward? Rudolph Araujo: Antoine, can you repeat your question? You weren't coming into clear? Antoine Chkaiban: I'm asking about the Ultra Ethernet consortium. Maybe can you tell us about the program of the consortium. Jayshree Ullal: Yes. Yes. Yes, Antoine, yes. So after 2 years of lots of hard work led by Hugh Holbrook and now Tom Emmons, UEC did publish their first specification, I believe it was 1.0 in June of 2025. Arista's Ethernet portfolio is entirely UEC capable, compatible, and we will continue to add more and more compliance, packet trimming, packet spring, dynamic load balancing. These are all important features that our switches support. And we will augment that with the ESUN specification. As I described, we've been an early pioneer, 4 vendors started this together, including Broadcom, Arista and a couple of our Titan customers. I'm pretty sure it will be 20, 25, 30 over time. And having a standards-based OCP ESUN agreement will allow us to expand UEC into the scale-up configuration as well, leveraging UEC and IEEE specs. So this modular framework for Ethernet for scale-up and scale-out is a thing of beauty, and Arista is in the middle of it. Operator: Your next question comes from the line of George Notter with Wolf Research. George Notter: I think in the monologue, you mentioned neo cloud is an area where you're getting more momentum. I think you guys actually said at the Analyst Day as well. I'm just curious like what are you seeing with that customer set? I guess, from my perspective I've historically kind of thought of that customer as being more focused on the bundle, which isn't necessarily your game, but it sounds like you're maybe talking a bit more positively. I'm just wondering what you're seeing in that space. Jayshree Ullal: Yes. No, George, I think you're right. I think in the beginning, we were looking at them bundling. I can think of 2 examples where we went to and invited to the party because you want my GPU, you've got to get the network from me, so we weren't there. But there are -- leaving the 2 aside, and even I think those 2 might be -- might get open-minded over time, there are many more neo clouds worldwide coming up that are really looking for Arista's help, not only on the product, but on the network design, on the software capability they just don't have the staff and expertise to do everything themselves, and they would rather let us satisfy their network needs. So we are taking down many neo cloud and smaller enterprises, admittedly smaller numbers of GPU clusters as well. But if they start with 1,000 to a few thousand, then we're hopeful they'll grow because the one advantage they seem to all have is colo space and power, which is, as you know, is a very prestigious asset going forward. Operator: Your next question comes from the line of Sebastien Naji with William Blair. Sebastien Cyrus Naji: I'd like to understand a little bit more about the investments you're making in the enterprise go-to-market. It looks like sales and marketing expenses stepped up in the quarter. Where do you think you make the most progress as we go into 2026? Is it geographic expansion? Is it investing more into the channel? Is it just trying to cross-sell more into the existing enterprise customer base? I'd love to get your thoughts there. Jayshree Ullal: Yes. You're hitting on a really important spot because we really have 2 sides to our coin. On one side, the AI and cloud makes us dizzy. But we're just as excited and dizzy about the huge $30 billion TAM, and that's why we're so happy to have Todd here. We were just at an international innovate in London that Ken, Todd and I all got a chance to see. And the excitement and enthusiasm for a relevant high-quality network vendor has never been higher. So indeed, we want to invest there. Todd, do you want to say a few words? Todd Nightingale: Yes. We're excited about the growth here across the board from the enterprise space, but there's 3 real dimensions we're staying really focused on. One is expansion into the campus. The VeloCloud acquisition completes our portfolio there, getting great traction, pushing extremely hard around the world. It's a ton, a ton of white space accounts for us that we haven't gotten. I think you mentioned geographic expansion. That's great. We saw good numbers in Asia this quarter. We've got a lot of opportunity, I think, to accelerate there, and we like the progress. But the last is just reaching new logos, and we're investing in our channel to really deliver that and bring us more opportunities more at bats to find folks and introduce them to Arista for the first time. Jayshree Ullal: That is a cricket analogy. Todd Nightingale: Yes, it was cricket. Jayshree Ullal: Yes, there you go. So Sebastien, we're feeling really good, and it clearly is the other half of our numbers. Operator: Your next question comes from the line of Ryan Koontz with Needham. John Jeffrey Hopson: This is Jeff Hopson on for Ryan Koontz. We've seen a lot of the deals with the hyperscalers or the AI model companies with new data center build-outs, probably not a level since we've seen with the cloud build-out. So I'm just curious, is there a way to think about Arista's opportunity with new network builds versus refreshing or upgrading existing networks? Jayshree Ullal: Yes, that's exactly the way to think about it because in the past, with the cloud, we rarely got to talk about gigawatts and beyond. So much of them were multi-megawatts. So these are newly constructed AI build-outs as opposed to the traditional CPU or storage-driven cloud build-outs. Of course, they will have refresh too. But frankly, they're not getting the attention. All the attention is going to the new build-outs for AI. So that's the right way to look at it. Rudolph Araujo: So we have time for one last question. Operator: That comes from the line of Ben Bollin with Cleveland Research. Benjamin Bollin: Jayshree, you talked a little bit about some of the tightening lead time conditions out there. Curious what you're seeing from these cloud customers around engineering and delivery lead times, how that has evolved? And in particular, just changes you're seeing on your confidence in delivering their needs, whatever, in the next 12, 18 months. That's it. Jayshree Ullal: Ben, as you know, forecast is a very delicate science. I hardly get it right. So I do rely as does Tyson and Ken and the whole team on early preview and early forecast from our large customers without which we couldn't do proper planning. Even before they put in their purchase orders, we've got to have a good idea of what they want. And you're seeing that reflected in Chantelle's purchase commitments. So when it comes to our large and intimate customer engagement, they understand and they've gotten burned by the 2022 supply crisis and are absolutely planning with us. Some of that is true in Todd's areas, too, with the large enterprises because in a large data center, you have to plan ahead. It's not like they miraculously show up. They need power, they need space, and those are 1- or 2-year lead times. Where we have to be more vigilant, and this is something Todd and my campus and the entire manufacturing team is working on, is realize as a campus business, we had one of our best quarters. Congratulations, Todd, Kumar, this quarter on the campus. That planning cycle is a lot shorter. That tends to be days and weeks, not months or half a year or longer, right? So we're working again on this dichotomy in our business and planning as much as we can for the AI, but also planning ahead as much as we can for the enterprise and campus. Would you like to add something, Todd? Todd Nightingale: Yes. I'll just add, we are getting aggressive, as Jayshree said, on to improve our campus lead times and really accelerate that business and help drive that enterprise growth that we feel pretty passionately about. And the only other thing is the investment here and the amount of dollars being put into purchasing, making those purchase commitments is key, and we're looking for improvement in that. Rudolph Araujo: Thanks, Jayshree and Todd. That concludes Arista Networks Third Quarter 2025 Earnings Call. We have posted a presentation that provides additional information on our results, which you can access on the Investors section of our website. Thank you for joining us today and for your interest in Arista. Operator: Thank you for joining. Ladies and gentlemen, this concludes today's call. You may now disconnect.
Sami Taipalus: Good morning, everyone, and welcome to the Sampo Group Third Quarter 2025 Conference Call. My name is Sami Taipalus, and I'm Head of Investor Relations at Sampo. I'm joined on the call by Group CEO, Morten Thorsrud; and Group CFO, Knut-Arne Alsaker. The call will feature a short presentation from Morten followed by Q&A. A recording of the call will later be available on sampo.com. With that, I hand over to Morten. Please go ahead. Morten Thorsrud: Thanks, Sami, and good morning, and warmly welcome to the conference call on Sampo's third quarter results also on my side. As this is my first set of results as CEO, I'm going to spend a little bit of time on our strategy and how it's playing out in our results. But before I go into that, let me first comment briefly on the third quarter as such. Sampo delivered another excellent set of results in the third quarter. By and large, we saw the same positive operating trends as earlier in the year, with strong premium growth, driven by private and SME and solid margins. The claims environment has been favorable with benign weather, large claims below budget and frequency trends in line with expectations. Still, we are continuing to be prudent in setting our loss ratio picks, meaning the benign claims environment has not fully flowed to the bottom line. On our underwriting margin, we saw a roughly 50 basis points of improvement in the underlying Nordic combined ratio, driven by both the cost and risk ratio. U.K. margins, on the other hand, continued to normalize from the elevated levels seen in the prior year, but remained within our target range. All in, year-to-date underwriting profit grew by 17%, driving a 14% increase in operating EPS to EUR 0.38. The result comes on the back of very strong performance through the strategic period so far, leading us to upgrade our operating EPS target from the period 2024 to 2026 to now above 9%. Outside of the operating result, we had a EUR 355 million gain from our stake in NOBA, driven by successful IPO, followed by strong share price performance. We sold only 1/4 of our holdings in the IPO, meaning we retain a 15% stake in NOBA valued at EUR 636 million, at the end of September. The EUR 150 million sales proceeds from the IPO will be returned to shareholders through a share buyback announced today. So that was an overview of the result. Now, let me turn to strategy. I'd like to start with a short comment on where Sampo is as a company today. We are, of course, a pure-play P&C insurer, large and well diversified with EUR 10 billion of premiums, spread across 5 markets of roughly equal portfolio size and then the 3 Baltic countries on top of this. However, what really stands out is that Sampo is at the forefront of the industry in pretty much every area in which it operates. As mainly a direct insurer, without material physical distribution, it has been essential for us to master the art of digital P&C insurance. In the Nordics, we've been at the helm of the industry digitalization, while the acquisition of Hastings in 2020 has catapulted us into a leading position in the U.K. price comparison website market. At the same time, our unparalleled partnership network with the Nordic motor industry, bring wide customer reach and expertise in new car technology. We are a leading -- we are a leader and digital frontrunner also in the Nordic commercial market, and we are the market leader and preferred partner in the Nordic large corporate market. Further, our pan-Nordic PI proposition has recently been strengthened by specialist insurer, Oona. Our Baltic business is a profitable, low-cost direct writer in a market of brokers and agents. Indeed, even Denmark, which used to be our Achilles heel, has been transformed into an attractive opportunity for us now through the acquisition of Topdanmark last year. In conclusion, we are in an enviable position to meet the future of our industry. So where do we go from here? I see the biggest opportunity in leveraging our unique set of operational capabilities to drive organic growth. As shown on this slide, we see structural growth opportunities in areas representing more than half of group's premiums. These should be familiar, is the digital U.K. market, PI in the Nordics, private property, SMEs. Our ambition in these areas are backed by structural trends as well as competitive advantages. For example, in PI, we are seeing increasing demand, combined with our first rate Nordic PI offering, which create opportunities across the customer segments. Similarly, U.K. consumers continue to shop more and more on price comparison websites, for which we have optimized our business. Taking a step back, we see growth opportunities in other parts of our portfolio as well. Right now, I would highlight Nordic motor, where we are in a pole position to benefit from a normalization in new car sales. Now, I talked a lot about growth, so before we go further, let me be completely clear on one thing, we are only interested in growing, of course, at attractive margins. The underwriting discipline that Sampo is known for remains fully intact. Turning to the numbers. Our results show that our strategy has traction. The growth that we've seen in the third quarter is a continuation of several years of strong development, as we can see on the left-hand side on this slide. Partially, this is the result of elevated inflation, particularly in the U.K., but at the same time, our growth is broadly based as we illustrate on the right-hand side. I would even argue that this understates the breadth of our growth momentum. In the third quarter, we achieved growth of 5% or more in all countries in both business area Private and Commercial in the Nordics. Let's take a closer look at operating trends by segment. I'll start with Private Nordic, which delivered a fourth consecutive quarter of record high GDP growth. What's behind this? Well, let's focus at least on 3 things. First, good underwriting through the inflation spike means that we have had -- we have not had to do corrective price actions in the same way as some of our competitors. This supports retention and increasingly allows us to attract new customers. Second, we have strong momentum in our target growth areas. PI, in particular, is strong, which is why we also have raised our guidance and outlook on GDP growth with a now ambition of more than 10% for the strategic period. Third, we are benefiting from higher new car sales with strong motor GDP growth of 13% in the quarter. Put simply, the investments we have made into underwriting, pricing and service are paying off as customer traction. Let me turn to the U.K. The last few quarters have truly illustrated the skills we have in trading on price comparison websites. By actively shifting the mix and leveraging our innovative telematics product, we have sustained attractive policy count growth and solid margins, while market pricing has fallen. This comes on the back of a strong 2024, allowing us to raise our U.K. underwriting profit growth target to now 20% to 25%. Looking ahead, we're always adapting to growth. We are always adapting growth to market conditions. The start of 2025 saw attractive motor market conditions, but as pricing declined, we have responded by slowing our growth rates. At the end of Q3, market pricing has fallen to a level, where we see fewer opportunities for growth, while larger part of the portfolio begins to hit up against target margins. As we are committed to being a disciplined underwriter, this means that we need to see increasing motor market pricing to be able to continue to grow. Like in the Nordics, we have a great track record in delivering solid margins through the cycle, also in the U.K., and we very much intend to keep this. The good news is that due to diversification, we are not too reliant on any one market or strategy for profit growth. Next, I will make a few short comments on Commercial. Our portfolio is dominated by SMEs that tend to act in a similar way to private customers. Here, we can leverage the same skill set that we have in private, particularly as the market is becoming more digital. Outside of SME, a material part of the book is what one could call local specialty business that require specific skills and a strong market presence. This includes our market-leading agriculture business in Denmark and Personal Insurance. Only some 20% of commercial sales are done via brokers, and retention are almost as high as in private. Turning to performance. We continue to deliver solid growth, driven by our target areas, SME, PI and online sales. So we can again see that our strategy has traction. Then, to the Topdanmark integration, Q3 saw a critical step in the Topdanmark integration process in the form of the legal merger of Topdanmark into If. Following this, we have seen a surge in synergies, as we've been able to move to If's Nordic operating model and start also to restructure our reinsurance programs. We have now delivered run rate synergies of EUR 24 million year-to-date, meaning we have reached our target for 2025 one quarter early. You should take this with a pinch of salt, synergy emergence can be a bit lumpy. So we stick to our target of EUR 140 million of ultimate synergies in 2028. Nonetheless, the strong execution to date increases our confidence in being able to achieve this figure. Longer term, the most important thing about the Topdanmark deal is that it transforms our competitive position in Denmark. Since it's still early days, we are not yet fully benefiting from our combined strength in the Danish market, and thus, there is a clear opportunity to improve the performance going forward. Final slide, let me try to tie it all together. We are in a great position as a group. Our results show that we have an organic growth strategy that is working and that we continue to deliver attractive and stable margins. The third quarter performance brings year-to-date underwriting profit growth to 17%, driving a 14% increase in 9-month operating EPS. This follows a 13% operating EPS growth in 2024. On back of these strong results, we have increased our operating EPS target for 2024 to 2026 to above 9%, up from the previous target of about 7%. The increase in the target show that we are going into 2026 with confidence and with ambition. We have great momentum, and we will not let up on pace. That concludes my opening remarks. Back to you, Sami, for Q&A. Sami Taipalus: Thank you, Morten. Operator, we are now ready to begin the question-and-answer session. Operator: [Operator Instructions] The next question comes from David Barma from Bank of America. David Barma: Firstly, on growth in Nordic Private, it was really good again this quarter. Could you give us a bit more color on growth by country? We spent a lot of time on Norway in the last few quarters, but maybe if you could give us some color on the rest of the geographies and the key lines that have been driving the growth in Q3, please? And then secondly, on Storm Amy in October, would you have some early estimates that you can share on the impact for Sampo, please? And then lastly, on the U.K., top line and policy count growth were still pretty strong in the quarter despite average premium being down high single digits. So could you please comment on the profitability of that new business? And how you're seeing market conditions change since the comments you've made on -- regarding Q3, I mean, in the last 6 weeks or so? Morten Thorsrud: Yes. Perfect. I'll try to answer to these 3 questions. First, on growth in Nordic Private, yes, quite a stellar performance, 10% growth overall for Private Nordic, and it's actually quite broad-based. So we have 5% or more in all countries, which actually is the situation, both within Private and Commercial. So both Private and Commercial produced more than 5% growth in all countries. And Norway, of course, still continue to stand out with double-digit growth. But it's good to see that the growth now is broad-based, and also, definitely, the other countries strongly support the growth story. When it comes to Storm Amy, it was a fairly sizable event, mainly impacting Norway in beginning of October. Initial estimate for us is between EUR 30 million and EUR 40 million. So somewhat sizable event, but of course, we're used to seeing these events from time to time, typically in the fall. Top line and policy growth in the U.K., what you will see is that we shifted the growth towards a little bit some other areas. So we had -- continued to have good growth in our telematics offering, also in other areas like bike, van, home. And then we had less growth in, what you could call, the core or classic motor product. So I think we used our excellent capabilities in the U.K. market in driving growth in areas where we believe that we still get attractive margins. And we still then have the same target for our U.K. operation. We talked about 88% to 90% in operating ratio. That is still what we focus on, and that's still what we aim to achieve when we write business, also the new business that we write now. Operator: The next question comes from Ulrik Zürcher of Nordea. Ulrik Zürcher: Yes. I thought the Nordic cost ratio was quite impressive in this quarter. Has anything changed? I think you indicated around 22.5% or something for the full year, which would mean, the cost ratio is a bit back-end loaded into Q4. Has that changed? And also, I'm wondering about given the strong top line momentum and scale economics that you have with -- like what should we look out for, for cost improvement in '26? Morten Thorsrud: Yes. The Nordic cost ratio develops favorably. As you remember, the starting point is 23%, when we include the overhead cost in Topdanmark, that is now included in If's cost base. And the progress is good. So we have a target of 40 basis points reductions for this year, and that's also the target for next year. Of course, growth is supporting this, and also, the synergy realization is supporting this. But again, there is nothing new on the target. We have a 40 basis points target for this year and also next year on cost ratio reduction in the Nordics. Ulrik Zürcher: Okay. Great. And also just a follow-up slightly on Norway. Like, obviously, this sort of exceptional situation can't continue forever. Do you see it continuing into next year? Or are we approaching sort of the peak of the market repricing? Morten Thorsrud: That's hard to comment on really what will happen in the future. Pricing in the Norwegian market has come down a little bit over the last few months. And, of course, it's difficult to expect that repricing will continue on these levels, but I'll revert from speculating when it comes to exactly when. Ulrik Zürcher: And also, a last one, just on the renewal date. I think it was mentioned in your presentation, but -- should we expect like continued strong commercial momentum into the renewal date with both price hikes and new volumes or just more normalized 5%? Morten Thorsrud: I think we continue to expect good development on the commercial book of business, also in the coming quarters. Operator: The next question comes from Vinit Malhotra from Mediobanca. Vinit Malhotra: Hope you can hear me clearly. The 2 questions I would choose today. First is the solvency even when adjusted for a little bit the buyback. I mean, was -- is there anything you would flag in that operating earnings contribution of about 9%, a touch lighter than other quarters. And maybe there's nothing to flag really, but I just thought I'll ask you on the solvency. The other thing I would -- wanted to quickly check is -- when we see your Slide 56, which is very helpful on the new car sales, and I see some big moves, but also Sweden being a little lower than recent, at least last 2 quarters, is there something to flag? Because also Q3 '24 was quite weak on the Swedish number here on the Slide 56. Is there something you would like to flag here? Also because -- are you seeing more competition? We've heard one of your peers talk about opening new contracts with car dealers. There's something you'd like to -- is there something there that is worth noting here for you? Knut Alsaker: Vinit, why don't I start with the solvency, Knut-Arne here, while Morten is trying to find Slide 46 (sic) [ Slide 56 ]. There's really nothing to flag on the solvency in terms of things that worry me. There are some things to be aware of in the 172% that we print. As you referred to, it is including the full buyback, which we announced today, which shaved off 5% on the solvency. Then there are some seasonality in calculating solvency ratios, where that ratio will go up in the beginning of the year because we have a tilt on renewals towards 1/1. So there's a lot of premium reserves, which is beneficial for the solvency calculation, and there's less premium reserves in the third quarter. In the third quarter, that basically shaved off a couple of percentage points of the solvency. But like I said, that will come back. Then, the solvency ratio in the third -- on 30th of September was lower due to higher FX risk related to NOBA. We didn't -- we basically couldn't hedge the Swedish krona exposure before we knew what the share price roughly would land on when it comes to NOBA post-IPO, but that is now being done, and a lot of it has already been done. So that will add back some 3, 4 percentage points on the solvency as well. And then fourthly, I think it is, there is a bit of technicalities related to the legal merger of Topdanmark, it's only 1% or so. That also will come back in the beginning of the year when we have the internal model in place. That is on top of the already announced SCR benefit of EUR 60 million to EUR 90 million, which we talked before. So there are some things that move the solvency ratio a little bit like I now had listed, but nothing that worries me in terms of the stability and solidity of our capital base. Morten Thorsrud: Good. And then to the now famous Slide 56. So that's the overview of new car sales in the Nordics. And as it shows, strong development in the Nordics overall, new car sales increasing with almost 10%, which is, of course, something that supports us, in particular, business area Private, where we see a 13% GDP growth on motor actually in the third quarter. Then the growth is mainly driven by other countries than Sweden. And for us, it's, in particular, important with growth in the Swedish market due to this special car damage warranty construction, where we are clearly the market leader, continue to be the market leader, which means that we have a good upside when the Swedish market continue to bounce back. But it's good to see now at least that the Swedish new car sales is also starting to show positive development. Operator: The next question comes from Nadia Claressa from JPMorgan. Nadia Claressa: Two questions from me, please. The first one is just going back on reserving. I think based on your opening commentary, Morten, it does seem like Q3 was a case of being opportunistically more cautious. So if you could just please confirm that the Q3 PYD is driven purely by this rather than any developments or underlying issues in your book? That would be great. And also, is this something that we should continue to expect going forward if the large loss experience allows for it? Or was this also more extra caution given your first quarter as CEO? So that's the first question. And secondly, on the change in the operating EPS target, just out of curiosity, why are you upgrading this now? I mean, were there any specific drivers that changed your view in the past quarter alone? Or was this more of like a catch-up given the strong year-to-date performance? Morten Thorsrud: Good. I think on the reserving, you're exactly right that this is how we typically operate. We try to be cautious. We would like to have sufficient reserves, and of course, we saw a very benign development in the third quarter with benign development on large claims, benign development in terms of weather claims and also favorable frequency development. So it's part of our DNA to make sure that we have strong reserves, and there is nothing more than that, that explains the reason why we have a little bit less runoff gain in this quarter. Then, to the change in the operating EPS target, while we thought it was natural to do an update in a way almost midterm in the strategy period. Could I have done it after Q2, but then it would have been the previous CEO making predictions for the future. So we thought it was sensible for us to do it now. And it's a good way for me to, of course, also indicate that we have a strong belief in continued strong development, continued strong performance. So that's why we chose to update the operating EPS target at this time. Operator: The next question comes from Vash Gosalia from Goldman Sachs. Vash Gosalia: Just one quick question as most of the other ones have been asked. Just on the new car sales, could you help us understand what are your market shares in each country with new car sales? Why I'm asking this is because your comments sort of makes me believe that you're going to benefit from rising sales in each country. But in the past, you have mentioned that Sweden is an exception where you, I think, have around 40% market share. So just trying to get a sense of where the other countries are, and that will be quite helpful. Morten Thorsrud: Yes, it's correct that we will benefit from increased new car sales in, of course, all markets. We are somewhat stronger on new car transactions than used car transactions. So a growth in this will benefit us in all markets. Don't have sort of exact market shares on the top of my head. But, in Sweden, we have about 70% -- 7-0, 70% market share on the car damage warranty construction. We have partnership with, by far, the most of the large brands in Sweden. And that's why that market is of particular importance. And again, when you buy a car in Sweden, you get a car damage warranty that comes with the car for free, is paid by the importer, and we are the main provider of this type of insurance. Vash Gosalia: So sorry, just to follow up on that. For the other countries, could you at least give us a flavor of how far you are from the 70% mark? I mean, would you say you're roughly close to that? Or materially... Morten Thorsrud: No, no, that's far from. This is quite an exceptional thing. The car damage warranty construction is something that only exists in Sweden. In the other markets, we would be typically having a market share a little bit above our underlying market share in motor in each market. So we will have an overweight towards new cars, but absolutely not in the same magnitude. Operator: The next question comes from Emil Immonen from DNB Carnegie. Emil Immonen: Just a couple more. First, on the operating EPS growth target, the 9%. Could you maybe elaborate on exactly how you think about it? The underlying driving factors as to reach it on average, you don't need that much growth next year, it would seem to me at this point. Morten Thorsrud: Yes. And I think, in many ways, you have to look at the target with the same lens that you typically do when looking at Sampo's targets, it's an above 9% target. It's not 9%, it's above 9%. And I think it's signaling that we expect that we'll continue a strong performance, but it's an above 9% target. Emil Immonen: Okay. And then one more question on NOBA, about how you approach that now as an investment. It was IPO-ed, and it's performing quite well on the stock market, it would seem. Is it still a legacy investment in your view that you want to exit fully? Or what's the thinking on that? Morten Thorsrud: Yes, we've been rather clear on that all the time that our strategy is to exit fully. So we sold down from 20% to 15% in conjunction with the IPO. And we will, of course, in the future, also reduce our holding and eventually exit the NOBA position. Operator: The next question comes from Henry Heathfield from Morningstar. Henry Heathfield: I was just wondering if I could return back to this sort of cost ratio, basically in the Nordics. So if I'm right, you're tracking or you're currently at 22.5%. Based on the 40 bps, you should be at 22.6% if I am right, and you're at EUR 24 million year-to-date, which is the target. So I'm just kind of wondering what's stopping you, either this year or next year, from kind of raising those cost synergy targets? Morten Thorsrud: I think we believe that we have an ambitious target in reducing by 40 basis points for a number of years going forward. That will give us strong support in terms of also underlying profitability. Of course, cost ratio is always jumping a bit up and down quarter-to-quarter. But yes, we are on good track on delivering on the 40 basis points improvement for this year and also have a good outlook then for next year. But I think 40 basis points is substantial and an important contribution, of course, to the Nordic business. So we continue with that as the target. Henry Heathfield: Is there anything I should be thinking about in terms of the fourth quarter in terms of headwinds or you're just being conservative basically and sticking to your targets really? Morten Thorsrud: No. I think, on the fourth quarter, we, of course, have the information about the Storm Amy, which is why we chose not to increase the forecast, but rather stick to the previous announced forecast or outlook. That, of course, is a sizable event, but something that is quite natural for our business, something that we typically see at this time of the year. But that's what's kind of puts a little bit of caution on the fourth quarter. Operator: The next question comes from Youdish Chicooree from Autonomous Research. Youdish Chicooree: This is Youdish from Autonomous Research. So my 2 questions. The first one is on the growth topic in the Nordics. You talked about the solid and broad-based trends in Private and Commercial. But could you also comment on Industrial? And yes, I'm really -- I really want to know whether you think this segment could be a drag on the overall growth next year. That's my first question. And then secondly, on the fixed income running yield, I mean, for the first time, the mark-to-market yield dropped below the running yield. So I was wondering if you could help us understand the implications of this and whether the book yield or the book running yield will drop by roughly 30 basis points in the coming couple of years, basically? Morten Thorsrud: Yes. I'll address the growth in Industrial, and then, Knut-Arne will do the fixed income and running yield. . Industrial is showing a minus 50% growth in gross written premiums in the third quarter. One should bear in mind that it's a small quarter for industrial. There's not that many customers renewing in the third quarter. So in terms of nominal amounts, this is not a huge figure. Year-to-date growth is down by some 4% in industrial. Largely, this is driven by the derisking that we've done in Industrial, where we'd like to see less volatility from our industrial business, and in particular, the property part of it, which should secure our profits going forward. In terms of growth, Industrial is, of course, a little bit different than the other business areas. We will only grow in Industrial when we see that the market opportunity allows for it. And the Industrial, which, of course, is the same also for other business areas, but you have more volatility on the pricing in the Industrial segment. So, therefore, it's natural that the growth in industrial is a little bit more volatile than what you see in Private and Commercial, but it's usually more a stable development. Knut Alsaker: On the fixed income running yield, Youdish, I would say that you're right in your assumption, everything else equal, and then, let's see where rates go in the future. But everything else equal, the running yield would trend downwards to the mark-to-market yield that we indicated end of third quarter. So roughly a 30 basis point drop, but trending downward, not necessarily in 1 quarter, obviously, given the maturity profile that we have. Operator: The next question comes from Vash Gosalia from Goldman Sachs. Vash Gosalia: Just a quick follow-up on your comment on NOBA. So we know you have, I think, 180-day restriction. But just trying to understand, is it fair to assume that you would sell down the entire stake within the current plan, so which is by the end of 2026? Or do you think there's a risk some of it might fall over to 2027 as well? Morten Thorsrud: No, it's correct that we have a 180-day lockup, and we started with ownership of close to 20%. Now, we reduced it down to 15%. It's not likely that we will sell off everything, of course, at once after the lockup period expires. We have to look at the market development, and most likely, this is going to be a more gradual process. But it all depends on market conditions at the time. So it could take some time, but -- and I think that's the natural sort of expectation that we do this gradually in a controlled manner. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Sami Taipalus: All right. Thank you very much. That concludes the call for today. Thank you for listening in.
Operator: Good morning, ladies and gentlemen, and welcome to Siemens Healthineers' Conference Call. As a reminder, this conference is being recorded. Before we begin, I would like to draw your attention to the safe harbor statement on Page 2 of the Siemens Healthineers presentation. This conference call may include forward-looking statements. These statements are based on the company's current expectations and certain assumptions and are, therefore, subject to certain risks and uncertainties. At this time, I would like to turn the call over to your host today, Mr. Marc Koebernick, Head of Investor Relations. Please go ahead, sir. Marc Koebernick: Thank you, operator. Good morning, and welcome to our fourth quarter 2026 earnings -- '25 earnings call. It's great that you are tuning in again today. At 7:00 a.m., we published our Q4 results, and the materials for today's results are all available on the IR section of the Siemens Healthineers website. It is common practice that our CEO, Bernd Montag; and our CFO, Jochen Schmitz, will be presenting to you what you need to know about our Q4 of fiscal '25 and about the outlook 2026. After their presentation, we will have a Q&A session. [Operator Instructions] Additionally, please note that a full transcript and recording of today's call will be made available on our Investor Relations website. Again, thank you for being here. And now I'll turn it over to our CEO, Bernd Montag. Bernhard Montag: Thank you, Marc. Dear analysts and investors, welcome to our year-end earnings call. Many thanks for joining. We closed fiscal year '25 successfully with a solid quarter and achieved our guidance. Growth came in at the upper end of our outlook range, and we grew in all regions, except China. This broad-based growth was fueled by healthy global demand and our leading position in the market reflected in the book-to-bill of 1.14 for the fiscal year '25. We are very satisfied with the performance in terms of adjusted EPS, which is well within the upper half of the outlook range. Excluding tariffs, adjusted EPS would even be above the upper end of our initial outlook provided back in November '24. I'm also very happy about the development of our free cash flow throughout the year, improving our leverage to 2.8x EBITDA. So we have finished this year strongly, as indicated early on, all resulting in a proposed dividend increase to EUR 1. Let me briefly also run through the highlights of our segments. Imaging, Varian and Advanced Therapies taken altogether increased revenue by almost 8%, driven by excellent performance in Imaging with continued margin expansion from scale, excluding tariffs. I'm very proud to see that Varian since the combination has grown every single year by at least high single-digit percentages, the margin expansion in Varian, excluding tariffs reached the upper end of our initial segment assumption of November 24. And Advanced Therapies contributed solid growth by keeping margins stable after a step-up in margin last year. With a successful and diligent implementation of our transformation program in Diagnostics, we have achieved another step change in profitability despite market challenges in China in fiscal year '25. And most importantly, we have prepared the business for future success. With this, I would like to hand over to Jochen. Jochen Schmitz: Yes. Thank you, Bernd. I will start with some color on the strong equipment book-to-bill of 1.12 in Q4. Book-to-bill was again clearly above 1 in Imaging, in Varian and in Advanced Therapies, which underlines the healthy growth trajectory. The businesses in all segments is well on track. Equipment book-to-bill in China continued to be around 1%. Revenue in China also continued at around the EUR 620 million mark in Q4 as in previous quarters. And there is still no sign in our numbers of a sustained market recovery in China. And this has implications also for our outlook. I will comment on China towards the end of my presentation again. Aside from China, we saw revenue growth across the board with excellent growth in the Americas and EMEA continued to grow on high absolute levels. I'm particularly happy with the solid revenue growth for the group in Q4. At this fiscal year, we successfully rebalanced the load over the quarters, taking some burden of Q4. In the first 9 months of fiscal year 2024, we grew by 4.3% and then had a strong finish with 6.5% ex antigen in Q4. This fiscal year, we grew by 6.8% in the first 9 months and finished the year with a solid 3.7% in Q4. On earnings, the year-over-year margin development was mainly impacted by tariffs. Excluding tariffs, the Q4 margin expanded by more than 100 basis points, driven by the strong operational margin expansion ex tariffs in the segments. Earnings per share, including tariffs, were at the prior quarter level. Excluding tariffs, EPS would be around EUR 0.74, i.e., growing by 10% year-over-year. And now let me run through the segment performances, starting with Imaging. In Imaging, our PETNET business and Photon Counting CT stood out as growth drivers again this quarter. Lifting Imaging revenue by 6.5% versus tough comps of 8% in the prior year quarter. Imaging's adjusted EBIT margin in Q4 phased roughly 350 basis points of headwinds in total from tariffs, unfavorable business mix and negative impact from special items. The special items were headwinds versus the excellent margin in the prior year quarter, for example, in the shift of government grants from Q4 to Q3 or a provision increase necessary for service field inspections. And now to our segments focusing on Therapy, Varian and Advanced Therapies. Since '23, Varian has had a cascade of double-digit Q4 in revenue growth. Based on that, Varian grew 1.4% on very, very tough comps. The lumpiness from prior year quarters is reflected in this year's Q4 growth rate with very consistent revenue delivery in absolute terms over the whole fiscal year and over the quarters for fiscal year 2025. Margin development, though, is very good at Varian. Excluding tariff impacts, Varian achieved a strong 21.5% margin, driven mainly by favorable business mix. Advanced Therapies showed solid revenue growth of 3.8% and generated a solid 19.5% margin, excluding tariffs on the strong level of the prior year quarter. And now let's complete the segment run through with Diagnostics. Diagnostics posted flattish year-over-year revenue due to volume-based procurement in China. We have already pointed to this impacting the second half of this fiscal year and that this will carry over into the next fiscal year until the impact is fully annualized in revenues as a new baseline. This expectation materializes as indicated. Nonetheless, the margin expansion in Diagnostics is still very well on track. The margin expansion benefited from a weaker prior year quarter. We said last year that the Q4 margin in fiscal '24, excluding negative effects related to prior year periods was around 7%. Taking this into consideration, the year-over-year margin expansion in Q4 was driven by operational improvements despite a negative effect of roughly 100 basis points from tariffs. Now let's have a look at the revenue margin performance of the group in Q4. With Q4, we grew year-over-year revenues ex foreign exchange each quarter for the third consecutive year, a strong testament to our revenue growth performance. Excluding tariff, this track record also holds for group margin expansion. Year-over-year and sequential margin expansion for the third consecutive year. A strong proof point that operationally, we consistently turned our strong revenue growth into operational earnings growth. And this brings me to the outlook for fiscal year 2026. We expect our growth trajectory to continue this year. In fiscal year 2026, we expect comparable revenue growth of 5% to 6%. As in the previous year, we have decided to be prudent in terms of assessing growth opportunities in China. We have been saying throughout 2025 that we need to see a sustained recovery to become more optimistic. We have not seen this so far and have hence decided again to assume flattish revenue in China for fiscal year 2026. Beyond this, we expect our good operational earnings performance to continue. However, in fiscal year 2026, we expect earnings growth to be negatively offset by the current macro challenges, particularly a strong euro and the tariffs, including these macro headwinds, we expect adjusted earnings per share to be between EUR 2.20 and EUR 2.40. I will break down the macro headwinds and the operational improvements in more detail later. But first, let's have a look at what the key assumptions for the segments and the other reconciling items are. On the top line, we expect Imaging, Varian and Advanced Therapies to continue on their growth trajectories. We expect Imaging to continue its strong trajectory after 8% growth in 2025 with very decent mid-single-digit growth in 2026. We expect also Varian to continue its growth trajectory in the high single digits as well as Advanced Therapies within mid-single digits. Diagnostics, we expect to be flattish due to the annualizing of volume-based procurement in 2026. On margins, you can obviously see the headwinds from foreign exchange and tariffs in the assumptions for the segments. However, when you exclude the headwinds from foreign exchange and tariffs, we see margin expansion in every segment. For Imaging, we assume that due to FX and tariff headwinds, margins will slightly decline. Those effects are even more pronounced in Advanced Therapies because of its higher exposure to foreign exchange and tariffs. We assume Varian and Diagnostics to face less tariff headwinds and no material headwinds from foreign exchange due to the different value-add structure. For Varian, we assume that the underlying margin expansion compensates for the tariff headwinds, broadly resulting in a year-over-year flat margin development. And for Diagnostics, we assume that the underlying margin expansion overcompensates for tariff headwinds leading to a minor margin expansion. Below the line, taking the guidance midpoint for financial income and tax, we assume year-over-year slight headwind in financial income net. This is mainly due to refinancing at higher rates and the lack of one-off gains from fair value accounting of smaller venture-type investments from a slightly normalized tax rate. It feels like many moving parts. But if we take it to the group level, it is not as complex as it seems. Hence, you find on the next slide, the main moving parts for EPS development from 2025 to 2026. I will talk you through the key effects from left to right. In foreign exchange, we assume a headwind of around EUR 0.15 year-over-year, primarily driven by the U.S. dollar depreciating versus the euro and many other currencies also depreciating against the strong euro, leading to a significant foreign exchange headwind. For example, in Q4, the difference between reported and comparable revenue growth was around 4 percentage points with the euro being around 6% stronger than in the prior year quarter compared to the U.S. dollar. We expect the foreign exchange impact on translation to continue with even more than 4 percentage point headwinds on nominal growth rates in our fiscal Q1 and Q2, where the weaker U.S. dollar of today compares to a period of a stronger U.S. dollar in the prior year period. And we expect a similar pattern in many other currencies compared to the euro. From annualizing tariffs in fiscal year 2026, we expect around another EUR 0.15 of year-over-year headwinds. We saw around EUR 200 million impact in fiscal year 2025 and expect around EUR 400 million in 2026. Fiscal year 2025 includes the first mitigation measures like early shipment and lower tariff rates before the 15% deal with the EU, which have paid off by now. Fiscal year 2026 includes mitigation measures like optimized sourcing, selected pricing measures. However, it does not include further mitigation from better pricing or potential shifting of value add. And as outlined above, there are EUR 0.03 year-over-year headwinds in financial income in 2025 from one-off gains from fair value accounting of smaller venture-type items, which cannot be expected for fiscal year '26. Excluding these 3 headwinds, we expect an underlying EPS growth of around 10% net driven by the operational improvements in the segment. We expect fiscal year 2026 to be the year that will be most affected by tariffs. Assuming a tariff environment like today's persisting, we expect the impacts from tariffs to become less each year based on our mitigation efforts. We expect tariffs to be fully mitigate it over the medium term. The 3 main mitigation levers are: market adaptive pricing, tight cost control and if this is not sufficient, shifting value add with our global manufacturing setup and our strong footprint in the United States and other places in the world, we have all the means to shift value add if necessary. We are evaluating the multiple options we have, and we will pull the trigger when these -- when there is planning certainty and if it makes obviously economic sense. Before I close, let me share our latest view on Q1. We expect revenue growth in Q1 to be below our outlook range of 5% to 6%, we expect Imaging and wearing growth in Q1 to be roughly around the assumptions for fiscal year 2026. That means mid-single digits and high single digit, respectively. However, we expect Diagnostics to be slightly negative due to the volume-based procurement impacts. Also, we expect Advanced Therapies to have a slightly softer start to the next fiscal year due to tariffs and foreign exchange, we expect margins in Q1 to be below the prior year quarter. And with this, back to you, Bernd. Bernhard Montag: Thanks, Jochen. This Q4 not only marked the end of our fiscal year but also concluded the so-called new ambition phase of our strategy. We launched new ambition after the closing of the transformative Varian acquisition at our last Capital Market Day in November 21. After that, the environment became much tougher. There were unexpected macro challenges like the extended duration of the pandemic, the inflation shock, the supply chain crisis, the anticorruption campaign in China and geopolitical tensions. Last but not least, higher tariffs came on top. Nonetheless, we have delivered around 6% revenue growth and double-digit EPS growth per year since '22 and what's maybe even more important than looking to the future. We have widened our innovation lead with breakthrough technologies like Photon Counting CT, our low helium platform in MR and HyperSight, RapidArc and perfect kinetics in Varian. We have grown our clinical relevance in cancer by combining imaging and therapy under one roof and being at the forefront of theranostics. We have increased our relevant in vascular interventions by developing new partnerships with device and robotic companies, and we are becoming more relevant in the nascent field of diagnosing and treating Alzheimer's. We have grown our C-level relevance with more than 200 value partnerships to date, a testament to this unique strength and new way of doing business and creating recurring revenues. We have further strengthened our leadership in AI with over 110 AI-supported products and techniques like Deep Resolve and MRI, which powered more than 30 million scans since its introduction in '22. Lastly, but no less, importantly, let me highlight the great turnaround our Diagnostics team has achieved from negative margins in the year of peak inflation and supply chain disruptions, they have taken Diagnostics to high single-digit margins, and they will not stop there. So what's next for Siemens Healthineers? As you are all aware, we have our Capital Markets Day coming up, and we have received a lot of interest in the event. We will present the next phase of our strategy and update you on our financial framework and the midterm financial outlook. All our business segments will be presenting their growth strategy, innovation road maps and plans on how to further improve profitability. And at a special highlight, we will give you a deeper look into our AI machine room. So coming to London, on the 17th should be worth your while, and I look forward to seeing you there in person. Marc Koebernick: So I think it's me now. Thanks, Bernd. Let's go to the Q&A. [Operator Instructions] And we have the first question or caller on the line, this would be Veronika Dubajova from Citi. Veronika Dubajova: I will keep it to one, maybe with the hope that I can come back again. But just looking at the guidance for fiscal '26. I was hoping you could both talk to sort of what gets you to the top end versus the low end, a slightly wider range than usual. It's obviously contemplating a lot of moving parts. So I kind of love to understand how you're thinking about it. And maybe at this point in time, I know it's very early, but where within the range do you feel most comfortable? That's my question. Jochen Schmitz: Veronika, it's always -- it's a great question. That's when you start off the year and say, okay, what bring you to the upper and the lower end. Obviously, conceptually, it has something to do with top line obviously being more at the upper end of the range in top line helps you to get further up in bottom line. I think that is more than logical. Then you also know that we have a certain spread of profitability levels in the segments, which can also make a difference depending on, I would say, how the growth trajectories will play out precisely amongst the segments. And I think what I'm saying here is not a surprise, yes, if Imaging is stronger relative to what we initially thought. For example, you see that moving this will give, I would say, a positive segment mix into profitability as an example. We have not built in, as I said, we have not built in any aggressive assumptions on China, flat China. If that assumption is -- would be too conservative is a thing -- is a topic. Otherwise, I think these are the, I would say, the main moving parts, I would say. Maybe one last aspect you didn't about it, but I still want to say it. Where we were very, very happy with what we saw on Varian. On the margin side, we are seeing that the 20%, we were always guiding for over the midterm is really inside. And you can see what large revenue quarter despite the fact that the growth rate was not super large can make of a difference. So with this, back to you, Marc. Marc Koebernick: Good. So we move on to Hassan from Barclays. Hassan Al-Wakeel: If you could talk a bit about the contribution of Photon Counting CT to, a, the Imaging revenue growth in the quarter, and b, the CT order book. I appreciate it's relatively early in your lower-priced launches. But any color around existing customers versus competitor replacements on the order front would be very helpful. Jochen Schmitz: Yes. First of all, when we highlight segments or businesses or products in our earnings call for Imaging, then they obviously grow faster than the average. That is the reason how we do this, yes? That means Molecular Imaging and Photon Counting CT were highlighted. And because they grew faster than the average and the average was already strong with 6.5%. On Photon Counting, we see, in general, an ongoing strong interest in the market for everything around this topic. I think when you just hear and maybe that's even more important, if you hear the buzz in the industry about this, every serious competitor is talking about this technology and that they want to have it desperately. But we are leading the camp by far. We have, as you know, the 3 product lines meanwhile out there. We have very, very good price points in place. Meanwhile, for Photon Counting CT, and we are very, very happy with what we see with regard to the demand patterns. And the demand patterns because we talk here revenue, the demand patterns are not only order intake and backlog development, they also transfer well into revenue, and that is a very, very promising and very, very happy about this. Bernhard Montag: For many customers, who so far have not been in our camps, I would say many, there are not too many, but because I think, especially in the high end, we have also a very high market share. I mean in general, it is for many of those who so far have not been in the camp, the reason to switch to our camp. And this can be hospital chains. This can be academic medical centers, not only because they look at it as a CT scanner, but as a means to offer new kinds of care, the preventive applications of early detection of coronary artery disease is something the frontrunners develop at scale. And there simply is only one company, you can do that with here. Marc Koebernick: So maybe also to add to that. We don't want to steal Andre's show totally in 1.5 weeks. When we have the CMD, so should maybe look forward to some more transparency on that topic then. Going on to the next call online, that will be David Adlington. David Adlington: Yes, just a question on China, please. GE's decision to sell their business there feels like a bit of a watershed moment. I just wondered how confident you were on the outlook for China isn't permanently diminished? And if we don't get a recovery there, are you still committed? I suppose following on from that, do you get an opportunity to pick up share following GE's exit? Bernhard Montag: So first of all, David, I mean, I'm not sure whether there is a GE exit. I mean I didn't follow their earnings call, but from my understanding, they were very positive about China. But I'm not invested into them. So you need to ask experts. So I take the question more as how do we look at the Chinese market, yes? So I mean, as Jochen said, there's basically 2 aspects here. On the one hand, we see in the next year, no reason to go into the year with a more bullish assumption of short-term growth in China. While we are confident that the market will return to mid- to high single-digit growth rates, it is an attractive market for us. It is and remains an attractive market for us. It is a market in which we were able to defend our market share. So when I say, defend our market share, while in the rest of the World, we have a very strong track record of market share increases. In China, we are on the same level as a couple of years ago, which is a success since basically, we are the only multinational company, which with the scale, with the local presence we have built with the 8,000 employees we have in the country, which is best positioned to withstand the challenges of a bit of uphill battles now and then from a regulatory and government environment point of view, but also when it comes to the rising strength of local competitors, yes. So that's basically the story. And I believe in when looking at different angle, so you didn't ask this way, but looking at the 6%, close to 6% growth we had in the last fiscal year and a similar guidance for the current year. It is a message here that we can achieve this without China contributing, which also means here that China is important from a mix point of view, but on the other hand, it's also just whatever, "12% to 15%" of revenue. Marc Koebernick: And then we're moving on to Julien Ouaddour from Bank of America. Julien Ouaddour: So my question is about the Imaging guidance. If I remember correctly, I think last year, you guided already for mid-single-digit growth for Imaging, you achieved standing 8%. Would it be fair that mid-single-digit growth this year is also kind of prudence? Can you confirm the drivers such as PETNET Photon Counting will continue to drive some growth. And if we can have any color on the specific growth you expect from CT and Molecular Imaging this year? I mean are we talking high single digit, double digit for these 2 businesses, that would be helpful. Jochen Schmitz: Julien, first of all, we are very happy with what we see in Imaging with 8.5% growth for the full fiscal year. I think that is a stellar number. And therefore you celebrate this, but this forms the basis for next year. That's always, I would say the flip side. On the other hand, when we look at order backlog and everything we achieved from an order intake order, I would say, secular growth drivers we have in this business, and you mentioned most of them, and maybe you did not talk touch about MRI, which is also a very, very strong foothold for us and with dry magnet and everything we will do there. I think we will see also this as a very, very old healthy growth driver in that business. Molecular Imaging with PETNET Photon Counting CT, obviously, will remain growth drivers also for this year. And I'm not sure if you listened -- I mean most of you listened very carefully to what I said, but I even had a word in front of mid-single digits which was decent mid-single digit. And yes, we are very happy what we see and decent mid-single-digit means that we are very, very confident about this. Julien Ouaddour: And so like does it mean that Photon Counting and Molecular Imaging, I mean, are growing double digit, I mean, 2025, and do you expect it to continue into 2026 just for these 2 businesses? Jochen Schmitz: Yes, I would say, Julien as Marc nicely said, we should keep some thunder left for Andre for the week -- in 12 days, but when you grow 8.5% and we highlight Molecular Imaging and Photon Counting, I think the math is relatively easy to be done. Marc Koebernick: So going to the next caller on the line, that would be Oliver Reinberg from Kepler. Oliver Reinberg: It would be on top line, could you just unpack a bit the kind of 5% to 6% assumption for next year? I mean I understand the kind of base effect you just talked about and obviously, the kind of China assumption, but can you just provide some kind of color what do you assume on pricing and in particular also in Americas where we've seen very strong growth if there's a kind of a tough comp for next year? And if I may bid on that, it sounded that on pricing, you're not willing to do more to offset the kind of tariffs. Can you just provide a bit of flavor why that is? And how quickly you expect this kind of headwind to offset? Jochen Schmitz: Maybe I'll start with the latter one. I think we -- I think we are -- since tariffs are a topic relatively clear about the, I would say, the levers how we want to offset tariffs in the midterm. And pricing and smart pricing was always the topic in this regard. But you might recall from the inflation times that there is obviously a time lag to revenue with pricing. And we also have to have this in mind, yes. Therefore, we will look at pricing and pricing -- our pricing excellence, our pricing, sometimes we have maybe a bit more than excellent. We have also certain pricing power will be a driver to compensate the tariff impact over the midterm, yes? Very clear message. But -- and I think that's also an important topic, but we will do this, as I said, in a smart way because we are very, very mindful about our market share gaining strategies, which brought us where we are today in Imaging, where we are today in Varian, where we are today in Advanced Therapies. Therefore, we need to strike that balance. But I think we have a clear plan in and it's also built in to our EUR 400 million mitigation -- net effect from tariffs this year. And with regard to, I would say, to the 5% to 6% growth for Siemens Healthineers, when you look at segments, I think the picture is relatively similar to what we have painted, what we have seen last year. And from a market standpoint, I'm not sure, Bernd, if you want to say something to the market or should I do? Whatever. Okay. I think we expect to see when you look at backlog development, we expect to see, despite having tougher comps in the United States or North American market, we expect to see strong contribution from the North American market, which is very healthy. Europe is growing again, which I think is good. And we also see, I would say, very, very good development in APJ and as we said, China, we have derisked. We have not built in growth tailwind from China into our numbers. Bernhard Montag: Yes. And maybe some more comment on the healthy development of the -- continued healthy development of the U.S. market. I mean we see that the technologies we provide are at the core of dealing with of treating and detecting early many, many, many diseases. So I mean, you can look at it in 2 ways when double clicking on Imaging, on the one hand, you can look at what's the growth of radiology and radiology is a profit center for institutions. When you look at -- from a hospital point of view. But on the other way to look at it is whether it is early detection of Alzheimer's, whether it is early detection of coronary artery disease with Photon Counting CT, whether it is planning minimally invasive surgeries, a lot of new treatment schemes require imaging. So it's a business in itself "for our customers", but it is in addition, center piece for delivering modern and state-of-the-art care. In addition, people continue to build out their ambulatory facilities, which means that there is also the need for additional sites of care, which triggers another growth, especially on the -- in MRI, CT sometimes also Molecular Imaging and also when it comes to the interventional market in AT. Marc Koebernick: Maybe just obviously, also have in mind that the PETNET business is largely still a U.S. business, and that's been growing very, very strongly. So that also contributes to the strong U.S. growth. Maybe going on to Falko from Deutsche Bank now. Falko Friedrichs: My one question is in case the Siemens Group announces an exit from their stake in your company at their event next week, could you remind us of the potential financial implications for your company, if there are any? I'm thinking of the financing rates, for instance. Jochen Schmitz: Falko, I think I said that already several times, when we look at our financing structure, it is at arm's length per se. When I look at if and when we need to refinance ourselves, I would expect us to be in a very, very healthy rating environment. And I don't expect significant impacts on our interest expenses just from the fact that Siemens may decide on their stake or to deconsolidate their stake in Siemens Healthineers. I think what we need to be mindful about is that we financed a lot of the Varian deal at a point in time when interest rates were low -- very low. And as you might know, we have to refinance any way independent of any stake development, a lot of money in the next calendar year, calendar year '26 more than EUR 3 billion, for example. And therefore, I think we will have, to a certain extent, if the interest rate environment stays as it is any way to deal with higher interest expenses, but not due to the fact that Siemens deconsolidates potentially. This is a very, very minor impact. Marc Koebernick: Moving on to Julien Dormois from Jefferies. Julien Dormois: It's actually relates to Varian. So obviously, Q4 was a bit weakish and you explained that because of the comps, and we see that probably the phasing effect considering the strong guidance for '26. But my question relates more to what you have done at Varian over the past couple of years on reducing the lumpiness on the margin side. Do you believe there is room also to flatten a little bit the growth curve at Varian in the future? Or is it just the nature of the business to see that sort of quarterly lumpiness in the numbers of Varian? Bernhard Montag: Jochen gave me a signal that I should answer that is difficult for me. No, no. no. So I mean, one topic is a little bit in the nature of the business. And it's maybe sometimes also fair to compare the, let's say, volatility of the AT business and the volatility of the Varian business. I mean, because what the 2 businesses have in common is that there is a limited number of units contributing to the equipment revenue per quarter. Yes, I mean, to give you a feeling roughly in both businesses. It's about whatever, delivering 200 units, yes, per quarter, yes. I hope it's not too detailed number here, but imagine something like this, yes. I mean AT is the smaller business simply because the average price of our cath lab is maybe just half of the average price of linac. So -- and that simply this lack of the law of big numbers, contributes to -- is one reason for the higher volatility in the Varian and AT growth rates compared to Imaging, where we just have multiple businesses contributing CT, MR, MI, X-ray and so on and so on, where simply these effects smooth out more than in Varian. And I mean -- and what we got wrong also in the more positive outlook which we gave in the Q3 numbers when we were hinting towards, let's say, a bit of a normal or to be expected growth rate in Varian for Q4, was the timing of a large deal, which starts to turn into revenue. Which is now pushed out by a quarter or will happen in the next quarter or will start in the next quarter. So you see these effects much more in Varian. We want to, of course, avoid this. Over time, nobody is happy when there are surprises like this, or volatilities like this. We still have the opportunity to further streamline the production. We are switching step-by-step to a build-to-order philosophy. And I think another aspect which really helps over time is that the recurring revenue on Varian is very high. So that also step-by-step, the importance of 5 linacs more or less, doesn't show so much in the overall growth rate. On the other hand, I really -- I mean talking about Varian, I want to highlight still, I mean, while the top line was a bit below what we kind of guided for in the last quarter. Profitability was really an exclamation mark. I mean, as Jochen said, and I think it's worthwhile to repeat that. Marc Koebernick: So moving on to Hugo from Exane. Hugo Solvet: A quick one on China, please. I understand that the guide is cautious and Bernd, you commented on the fact that for the long term, it will be an important growth driver nonetheless. Curious, what are you seeing exactly on the ground there? Are you seeing some green shoots tenders slowly but surely moving in the right direction? That would be helpful. Bernhard Montag: I mean not -- what we don't see is the very clear green shoot. And as you know, we have clearly said that we don't want to base our assumptions on speculations meaning at some point in time, it has to go back here because I think there was a bit of a learning as you know, and I'm -- this is meant to be expressing our learning curve or you can also call it self critical, 2 years ago when we had to go in -- exactly 2 years ago when we had to give the guidance for the fiscal year '24. When that was a month or so after the anticorruption campaign started. We were -- basically our assumption was based on the -- let's say, our guidance was based on the assumption that something like the effect of the anticorruption campaign should take 6 months, 2 quarters and then things will go back to what we are used to. But that was an unsubstantiated assumption in which we basically were betting on what authorities are doing and how purchasing schemes will be regulated in China. We don't want to do this again, yes, because I mean, in this fiscal -- the year '24 was, on the one hand, a good year for Siemens Healthineers because we could compensate that this assumption wasn't true by stronger business in the rest of the world, but it somehow was a cloud over the share price for quite a while in that year. So from that point of view, we have clearly said we don't -- we only changed the assumption on China when we really, really see signs of a significant new momentum in the market. And this is not what we see. Otherwise, we would have not built that guidance or that assumption into the guidance. Marc Koebernick: Moving on to the next caller online. That will be Oli from ODDO. Oliver Metzger: One question on Diagnostics. So there is the China NVP headwind which should be, let's say, phase out somewhere in -- after Q1, but can you also make a comment about what do you see from an underlying performance for Diagnostic, if you exclude the headwind for Q4, but also what do you expect more from regional perspective for next year? Jochen Schmitz: Oli, I think, unfortunately, I would say your assumption on this is over with Q1 is too optimistic. Why is it -- I think we will see impact from this throughout the year because there is -- this is an ongoing process, and they go into -- they drive this volume-based procurement through the -- all the provinces and all the panels, which could be affected by this. And this is an ongoing process. I think when we started to seeing that this will happen, I think we talked about 1.5 years of impact at least, I think we said we expect to see this in the second half of fiscal year 2025, more pronounced and throughout 2026. And that's what we expect, and that's why we also guided for only flat growth development. And when you look at the industry, I think we are obviously very much in line with what you see from others, even maybe slightly less impacted because our business in China is a bit smaller than some of the other main players in the industry. When we look at underlying other, I would say, drivers of our top line development. I think it's definitely still the transformation, the transformation in, in what we call core lab solutions, which is the biggest portion of the business, where we drive, so to say, the installed base towards Atellica only. I think we are very, very satisfied with what we see on Atellica. The transformation is working well, but also as explained in the past, by switching and/or shifting the installed base towards Atellica and also winning new deals with Atellica. We also look carefully into the existing installed base, and there are accounts, which do not cater I would say, perfectly for what we want to accomplish with Atellica, and therefore, we let them deliberately go. Therefore, there is also, I would say, a structural, I would say, clean up of revenue built into that translation. From a market standpoint, I think we see, I would say, generally speaking, we see healthy markets in Europe, in North America, but also in APJ. I think the only exception is China. Marc Koebernick: So we are slowly but surely coming to the top of the hour. 2 callers on the line left, Sam England from Berenberg. Samuel England: Just around tariff mitigations post 2026. So if you look at the bridge you provided, can you give us a bit of a sense for what proportion of the mitigations on that from pricing cost control, which are presumably things that are easier for you to do versus shifting manufacturing around and around manufacturing. How are you thinking about the decision to move manufacturing now? What would need to happen you to take that step and what sort of time scale could you deliver manufacturing changes? Jochen Schmitz: Let me first say, as always said, we report out a net number. Because from our standpoint, that is the most meaningful way of looking at it. Otherwise, you inflate numbers and then you inflate -- potentially you inflate mitigation measures and then you discuss things and it doesn't help. So what comes from what? I think, when I would say the vast majority for mitigation comes also today from, I would say, smart pricing, but this will increase over time. As I mentioned beforehand, pricing takes a certain time before it finds its way into the P&L. What do I mean with this? You need to negotiate a deal, then you hopefully book a deal, and then you have a time lag between booking and rev rec. And that is, on average, for example, in Imaging, between 6 and 9 months, just the time line between booking and billing just to give you a flavor. So therefore, it takes time. And as I said, we are not following here a brutal pricing way. We follow a smart pricing way. We look where our pockets of strength are, where pricing excellence plays a role, where pricing power plays a role. And we have, so to say, as a boundary condition for how we think about pricing is our market share gaining strategy. I said that several times already. Therefore, we are very, very confident that smart pricing or market adaptive pricing will be one of the main levers to mitigate tariffs, but it will not only -- be the only one. Tight cost control, I think we are currently and we will announce that, and we talk a lot about this about our new strategic phase in 12 days from now. When you start a new phase, you also look into your own house, you look to clean the desk, yes. And we look for a period of -- also higher productivity than normal. You know that our normal productivity is around 5 percentage points of total cost, and we have a clear guidance in the team to go beyond that. Also here for the next 2 to 3 years, yes, and we expect here, I would say, the major things kicking in more in 2027 and 2028 as we have to initiate those measures and then implement. That's why we also guided for a constantly lower impact from tariffs over the years under the current assumptions for tariffs. And that maybe leads perfectly over to your other question, value-add structure shifts. There are -- there is still uncertainty out there on tariffs. We see that on a daily basis, to be honest. And making shifts is something we are happy to do, but we also need to be careful that we don't rush anything in this regard, because these are major decisions. And we also need to be mindful where to shift to. I mean it's because you can also think about United States sounds obvious. It's also a very attractive position to a certain extent. On the other hand, you could also think about different shifts and you think about other low-cost environments, which then maybe have a different driver behind. It's not that it doesn't directly relate or reduce the tariff, but it offers you other advantages, which fall more onto this under the topic of tight cost control and so on. So therefore, we are looking carefully in it, and we try to find a solution which is sustainable, which is long term, because value-add shift is not a short-term measure and has -- should have a long-term impact. Marc Koebernick: Moving on to the last caller for today. Closing off with Richard from Goldman Sachs. Richard Felton: Great. So just coming back to market share trends in China. Bernd, you mentioned that you've been successful at defending your share in recent years. But I'd be interested in your thoughts sort of on the forward, if anything is changing in the competitive dynamics as the market comes back post anticorruption? I suppose sort of the context of my question is the results of some of the local Chinese competitors. It looks like their businesses have recovered ahead of the multinationals, and there's been some interesting product launches. So any comments on how you see those share trends evolving going forward would be very helpful. Bernhard Montag: Yes. Thank you. I mean when it comes to market share development, I mean, just to reiterate what I said, I mean, we said, we were able to keep our market share to defend it on the high level and also to maintain our #1 position in the market. Compared to the rest of the world, yes, the gap to others is not as high and compared to the rest of the world, we have not been gaining market share but defending market share in a market with a different set of competitors. Now what is changing in the Chinese market is, on the one hand, the effects of the anticorruption campaign, but then I mean we talked about that in Diagnostics, which is not your question here, but we also see it in Diagnostics changes to this volume-based procurement. We see more and more experiments and I choose the word consciously to go with provincial central biddings for health care equipment. As an experiment, this is also for the provinces, a learning curve to go through here because there have been provinces in which complete no name companies have won some of the tenders and it was simply based on price. And now the question is, can they deliver at all? What's the service and so on and so on. So there is a learning curve also an adaptation of what this means from a transformation of the business in this part of the market, which so far have been very much governed by using so-called business partners. So -- but overall, from a competitive dynamic, what we see is -- and this is high-level statement. We defend our market share. The smaller multinationals are losing, yes. And with this, I mean, companies like Philips, like Canon, I have the impression that GE is also a bit weakening while local competitors are gaining share from this. And I think that one topic is here that is really, really important, and we benefit from having scale in China, as I said in the question before. We have 8,000 employees in China. We are very locally present. We have 1,000 engineers. We have -- we manufacture the vast majority of our products and for the local demand locally, and that is important to have. And if you are subscale in the market, it's tricky to maintain a position, but I believe we are very well positioned for the future. Marc Koebernick: So that basically brings us to the end of today's call. Thanks for all your questions. Thanks for dialing in. And obviously, looking forward very much to seeing all you in person at our Capital Markets Day on the 17th of November in London. So bye-bye, stay safe until then. Operator: That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. A recording of this conference call will be available on the Investor Relations section of the Siemens Healthineers website.
Operator: Ladies and gentlemen, good morning, and welcome to the analyst conference call on the Third Quarter 2025 Results of Ahold Delhaize. Please note this call is being webcast and recorded. [Operator Instructions] During this call, Ahold Delhaize anticipates making projections and forward-looking statements. All statements other than statements of historical facts may be forward-looking statements. Forward-looking statements are subject to risks, uncertainties and other factors that are difficult to predict and that may cause our actual results to differ materially from future results expressed or implied by such forward-looking statements. Therefore, you should not place undue reliance on any of these forward-looking statements. The introduction will be followed by a Q&A session. Any views expressed by those asking questions are not necessarily the views of Ahold Delhaize. At this time, I would like to hand the call over to JP O'Meara, Senior Vice President, Head of Investor Relations. Please go ahead, JP. John-Paul O'Meara: Thank you very much, Sharon, and I'm delighted to welcome you all today to our Q3 2025 results from sunny Zaandam. On today's call are Frans Muller, our President and CEO; and Jolanda Poots-Bijl, our CFO. After a brief presentation, we will open the call for questions. In case you haven't seen it, the earnings release and the accompanying presentation slides can be accessed through the Investors section of our website at aholddelhaize.com, which also provides extra disclosures and details for your convenience. [Operator Instructions] To ensure ease of speaking, all growth rates mentioned in today's prepared remarks will be at constant exchange rates unless otherwise stated. And with that, over to you, Frans. Frans Muller: Thank you, JP, and good morning to all of you indeed from a sunny Zaandam. As you will have seen in our interim release this morning, our 2025 year-to-date performance is a great proof of the potential and value creation we are excited about with our Growing Together strategy. From a macro, social and political perspective, there's a lot going on in the world, the effects of which are felt in our stores every day in real time. With rising inflation, stagnating economic growth and changes in government policy, which, in some cases, are becoming more frequent and more unpredictable, the business and customer climate is for sure, volatile. Whether it is the current delay to the distribution of SNAP benefits and rising health and medical costs in the U.S., timing of the food stamp payments schedule in Romania, the recent limitations on the grocery trade market implemented by the government in Serbia, this creates uncertainty. Tough choices and headwinds for consumers and businesses alike. At the same time, the industry is evolving, be it omnichannel, data, AI and mechanization. Those companies, and I would include Ahold Delhaize in that group, who are at the forefront of these changes, who are well prepared, well invested and can leverage the experience and creativity of their people, those companies will outperform. Therefore, to ensure we continue to sell successfully in this dynamic, I believe 3 things are essential to keep the rather steady: flexibility, resilience and culture. These qualities become truly powerful when they are aligned behind a focused and well-articulated plan, which is exactly what our Growing Together strategy provides. It connects how we serve customers, run our operations, invest in our people and deliver strong financial performance, all while advancing our commitment to health, sustainability and responsible growth. So let me share a few examples how this tangibly shows up across our business in how we innovate for customers, build trust through transparency and act responsibility -- responsibly in our communities. The flexibility comes to life through our work in our own brands, where we adapt quickly to evolving customer needs and local market dynamics. And by harmonizing assortments, accelerating innovation and aligning product development across our regions, our teams can respond faster and with greater position to what customers want compared to competition. This agility helps us deliver differentiated value and quality while simplifying operations and improving profitability. All of our brands have seen year-over-year growth in own brand penetration. And in both regions, we are seeing own brand sales growth outpaced the rest of the store in both dollars or euros or units. But this is not the time to sit back and relax. And therefore, we are stepping up our own brand game and have undertaken a comprehensive cross-functional and cross-regional view to identify further opportunities. We will lean into this more heavily as we move through the next seasons. We have the biggest own brand share of store growth opportunity in the U.S. Some of the foundational work put in place to sustain momentum in 2026 and beyond includes, for example, the review of our 90% of our categories to harmonize assortments, align product specs and reduce supply complexity. The identification of a pipeline for new products in high-growth categories and the activation of commercial plans across the brands to raise own brand awareness and drive higher consistency and efficiency in execution. In Europe, we are building on a very strong position with own brand share already around 50%, 5-0 percent. Therefore, we are concentrating on further strengthening competitiveness through continued assortment harmonization, expansion of our health-oriented brands like Nature's Promise and Terra and the expansion of our everyday low-price products or how we call them Price Favorites. All our European brands now have a minimum of 900 Price Favorite products across their assortments. Through our family of great local brands, we have unparalleled proximity and rich anonymized data to loyalty programs that gives us a real-time understanding of what matters most to our customers. And during challenging times, it's important that our customers do not have to choose between eating an healthy and nutritious meal and paying their rent. This mindset keeps our people motivated and connected to our purpose. Resilience for our customers comes from transparency, being open and consistent about the value, quality and health choices we provide. We strengthen trust by clearly communicating nutritional information, offering price certainty and helping customers to make -- to be informed, affordable and healthy decisions. Here, visibility and education are equally important. Customers increasingly value the healthy options accessible across our brands. They also appreciate the simplicity of easily identifying the health differences between comparable products, such as with the Guiding Stars in the U.S. and NutriScores in Europe, nutritional rating systems used for our own brand products. In the U.S., we are partnering with Circana to expand the accessibility of the system to a broader range of suppliers. Albert Heijn in the Netherlands is revamping its fresh product aisle, expanding its offering with more convenience, new snacks and ready-made meal kits. It's also introducing new fresh food packages to inspire customers to prepare fresh and nutritious meals more quickly and easily. Maxi Serbia held its third Healthy Food Every Day school program to encourage healthy eating amongst children. And in the program, students across Serbia learn about the importance of a balanced diet, eating fruit and vegetables and physical activity. And finally, our culture is reflected in how we show up for our communities. Those partnerships with organizations such as The Global FoodBanking Network and local initiatives like Food Lion Feeds and Hannaford school pantries, we help families access nutritious food and reduce waste across our value chain. It has been just over a year since Ahold Delhaize partnered with The Global FoodBanking Network. And since then, we have provided the equivalent of 2.9 million meals to those in need. Hannaford, its 200th school-based food pantry for students in need, and they launched that recently and through partnership with school districts, food banks and hunger relief organizations, the program has helped expand food access for students from preschool through college. As part of its annual Great Pantry Makeover initiatives, the Food Lion Feeds program restocked 33 food pantries to better serve neighbors experiencing food insecurity. More than 92,000 pounds of food items were donated and associates contribute more than 1,500 volunteer hours. And don't forget, by 2032, Food Lion has committed to donate 3 billion of cumulative meals. Albert Heijn held their annual "you can't learn on empty stomach" campaign, where customers could buy healthy breakfast or dinner products at a discount and donate them to the Dutch food banks. And through the campaign, more than 350,000 products were donated. These efforts are not site projects. They are part of who we are. They demonstrate that our culture of care and connection extends well beyond our stores and that we define success by the positive impact we create. Delivering for our customer communities today sets the standard for how we build the business for tomorrow. We are translating the same flexibility, resilience and culture into our physical network, supply chain infrastructure and technology investments, expanding and densifying its growth markets, modernizing logistics and embedding AI-driven innovation that will enhance both customer experience and productivity. Our U.S. brands are solidifying their real estate pipelines to accelerate new store openings in the coming years. We see the strongest opportunity for growth in the markets served by our Food Lion brand. In some of our markets like Raleigh and Charlotte, we have seen population growth of 7% to 8% in the past 5 years, and that is not slowing. Having achieved its 52nd consecutive quarter of same-store sales growth, Food Lion is well positioned to extend its record performance. Today, Food Lion is launching their omnichannel remodels at 153 stores in the Charlotte market. These remodels enhance the omnichannel shopping experience and include items like updated assortments and easy meal solutions that they're ready to cook or eat and, of course, are priced right. Self-checkouts for an enhanced and efficient shopping experience and e-commerce options for all customers through Food Lion To-Go or a store pickup. This is now the third market to complete the omnichannel remodels, where we have previously launched remodels in Raleigh and Wilmington, we continue to see strong sales performance with average weekly sales outpacing non-remodeled stores. Construction is therefore also underway on 92 store remodels in the Greensboro market, which will be launched in 2026. In Europe, Delhaize Belgium is expanding its footprint with another 8 new supermarkets that will open in '26 under the brand's affiliate model. The new stores complement Delhaize existing network and reinforce our growth ambitions in Belgium. Additionally, we expect the Delfood transaction, which is -- which are the former Louis Delhaize stores to close in the first quarter 2026, allowing Delhaize to further differentiate itself in the convenience store segment. We also continue to make good progress on the integration of Profi, where we see a strong future growth path. Over the past 3 years, the brand has opened over 200 stores and intends to ramp up expansion in the next 3 years. A few of the things we have done this year to set ourselves up for future success include like things like introducing our own brand assortment to Profi customers, enhancing value and differentiation, expanding Profi's strong quick meal service offerings of coffee, fresh pastries and convenient meals and those options also to our Mega Image and our Shop & Go stores and to meet, therefore, evolving customer needs. And we slowed our cadence of store openings to finalize the commitments we made to the competition authority. At the same time, our Romanian teams have used the time to identify optimal locations for each of our local brands to ensure we leverage their unique strength and create a better fit to local market dynamics. And you will see accelerated growth in 2026 on this front. With our customer value proposition advancing and our footprint ambitions taking shape, let me spend a few minutes on where we are on strengthening capabilities that will support the next phase of growth. The same flexibility, resilience and culture that guide our brands also drive how we invest in infrastructure, automation, technology and data. These enablers make us more efficient, deepen our customer relationship and ensure we use our data to create a faster and more connected business. So here are a few examples to illustrate this. To facilitate growing capacity demands, 2 weeks ago, we announced plans for Ahold Delhaize USA to build a new state-of-the-art distribution center in Burlington, North Carolina. The new facility, which will add over 1 million of square feet of distribution center space is expected to begin operations in 2029. To maximize efficiency, the site will leverage proven supply chain mechanization technology. And this investment is within the scope and parameters of the Growing Together financial network. Our culture of innovation is also providing new and powerful ways to interact and serve our customers as we will explore use cases for new technologies and business process improvement. With the rapid developments in AI, we see many opportunities to accelerate across selected domains of our business, focusing on the ones that can have a real impact on our business. And I'm confident that under the leadership of our new CTO, Jan Brecht, we will make fast progress building the right foundational AI platforms that will enable effective future scaling of winning AI solutions. Our teams will scale our proprietary retail media platform, Edge, to our U.S. brands in the coming year. This is an important step as retail media becomes an increasing effective way to create a relevant customer experience and provide additional revenue streams. The platform powers on-site display, sponsored search and in-store digital screens and has already proven successful at several of our European brands. As 2025 draws to a close, I'm proud of our progress and more importantly, that we have sustained and strengthened brand equity and leading market positions across the portfolio. I'm confident we are doing the right things to reinforce our strategic levers to capture growth, volume and market share. And at the same time, we are staying close to our customers and associates working hard to navigate these turbulent times together successfully. As we turn our attention to delivering a strong holiday experience for our customers, prioritizing value, healthy assortments, convenience and everything they need to create their own special and unique holiday moments, I also wish you happy holidays, starting with Thanksgiving in only a couple of weeks. Now over to Jolanda to talk more about the specifics of our third quarter and provide more color on our outlook. Jolanda Poots-Bijl: Thank you, Frans, and indeed, good morning to everyone. We've delivered a strong quarter, steady sales growth, solid execution and continued progress on our Growing Together ambitions. What I'm particularly proud of is our ability to deliver a balanced and consistent performance in a dynamic environment. The backbone is our passionate and dedicated people, supported by a strong portfolio of brands that stay close to their customers and local markets. By combining that deep local insight with the scale and capabilities of our group, we continue to adapt quickly, find efficiencies and create opportunities in real time. This balance of flexibility, resilience and culture is what underpins our financial strength and long-term value creation. Let's have a look at the key underlying results for the quarter, as shown on Slide 17. Net sales grew 6.1% to EUR 22.5 billion. This reflects good momentum across our regions, fueled by our growth model and strategic priorities, which have been a key catalyst contributing to a solid volume performance. The closure of Stop & Shop stores and the cessation of tobacco sales in Belgium negatively impacted net sales growth by 0.7 percentage points. Underlying operating margin was 4.1%. Strong performance in the U.S. more than offset the first-time consolidation of Profi and planned strategic price investments in the U.S. Diluted underlying earnings per share was EUR 0.67, up 8.7% at actual rates. Higher underlying operating profit and the impact from the share buyback program was partially offset by higher taxes and finance expenses. Slide 18 shows our results on an IFRS reported basis for Q3, which were EUR 31 million lower than our underlying results, primarily due to impairment charges on operating stores in the U.S. and an adjustment on the losses related to the affiliation in Belgium. Let's now turn to our regional performance. On Slide 19, you see comparable sales growth by region, including and excluding weather, calendar and other effects, which shows we delivered another solid quarter of steady sales growth. Looking at the regions in more detail. U.S. net sales were EUR 12.9 billion, an increase of 1.9%. Comparable sales, excluding gas, increased 3.1%, excluding a negative impact from weather of 0.2 percentage points. This reflects solid comparable performance and continued customer momentum. In addition to the positive impact from comparable sales, net sales were negatively impacted by the following: around 80 basis points from the impact of Stop & Shop closures and around 20 basis points from a decline in gasoline sales. The underlying operating margin in the U.S. was 4.6%, excuse me. Excluding nonrecurring items, margins were up 20 basis points from the prior year due to higher sales leverage and careful timing of promotions using our learnings heading into the holiday season. This more than offset our price investments and the dilutive impact from a change in sales mix from online and pharmacy sales. The nonrecurring items, including a release of a provision on our self-insurance program. This primarily resulted from continued improvements in workplace safety. Given all the stresses in the health and medical market, creating a healthy, safe workplace is equally a vital part of what we do as a company. The Stop & Shop team has been laser-focused on executing their pricing strategy and have extended key elements and refinements to an additional 88 stores in Massachusetts. At the same time, our associates are improving the quality of service and in-store execution, optimizing promotional effectiveness and tightening day-to-day operations, while there's plenty of work ahead of us, I am encouraged by the positive first response from customers, which we see in our improved Promoter Scores. As we close out the year, I expect our fourth quarter U.S. margin to be roughly in line with the prior year as we continue to invest in value, service and in the customer experience, ensuring sustained momentum into the new year. Turning now to Europe. Sales were EUR 9.6 billion, an increase of 12.4%. The integration of Profi had a positive impact of 9.1%. Adjusted comparable sales growth was 3.4%, excluding the impact of 0.6 percentage points from tobacco. We expect to see a similar impact for the coming 2 quarters when we cycle the tobacco regulation in Belgium coming into effect. As we saw in Q3, comparable sales growth eased, partly due to some of the macro effects Frans mentioned earlier. Also, to a certain extent, as we begin to comp our own successes of the past years in the region. In the CEE region, we expect to see slightly lower growth persist as market growth is pressured due to rising inflation, which, in this case, is more policy-driven, for example, VAT increases in Romania than supply driven. Underlying operating margin in Europe was 3.9%, stable versus last year. Margin improvements in Belgium and better labor productivity in general were offset by the impact of the first-year consolidation of Profi and lower profitability levels in Serbia due to the new governmental degree on grocery industry pricing. The decree started from September 1 and remains in effect until February 2026. Given this new headwind, as we look into the fourth quarter, we expect that the margin profile for Europe will be at a similar level to that of the third quarter. I remain encouraged by how our local brands continue to balance affordability and innovation while protecting profitability, a clear sign of operational resilience. Our relative performance remains strong, and we continue to see the long-term growth and margin opportunities in line with our Growing Together plan, particularly as we drive more alignment of best practices and leverage our scale. Our omnichannel ecosystems continue to drive growth and differentiation and help us build market share. During the quarter, online grocery sales grew 15.4% in the U.S. and 11.9% in Europe, marking a sixth consecutive quarter of double-digit online growth. In the U.S., this reflects our disciplined store-first model, which we pivoted to in 2023. This strategy supports enhanced convenience, delivery immediacy, optionality, order quality and profitability. With over 2,000 stores across our network, our customers can shop nearly the full store assortment and can take advantage of our same-day fulfillment options. Over the past 3 years, we've seen same-day delivery increase from 65% of our orders to nearly 90%. We also completed the rollout of PRISM at Food Lion and Hannaford. And with that, all 5 U.S. brands are now on our proprietary platform, which will amplify speed and impact of innovation in omnichannel convenience for our customers. As online further evolves, so too will our operations and infrastructure with it. We will further evaluate our fulfillment operations to optimize the customer experience and improve online profitability. At Albert Heijn, double-digit growth was supported by a 10% increase in orders. To support its growth, Albert Heijn has announced its real-time delivery slot system to offer personalized delivery windows during checkout based on location and order history. Using AI, this system dynamically recalculates routes and time slots to minimize emissions and maximize efficiency even as orders come in. bol enjoyed another strong quarter, growing 8.4% and is on track to deliver a very good year. As the clear #1 in the market with a reliable assortment, local relevance and growing network of international partners, bol is a well-skilled and innovative e-commerce business with the personality of a great local brand. During the quarter, bol launched branded shelves, a new self-service advertising product, giving sales partners and suppliers their own digital storefront. This marks the next step in bol's development as a full-fledged media mail platform. Moving on to Slide 23. Q3 free cash flow was EUR 389 million lower year-on-year due to phasing and lease repayments. Even with headwinds from foreign currency, we remain on track to deliver on our full year 2025 free cash flow commitments. Our strong balance sheet gives us the flexibility and resilience to keep investing in the business while also returning cash to our shareholders. In that context, we are pleased to reconfirm the continuation of our EUR 1 billion annual share buyback program for 2026, underlining our confidence in future cash generation and earnings growth. Alongside financial results, we continue to advance our healthy community and planet ambitions. Our MSCI AA and Sustainalytics low-risk ratings have been reaffirmed, reflecting consistent ESG performance. Through initiatives such as the Healthy Future Academy, we are equipping associates with knowledge, skills and confidence to further integrate health and sustainability in their daily work. The program takes learners on a journey from farm to plate, covering topics like nature and climate, circularity and health throughout Ahold Delhaize value chain. Across our brands, we're making healthier and sustainable products more affordable and accessible. From Delhaize Belgium reformulated own brand canned vegetables to new hybrid meat and plant-based products. In addition, we continue to foster collaboration with suppliers across our value chain to support regenerative farming and reduce greenhouse gas emissions. Ahold Delhaize USA recently introduced their partnership with Danone North America and The Nature Conservancy aiming to reduce methane from yogurt production over the next 5 years. This follows earlier partnerships with Kellanova, General Mills and Campbell Soup. These examples show how commercial performance across our brands and responsibilities go hand-in-hand. As we move into Q4, our priorities are clear: deliver a strong holiday season, serving our customers with healthy and affordable products. I'm confident that our strong foundations, dedicated associates and customer-first mindset enable us to deliver on our promises for the year, which you can see reiterated on Slide 25. As it is important to track underlying operational performance in both our reporting and our outlook, for 2026, we will align our external guidance to a currency-neutral basis, which is also more attuned to market practice for multicurrency companies. In summary, our strong year-to-date performance reflects a company that is flexible in execution, resilient in performance and guided by a culture of accountability and care. These qualities, together with our clear strategic focus, position us well to continue driving sustainable growth and long-term value creation. And with that, I thank you for tuning in. And Sharon, please open the lines for questions. Operator: [Operator Instructions] And your first question today comes from the line of Robert Jan Vos from ABN AMRO ODDO BHF. Robert Vos: I have 2. Since you mentioned it as one of the reasons for the strong margin expansion in the U.S. in Q4, could you quantify the impact of the timing of the promotional activities in the U.S. in Q3? And my second question is, you talked about the growth in Europe and that it is expected to be a bit more subdued going forward. It was 2.8% in the quarter. However, if we look at food inflation levels in the countries of presence, these are generally a bit higher than that. So that indicates some negative volumes. Can you elaborate on this, please? Those were my 2 questions. Frans Muller: Robert Jan, Jolanda takes the first question, then I take the second one. Jolanda Poots-Bijl: Okay, Robert Jan. Yes, the Q4 question you asked about the promo phasing. As we indicated, our Q3 results were impacted by one-offs of 20 basis points in the U.S., and this 20 basis points is related to the release of the provision that I talked about and the promo phasing, and that's the guidance we can give you on this front. Frans Muller: And on the European margins, they are corrected 3.4% in Europe for the quarter compared to a comparable of 2.8%, which we report. And it has to do with the timing and phasing effects of nonrecurring items from last year. Robert Vos: That's clear. But can you maybe elaborate a little bit on volumes? Were they still positive in most brands? Frans Muller: Yes. Volumes year-to-date, we have positive volumes, and we also expect that will be the same for the fourth quarter. Operator: We will now take the next question, and the question comes from the line of Sreedhar Mahamkali from UBS. Sreedhar Mahamkali: Perhaps if you can talk a little bit about the comments you made, Frans, on the real estate team pulling together pipeline and the warehouse [ Burlington ] you made $860 million. If you can help us understand what we should be thinking about the growth in terms of new footage new stores, maybe next year or the year after, how we should be thinking about what sort of magnitude? That's the first one. Second one is just a bit more of a request to clarify the U.S. margin drivers in the quarter. I know you've talked about 20 basis points. But did you just say, I think the 20 basis points refers both to the provision release and the promo shift? Or was the provision release 20 basis points and then the rest is in the underlying 20 basis points improvement? And the real question there, I guess, for me is, is the provision release a longer-term realizing you provisioned very, very prudently, and this could be there in a year, 2 years', 3 years' time? Frans Muller: Thank you, Sreedhar, for your questions. Jolanda will take up the second one or partially the third one. On the first question on the DC, the DC for Food Lion in the Carolinas is, of course, an evidence of our success, I would almost say. We grow very fast with Food Lion and have also future plans to grow further, both in store remodels like the 153 we just launched in Charlotte, but also with new store openings like we said before. And those new store openings, that is organic growth for Food Lion and the store remodels and the increased success of Food Lion needs more capacity, which is a good thing. The other thing is that we also said in our Grow Together strategy for the 4 years period that we will remodel 1,000 stores in the U.S. So we are on the path of growth. And when we talk about store growth, then we talk about Food Lion, Hannaford and The GIANT Company. And let's not forget that we are in the southern part of the East Coast, where both we see population growth and GDP growth as well. So we're in a very good spot there, and that's why we need more capacity. So it's a logical effect of our success. Jolanda Poots-Bijl: Thank you, Sreedhar, for asking that question on the U.S. margin. The 20 basis points is indeed a combination of the promo phasing that we referred to and the release of the provision. And then your next question on the provision, that's a provision that is reassessed every year, but we do not expect at this point further releases on that provision. So it's a one-off, and that's why we refer to it. Operator: Your next question comes from the line of Rob Joyce from BNP Paribas. Robert Joyce: I'm going to go with 3 as well. So just looking through the kind of SNAP impact from the payment pause, which is probably a [ P ] of one event. Do we now think the U.S. margin has reached a point where it should be kind of broadly flat going forward and looking into 2026? And do you think you are gaining share in the U.S. and can continue to gain share at this kind of margin level? That's still in the U.S. And then in terms of Europe, I mean, it looks like you're suggesting margins should be down, give or take, 50 basis points in the fourth quarter. How do we think about that flowing into next year? Is that a drag on margins we should think about for 2026? Or is 2026 a Europe margin growth on the back of some of those Profi synergies in particular? Jolanda Poots-Bijl: Thank you for the questions asked. First, starting with the U.S. margin profile, which we disclosed will be for Q4 comparable to the prior year, which was 4.2%. We envision to maintain our cadence of price investments, continuation of the sales mix. Bear in mind, [ Rx ] and online are growing double digit. And there's indeed the promo shift from Q3 to Q4 that we see there. If I look at the European Q4 margin, as I disclosed in my statement just now, we expect the Q4 European margin profile to be comparable to Q3 this year, which was around 3.8%. And there you see the impact of the first-year consolidation of Profi. We discussed in previous calls that Profi, the closure of the transaction was somewhat later than we hoped for, and therefore, the synergies also kick in somewhat later. The second impact in the European margin profile is Serbia, the decree that I talked about, which is in there. Overall, as we say, we're steadfast on our commitments to deliver on our Growing Together strategy with an average of 4% margin over the whole period and a 4% growth CAGR, and I don't see any reason to deviate from that. So confident for the next year. And of course, we will provide detailed guidance in February going forward. Robert Joyce: Sorry, just to follow up on that U.S. margin. The question on the market share. Do you think you're taking market share now in the U.S.? And are you kind of at the right level to continue taking share? Frans Muller: We take market share in the U.S. We also see with the latest numbers on grocery development that we trend better than the market. And I think this has to do with the price investments we made, the online performance where we have a very strong penetration. So I think we can confirm that we gain market share in the U.S. geography as a whole. Jolanda Poots-Bijl: We also expect positive volumes in Q3 for the U.S. as well. So yes. Frans Muller: That's what I said before. So the Q4 trend is the year-to-date is positive volume that will prolong for the Q4. And I'm also happy we had yesterday our total Stop & Shop team with us. And also from them, we see now that they trade positive volumes as well. So that's going in the right direction. Operator: Your next question comes from the line of William Woods from Bernstein. William Woods: The first one is on Stop & Shop. I suppose, are you happy that you've done enough at Stop & Shop to date to sustain that turnaround? And I suppose what have you learned and adapted as you've rolled out this strategy? And then the second one is just a shorter-term question on SNAP. How are you thinking about the impact of SNAP at the moment? What are your latest conversations on that? Frans Muller: So Jolanda will say a few things about the nutritional assist programs. I will say a few things more about Stop & Shop. So you were faster on your feet already talking about Stop & Shop than I thought. So I was saying a few things about Stop & Shop because we are excited about the development there. The team was with us, and we had a full report yesterday as we see from them every month with our full management board because this supports an important project. The Stop & Shop team has now invested -- price invested in 70% of their fleet. And like Jolanda mentioned before, 88 new stores to be price-invested in Massachusetts. We have improved execution in our stores, availability, fresh performance and that topic, we work hard on productivity and execution. We closed last year 32 loss-making stores, as we earlier said to you. We have already a very strong online performance with Stop & Shop and a good 10% penetration. And we also see, if you look at the market numbers that we gained volumes that our NPS are trading very nicely up. And also the team with Roger's leadership has also renewed, and we see also there a lot of energy and positivism. Having said all that, that does not mean that we have not still a lot of things to do. And that's what I mentioned before, the type of turnarounds need more time. But good evidence. Team is enthusiastic and energized about the results we see. So I'm optimistic going forward. But again, we come back to you next quarter on this topic, too. Jolanda Poots-Bijl: Yes. Thank you, William, for the question on SNAP. First of all, we think it's quite disappointment, very disappointing for those impacted, those families in need, especially with the winter and holiday season ahead of us. Thus far, for the business, we do not see material impact. We, of course, will closely monitor developments going forward, and we will stay close to our communities. Yesterday, Food Lion released that they've contributed an additional EUR 1 million in support to help the communities they operate in. And also our whole focus on reduction of prices, the price investments of EUR 1 billion in 4 years' time will also support these families. So closely monitoring impact. That's what we're doing. William Woods: But just to clarify on the SNAP impact, if it doesn't get paid or only half of it gets paid, so you're just saying that there's no material impact to Q4. Is that right? Jolanda Poots-Bijl: That's not what I said, William, exactly. I said thus far, we don't see a material impact, and we closely monitor developments going forward. And we remained -- okay. Operator: [Operator Instructions] We will now go to our next question, and our next question today comes from the line of Fernand de Boer from Degroof Petercam. Fernand de Boer: Maybe to come back on the SNAP impact. Could you quantify? Because I think a couple of years ago, you did quantify how much SNAP was of your U.S. sales? And that's the first question. And the second one is on the Netherlands with bol. At this moment is still going very well, I think. But also Amazon recently announced a huge investment program for the Netherlands. Do you see this market changing? And how are you going to prepare for the investment of Amazon? Jolanda Poots-Bijl: Thank you for the question. The SNAP penetration, that's the only quantification that I could provide at this point in time. It's a very -- at a very low level in our company. So it's at one of the lowest levels since a few years pre-COVID. So low penetration, no material impact thus far, and we will monitor just like you what's really happening in the next few months. Frans Muller: And at the same time, Fernand, like Jolanda mentioned before, we did a lot of things on value and price investments. If it's our own brands, if it's investing in our prices. And we're very fortunate that we have a very good relationship with Feeding America and our local food banks to make sure that we can support those families and communities in need. That is now our first priority. And then we monitor the situation how this will evolve, the shutdown and therefore, also the connected SNAP funding. Talking about Amazon and bol, it's a competitive environment. It's -- we see every quarter something new in this beautiful online space in the Netherlands. But I just would like to come back to the facts and how we prepared for that. bol has an 8.4% growth, which is, therefore, growing roughly double how the marketplace is growing for general merchandise. So we're gaining share again. Like Jolanda already mentioned, we're up for a very good year for bol, both top line and bottom line. The company does a great job in adding new categories like refurbished, for example. And the company is also under the leadership of Maite made a very nice transition from Margaret, it was successful, Margaret in her leadership to Maite into the future, and it has gone very smooth. 46,000 partners on the platform, and we increasingly develop the relationship. We talk about logistics viable, advertising viable. So we make bol an even better platform for them to compete with. And we also see that the number of suppliers, the number of partners on the platform is increasing, and we also have a very nice tap into Chinese and Asian suppliers directly on the platform, which gives us a great advantage. You have seen with all the other Chinese players that there is a little bit lower strength because of European regulation on quality and on trading. And that's why also people recognize that bol in its quality assessment, quality and compliance with the European law that they're very much in line and that is for more and more customers and asset. And just look, Fernand, I don't know if it's for your -- for family members or nephews and nieces, just look at the sensational toys catalog over Christmas for Sinterklaas here, 3 million copies out and sensational good toy catalog. So with Black Friday coming up, with Sinterklaas, with Christmas coming up, bol is super prepared for the season, and I'm very confident that we have a very strong run there as well. So yes, we see people investing, making announcements. We look at our own thing and our own strength to see where we can improve both pricing, both value, both logistics and services. And that's why I sound -- and you can hear that. That's why I sound quite enthusiastic, excited about this business. And I'm very proud about the bol team, how they progressed so far. Fernand de Boer: May I do one follow-up on the promotions. Why did you change the strategy there? Why did you do the phasing? Is it simply more to get in Q4 and a little bit less in Q3? Or how does that work? Jolanda Poots-Bijl: Yes, you're referring to the promotions for the U.S., right? Fernand de Boer: Yes, yes. Jolanda Poots-Bijl: Yes, yes, exactly. That promo phasing, as we call it, we're just learning from our promos, optimizing and heading into the holiday season, we shifted a bit of that promo atmosphere into the Q4 quarter based on the learnings we had. But it's also -- don't make too big a thing out of it. It's trending over time. You adjust where you think you can optimize your returns, and that's just what's going on. Frans Muller: And $1 billion price investments, $1 billion price investment for the U.S. in our total Growing Together plan, that is absolutely our commitment, and we are in line with that commitment. Operator: We will now take our final question for today. And the final question comes from the line of Maxime Stranart from ING Bank. Maxime Stranart: I hope you can hear me well. So 2 questions for me as well. Firstly, looking at the U.S., it looks like your comment on Hannaford posting consecutive quarters of growth has disappeared from the release. So I just want to inquire there what has happened with Hannaford precisely. And secondly, looking at Europe, you have decreased your guidance for Profi for full year sales. Anything we should read into it and how it would translate into growth in 2026? That would be all for me. Frans Muller: Yes. So thanks for your engaged question on our beautiful brand, Hannaford in the Northeast. [indiscernible] but also this quarter was another consecutive quarter of same-store sales increase. So strong as they go and going strong. So don't have any second thoughts. A few things on Profi, Jolanda? Jolanda Poots-Bijl: Yes. You asked about the sales profile for this year on Profi. That has been impacted more by macroeconomic factors than anything else. It's the VAT being increased with 2% in Romania, which, of course, impacts sales. And the food vouchers in Romania, the timing of that provision to customers has changed and impacted sales somewhat. There was also a small increase -- a small impact because the 87 stores that we are selling is related to the transaction with Profi happened somewhat earlier than we projected. So it's now in November, and we planned for it in January, which is all good, of course. Is there anything that would impact our structural guidance on the growth for Profi? Not at all. So it's macroeconomic and some of the stores that needed to be sold earlier in timing than we predicted earlier onwards. Frans Muller: Just quickly ChatGPT the data -- data on Hannaford, so super proud. It was the 17th consecutive quarter for growth -- comparable sales growth for Hannaford. So that is then also that data point with you. Operator: We have a follow-up question from Rob Joyce, BNP Paribas. Robert Joyce: Just a couple of quick follow-ups. I think -- sorry if I just missed it in that last Profi answer, but are we still expecting Profi from 2026 to be back in a position of kind of expanding profitability and growing there? And then the second question was, I just had a few questions about the U.S. slowing in the most recent months. Have you seen any sort of change in the trajectory of the U.S. business there? Any underlying weakness in the consumer? Frans Muller: Yes. On the U.S., thanks for that question. I think we gave you already the data that we are -- if you look at Nielsen numbers that although the market is a little bit softer that we did better than the market. So we gained share. And inflation in U.S. at the moment is roughly in 2.5% food at home. So I think we see that we are very well positioned there, but the market was slightly softer. But in that slightly softness, we gained share. Jolanda Poots-Bijl: And the question around Profi, we're very happy to have Profi in our family of great local brands. We will invest in opening up stores going forward intensely because we really see that there is an opportunity for Profi to grow going forward. And as we stated earlier, Profi is expected to come into the average European margin levels in 2 to 3 years going forward with the synergies that we are now realizing and that will impact 2026 positively already. Frans Muller: And synergies come in better than planned, by the way. So also the teams are very successfully working on that. Jolanda Poots-Bijl: On a positive note by our CEO. Frans Muller: No. But I think we have a little bit of experience with integrating businesses, I think. And it's never easy. It's the cultural component, the people component, the network, the synergies. And at the same time, also keep on accelerating your growth because Profi is a growth machine for us and 200 stores in the last years. That means also as from '26, we start growing again fiercely because that market gives quite some opportunities, especially with the business model of Profi and in the rural areas. That's why this is strategically the right move. That's why we're close to EUR 5 billion in Romania in sales #2, and that's the planning we have. Operator: Thank you. I will now hand the call back to JP for closing remarks. John-Paul O'Meara: Thank you very much, Sharon, and thank you all for joining us today. We look forward to catching up with you in the coming weeks. And just to reiterate, a happy holidays to everyone that we don't see between now and the end of the year. Jolanda Poots-Bijl: Thanks for joining us. Frans Muller: Thank you. All the best to you. Have a good week. Bye-bye. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
Laura Lindholm: A warm welcome, and thank you for joining Cloetta's Q3 Interim Report Presentation. I'm Laura Lindholm, the Director of Communications and Investor Relations. Our CEO, Katarina; and CFO, Frans will first go through our results, after which we will move to the Q&A [Operator Instructions] Over to you, Katarina. Katarina Tell: Thank you, Laura. I'm very proud to present our third quarter results. We have now successfully established a strong uplift in profitability. We are steadily approaching our midterm target of an EBIT margin of at least 12% by 2027. And this quarter is an important milestone on our continued focus on driving profitable growth. But first, over to the agenda. Today, it looks as following. I will start with Cloetta in a brief. Then I recap on our strategic framework and our updated financial targets that we shared earlier in this year. After that, I move over to our Q3 highlights. Our CFO, Frans, will then walk you through our Q3 financials. And as always, we wrap up with a Q&A. For any new listeners on the call, let me start to tell you a bit about Cloetta. Today, we are the leading confectionery company in Northern Europe. We were founded in 1862 and have for over 160 years, been spreading joy through our iconic brands, and we are planning to stick around for at least another 160 years. We have grown a lot since the early days, and now we have operation in 11 countries. In 2024, we hit SEK 8.6 billion in sales, and our operating margin was 10.6%. As I already mentioned, we have now established a strong uplift from this profitability level, which we will talk more about today. Over half of our sales come from our 10 biggest brands, and we call them our Superbrands. Despite the current geopolitical uncertainty, our company remains largely unaffected. This resilience is due to several key factors. First, we operate in a noncyclical market with stable consumer demand, which provides a solid foundation even in uncertain times. Second, our strong and trusted brands gives us the ability to adjust prices when needed without losing customer loyalty. Third, our broad product portfolio allow us to offer a range of alternatives, helping us adapt quickly shift in consumer behaviors. And finally, our primary focus is on Northern Europe, a region that is generally less impacted by global geopolitical tensions compared to other parts of the world. Together, these strengths position us well to continue to deliver stable performance and long-term value. I will now briefly walk you through how we bring our vision to life through our strategic framework and then in relation to this, also our updated financial targets. For more detailed information, please view the recording of our Investor Day available on our website. So let me start by talking about our vision at Cloetta because it's really capture what we're all about. Our vision is to be the winning confectionery company inspiring a more joyful world. And that is not just a nice phrase on a wall. For us, it's really a commitment to excellence, to innovation and most importantly, to the joy we bring to people every single day. This vision is what guide us, and it is what pushes us to keep improving, to stay curious and to lead the way in our industry. We have created a clear strategic framework to guide us forward. And right at the center is, of course, our vision, to be the winning confectionery company inspiring a more joyful world. But having a vision isn't enough on its own. We can't chase every opportunity or be everywhere at once. So we have made some choices that will help us scale, grow and make the biggest impact where it matters the most. We have 5 core markets, and they are Sweden, Denmark, Norway, Finland and the Netherlands. Around 80% of our total sales today come from our core markets. Our first strategic priority is to focus on our 10 Superbrands in our core markets. These are the brands with the biggest potential and by focusing on expanding strategy, we can unlock new opportunities, grow and drive scale. I will today also give you 2 examples of how we work with them. Next, we are looking beyond our core markets. We have identified 3 high potential markets outside our core markets, and they are the U.K., Germany and North America. By focusing more and making clear choices, we believe we can truly make a difference and achieve strong growth in those markets. Our third priority is to step up marketing and innovation. The market is constantly evolving, and we need to stay ahead, not just reacting to trends, but actually helping them to shape them as well. For the past 7 years, we focused purely on organic growth, but now we are open to exploring M&A as long as it fits our strategy and makes good business sense. That said, any M&A would be an accelerator and is not built in the plan to reach our financial targets. To make all of this happen, we also need the right enablers in place. That means having a simple, efficient operating model and a structure that supports our goals. During Q2, we announced changes to our organizational structure, including some reduction in positions and updates to our group management team. The goal is to better align with our strategy and move faster, but also to support our profitability journey, and we have now finalized all major project milestones. People and our culture are, of course, key to our success. Without that, everything else is just a black box. Our culture is the foundation of everything we do, and we are committed to build a strong, capable and joyful organization. I would like to take the opportunity to thank all my colleagues for keeping their eye on our progress and delivering results, especially during the last 6 months of transformation. Now I'd like to share a few concrete examples of how we are bringing our strategic framework to life. Today, I would especially like to focus on our first pillar, and that is win with Superbrands. One of our key focus areas here is expanding our top 10 brands into new categories, sales channels and core markets. In Q3, we initiated 2 now ongoing launches for Malaco, a super brand within the candy category. The launch of Fruit Drops builds on the trend of consumers increasingly looking for sustainable products and with more natural ingredients. The launch is still ongoing, but both pouches are already available in Sweden. One is available in Norway and both will be launched in Denmark in the first quarter next year. Fruit Drops are vegan and do not include artificial colors or flavors. They contribute to our sustainability agenda and are also aligned with our targets to offer products that match the evolving consumer preferences. The other ongoing launch I would like to highlight is the Chewy Soft Bites. Consumers are seeking for exciting sensory experience and Chewy Soft Bites certainly reflects this trend. This is another multi-market launch, which builds on product that was already proven consumer concept in the U.K. They have been in the Dutch market for a bit more than a year and are now launched in Denmark, Norway and Sweden. And the 3 bags are already now among the top 10 most sold novelties in Denmark in 2025. My other example of our achievement within Superbrand is related to the pastilles category, which is around 10% of our total sales. In the quarter, we were very successfully launched a limited edition of Läkerol hot pepper pastilles in the Nordic. The target of this limited launch was to bring new consumer both to the brand but also to the category. We more than succeeded as more than 40% of the consumer who brought the products were new to the pastilles category. Linked to our strategic priorities and vision, we updated our long-term financial targets in March this year. With a clear plan, we have stepped up our long-term organic target from 1% to 2% to 3% to 4%. Our long-term adjusted EBIT target will remain at 14%, but our plan shows that we should at least reach 12% by 2027. Historically, our net debt target has been around 2.5. Considering our consistent achievement of this target in recent years, we have set a new net debt target below 1.5. However, should a compelling M&A opportunity arise, we might temporarily exceed it. Last but not least, our dividend policy have moved from a payout without a range of 40% to 60% to above 50% of the profit after taxes. And now a short quarterly update. As previously mentioned, our strong uplift in profitability continues, and I'd like to highlight some key takeaways. We are committed to profitable growth, and this is also reflected in this quarter. We reached 11.9% in EBIT margin, which brings our rolling 12 months profitability to 11.4%. We have now a strong uplift in profitability established, and we are steadily approaching our target of at least 12% by 2027. In this quarter, we delivered stable, profitable and organic sales growth with some regional variations. The Nordic region showed strong organic sales growth, while the other European markets faced some short-term challenges due to slowing inflation and related market dynamics. We continue to grow double digit in the U.S. Inflation continued to slow down in all our European markets and retailers and food industry manufacturers experienced some pressure related to food pricing. At the same time, lower inflation creates opportunities. And one example is that more consumer most likely will return to the chocolate category. With our broad portfolio and our new strategic framework, we have a clear path towards our long-term organic growth target of 3% to 4%. As previously mentioned, our new strategic framework is in place and all our major milestones linked to our operating structure are also achieved. With strategy and most of the structure now in place, we expect to see the result of this work during next year. And now it's finally time for the financial, and I hand over to Frans, who is eager to walk you through both our third quarter and first 9 months financials. Frans Rydén: Thank you, Katarina. So yes, let me take you through some more details here. But again, I would also summarize this as stable growth, strong uplift in profitability, strong cash flow resulting in a strong financial position. So starting with the net sales, as I always do. So in the quarter, we delivered stable, profitable organic sales growth of 1.3%, which brings the year-to-date organic growth to 2.2%. And I'm emphasizing profitable here, and that is key and a key aspect to understand the growth in the quarter, and I will come back to that. Now within this growth, as Katarina highlighted, we had strong growth in the Nordic region, a very strong growth, as a matter of fact, as well as in North America, but that growth was partially offset by the rest of Europe as sales were affected by changing retailer dynamics. Now we don't report sales or growth by market. But in the report towards the back, you have a table there where we do report percent share of total sales by market. Now it is a bit of a blunt tool to understand the detailed growth in the quarter. But if you look at the year-to-date, you can get a view of what I just shared. So if you add up the percentages, you can see that the sales outside of the Nordic region have dropped from accounting for 34% of our total net sales last year, year-to-date Q3 last year to only 31% of our total sales Q3 -- Q3 year-to-date this year. So it's a drop of a couple of percent there, and that's sort of an indication of what I just shared. And that is net of the fact that the strong growth we see in North America, of course, counts in the reporting as outside the Nordic region. Now one of the benefits of our portfolio is not only that we play in various confectionery categories, but also that our sales are across a number of markets. And I would argue that a continued stable profitable growth despite the rest of Europe faring a bit worse lately is an effect of that. Now without going into too much details by market here outside of the Nordic region, I'd like to say that it's well known that the general inflation has put a strain on consumers, and that in turn has affected retailers and the trade dynamics have changed, and there are both societal and political pressures relating to food pricing. And those pressures picked up as some of the commodity cost inflation slowed down over the summer, including a very much publicized cost of cocoa coming down from its historically high peak. So not all costs have come down, of course, and there is a delay when changes start to affect manufacturers. But in this environment, our strategy has remained to drive profitable growth also when it has meant giving up some short-term sales. And the context here is very important, and that context includes that we are still rebuilding margins that we used to have but have lost in the Branded Package segment. And we are rebuilding those margins through growth and scale through cost controls and efficiencies and while continuing to invest in marketing and innovation, but also through fair pricing. Now before moving on to the sales by segment and the profitability, let me also state that the reported sales were affected by currency headwinds as the Swedish krona strengthened. Nonetheless, the sales of SEK 2.177 billion that you see in the left graph on the last column of the left graph, that is our ninth consecutive quarter of sales above SEK 2 billion. And it is actually a step-up in sales of almost SEK 100 million versus quarter 2 this year. And as you recall, quarter 2 really benefited heavily from the Easter phasing. So we are pleased with continuing the upward trajectory in our sales. Separately, note that the structural changes in the quarter is zero, and that is as the divestment of the Nutisal brand took place in June last year and therefore, no longer feature in the quarterly comparator, but of course, it's still there in the year-to-date. So moving on to the sales by segment and showing -- actually, starting with the base of the slide today is the Pick & Mix segment, which grew a strong 9.4% in the quarter. And just, I mean, let your eyes feast over those previous quarters here. I mean it is very, very nice. Now that growth was then partially offset by the branded package shown above, where organic sales were down 1.8%, which is actually quite similar to the average development in the first half of this year. But again, as mentioned, related to the development outside the Nordic region. And this is arguably another angle to the strength of our portfolio that we have this portfolio where we can pick up on shifts in consumer behavior, whether that is at the macro level with consumers increasingly loving our Candyking Pick & Mix offering or at the micro level, allowing us to lean on other categories as we did when the price of cocoa spiked. I think it's also a sign of strength that consumers have continued to buy our product as prices in retail have gone up. And also for Q3, our volumes, they're actually down only about 1%. And if I would exclude chocolate in that, then our volumes are actually flat to growing. Then unpacking the branded package sales a little bit, maybe pun intended there, the growth is affected by our continued optimization of the product portfolio to improve profitability. And I'll come back to that as well. But primarily, this is about us staying firm to our strategy of growing profitably rather than to grow at any expense. And the focus on profit is obviously best reflected when we look at the profit. So let's move on to that. So we're very pleased with the result in the quarter to deliver another uplift of operating profit margin adjusted to 11.9%. That's 110 bps better than last year, and it lifts the year-to-date margin to 11.5% and the rolling 12-month margin, as Katarina mentioned, to 11.4%, and that is the strongest since 2019. 11.9% also makes this quarter the fourth consecutive quarter with a margin above 11%. And we can compare that to the prior 3 years where the average margin was, let's say, in the 10%-ish range, but where no individual quarter actually reached 11%. So when we talk about a permanent uplift in operating profit margin, I think that is a fair representation. Obviously, it's also interesting to note that we are consistently getting closer to our midterm target, which is to reach a margin of at least 12% no later than 2027. I want to break this down a little bit further. So if we look at the key drivers for the improved profitability, they are, number one, carryover effect of fair pricing initiatives that we took last year and a little bit at the start of this year, but it's not new pricing in the quarter. Secondly, it's about cost control and efficiencies. And both segments are favorable here. For Pick & Mix, it's on account of efficiencies in merchandising and fixtures. And on the branded package side, again, the portfolio optimization and net revenue management comes back. And as a comment on that, when we optimize the portfolio, it is about replacing slower-moving, lower-margin products with something better, and that helps not only our business, but also our customers by providing a product that the consumer wants even more of. So it's really a win-win-win situation. And then finally, on cost control and efficiencies, both segments benefit from savings from the change to the organizational structure to benefit our new strategy that Katarina mentioned. Then the volume mix, it is unfavorable. And within there, you do have an unfavorable mix as Pick & Mix grows faster than the Branded Package segment but that is partially offset by a favorable mix within the branded package on account of the focus of profitable growth, as mentioned. You also have the effect of the slightly lower volumes, which is sort of the 1% that I mentioned, but also given lower production, it means that there is less volumes to spread the fixed cost over. Finally, and maybe most importantly, for the long-term outlook, the step-up in profitability is not due to any reduction in the investments behind our Superbrands. And I do want to add that at SEK 259 million, as you see in the last column in the left graph, that is actually our highest ever quarterly profit in Swedish krona. In this strong profit, I can also mention that we -- it doesn't include any reimbursement for costs that we incurred in Q1 2024 as a result of the isolated quality incident at that time due to one of our suppliers. But that process is ongoing, and we now estimate to receive such reimbursement in, let's say, in the next 6 months. So with that, let's step up and look at the profitability by segment and see if that actually reflects what I just said. So over and under, you see that both segments margin improved in the quarter, both over last year for the quarter and also year-to-date. The Pick & Mix segment on the lower half, where quarterly margin again is above 9%, also shows why we, during the Investor Day, raised the margin target for Pick & Mix from the prior 5% to 7% to what we now have now is 7% to 9%. And for the Branded Package segment at the top, we improved the adjusted operating profit to 12.9%. And while that is a good thing, we also know that this margin used to be above 14%, and we will continue this work as outlined in the Investor Day through the focus on our Superbrands in our core market through stepping up in the effectiveness of our marketing and innovation and to continue to recover margins there. That said, let's move to the sales, general and admin. Here, you see that costs are down both in absolute and as a percent of sales. But firstly, the strengthening of the Swedish krona in the quarter, which we earlier saw suppressed our reported sales. It does have the opposite effect when we translate our foreign incurred SG&A to Swedish krona. But then you have the net effect of cost controls, offsetting annual salary increases and other inflation, while again not driven by reduced investments in our Superbrands. Now with respect to the cost control, the quarter does benefit from savings from the restructuring program for the new organization. And here, I can reconfirm what we have shared earlier that we expect to achieve up to 20% of the annualized savings of SEK 60 million to SEK 70 million in the second half of the year and the full effect as of the first quarter next year. On the year-to-date, I want to mention the items affecting comparability there of SEK 52 million in lower cost, and that SEK 52 million is the net effect of the onetime impairment of Nutisal that we took last year when we sold it and then the provision related to the organizational changes this year, which is mostly severance cost. So since the provision this year is smaller than the impairment last year, the items affecting comparability comes out as a favorable variance here. Coming then to our cash flow. As mentioned in quarter 2, our normal seasonal pattern is to tie up cash in the first half and generate cash in the second half. And that holds very much true as we look at quarter 3. So in the quarter, we generated a very healthy SEK 339 million in free cash flow. On a profit after tax of SEK 189 million, so almost double the profit. The key driver of the free cash flow is, of course, the stronger operating result, but then a favorable working capital management. But also as the comparator where last year, the steep inflation meant a much less favorable working capital. Last year in Q3, we actually opened with extra payables on account of purchases to replace raw materials with quality defect, which was again the same thing as this isolated quality issue that I mentioned earlier. Now this year, of course, we don't have that problem. Our CapEx in the quarter at SEK 41 million remains on the lower side. And as presented during the Investor Day, is that we expect investments will start to rise in the future to secure growth and profit. Now in this strong free cash flow, -- could it be just phasing from Q2? Well, the answer is no because actually, on a year-to-date basis, this is the first time ever that we've exceeded SEK 0.5 billion in free cash flow. It's actually strong -- so it's the strongest we've had year-to-date. It's more than 50% higher than year-to-date last year. So obviously, it's not a phasing. Finally, with our strong financial position, we have also paid back SEK 800 million of loans to our credit institutions, and you see that in the graph at the top and to the right, which brings me to my last slide on financial position. So we closed the quarter with a net debt to EBITDA of 1.1. So again, better than our new lower target to be below 1.5 and 1.1 is the same we delivered in Q1 this year. And these 2 quarters are tied for the gold, 1.1 is the lowest ever we've had for Cloetta. And the result is a combination of the strong cash flow that we looked at, resulting in lower net debt, bringing it down to SEK 1.4 billion. That's almost down SEK 0.5 billion versus Q3 last year. And then, of course, the improved earnings that we have now spoken quite a bit about. In quarter 2, leverage went up a bit as we paid dividends. So it's great to see that it's back down again to an all-time low. And actually, on the note of dividend, it is really encouraging that our year-to-date profit after tax of SEK 558 million is already SEK 1.96 per share, and that's only after 3 quarters, mind you. So we're pleased to have created good conditions also with respect to our fourth financial target on dividend in addition to top line growth, the stronger EBIT margin and keeping leverage low. Finally, we have plenty of access to additional unused credit facilities and commercial papers based on the new credit facilities entered into during the quarter and as shared earlier in the press release. So access to cash, together with our cash on hand totaled about SEK 2.5 billion as we closed the quarter. So for yet one more quarter, I conclude that our financial position is very strong. And with that, over to you, Laura. Laura Lindholm: Thank you very much, Frans, and thank you very much, Katarina. We already have questions in the chat, but we will start with the telephone lines. [ Valentina ] over to you and for our first caller. Operator: [Operator Instructions] The first question comes from Adrian Elmlund from Nordea. Adrian Elmlund: Adrian here from Nordea. Can you hear me? Katarina Tell: Yes. Frans Rydén: Yes. Adrian Elmlund: Very good. Pleased to see the results. I have a couple of questions, 3 of them, I think. So first off, [ Berry Kelevot ] noted this morning that they expected some mid-single-digit percentage decline of their sales and volumes in cocoa products in the upcoming financial year. So this is, as you know, due to the continued pressure of high cocoa prices. But kind of my question here to you is, do you believe that the market has priced in the inflated cocoa prices, meaning basically what price per tonne do you think is priced in? Looking at the chart now, I think that we're seeing some USD 6,500 per tonne at the moment. Just want to see your reflections on that during the overall market. Frans Rydén: Yes. So I'm just thinking how to reflect this. I think it's -- I think the way that we like to think about this is that, obviously, when costs are coming down, which they have, at least for the cocoa, but not all commodities are down. Sugar, for example, is actually up. And cocoa is not really cheap based on historical levels. But when they're coming down, that's a good thing. It means that over time, the cost for the consumer will be lower, they'll come back into the category. So we think that's a very good thing. Now at the same time, it doesn't happen immediately. It depends on how much inventory you have, what kind of contracts you have in place, how the rest of your business looks. And of course, we look at the competitors and we -- when they publish their results, we can see what is happening in their business. But I don't really want to comment on their businesses instead focus on ours. And ours is simply the following that, that we will continue to execute our fair pricing, which means that when costs go up, we take pricing. And when they come down, we roll back. But of course, it has to be done in a responsible manner as well together with the retailers. And that, I think, over time, will serve everyone really well. And I think what we will see is that consumers that maybe have moved into, let's say, chocolate muffins and similar products when cocoa was very expensive and they've given up on their chocolate tablets, they'll come back into the confectionery category. But exactly how much has been priced in, I think that varies really between the different players in the market. Adrian Elmlund: Okay. A second question here. I want to dig a bit into the margin contribution here between the Nordics and the rest of Europe. Kind of what I'm looking here is trying to understand how much of the margin uplift in the quarter is thanks to a stronger geographical mix, contract your own margin enhancing activities or sort of product mix? Frans Rydén: Okay. Fair enough. So maybe given that we don't actually publish margins by market, but I think what I could help you here is to start with that. So we are Northern Europe's leading confectionery company. It's not just a slogan. We have very strong relationships with our customers that go back decades and decades, maybe hundreds of years in some cases. And our position with the consumers is unparalleled, I would argue, for the products that we play in. So we're very, very strong there. Whereas in the rest of Europe, we're more of a challenger, which is where the opportunity comes from. Here's what we can make something different out of our business. But obviously, we are much stronger in the Nordic regions than before. Now I think if you think about the 2 big markets there like Germany and U.K., I think it's fair to say that Germany is perceived as a market with a lot of strong discount retailers and that you have to work hard for your margins there. But for the U.K. we have in the past actually reported a little bit around the profitability there. I think it was as late as Q2 this year and certainly in last year as well, where we said that we had some negative taxable results in the U.K. And as a result, we had deferred tax provisions that we chose not to recognize. So we basically have said that the U.K. result is not good. So if you think about the U.K. having negative taxable results and the fact that Germany is a tough market, you could see how there is a favorable mix when the Nordic European countries are growing faster. But beyond that, I can't share you a number today. Adrian Elmlund: That really helps. Kind of a follow-up question to that, if I may. like how confident are you that the sales pressure that you're now seeing outside the Nordics, as you stated in the CEO words, are short term? And why are you not seeing similar patterns in the Nordics? Do you think that can happen? Katarina Tell: Yes. I can answer this one. So as mentioned also in the CEO word is, of course, we have -- we launched our new strategy during the spring. We have created a structure, done some reorganization. And now we are -- the strategy are set. The organizational setup or structure are more or less done. So we expect to see the result of this next year. And as you remember, we have to grow with the Superbrands, and then we have to grow beyond core markets. And here, we see still some opportunities where we believe we will have growth in U.K., in Germany, in North America. And then we also have the third strategic pillar, and that is to grow through innovation and excel in marketing. We believe in the strategies, and we believe also we have the structure in place to deliver on the strategies for next year, if that answers your questions. Adrian Elmlund: Okay. I have one final question. Sorry for taking multiple questions here. But the final one. Regarding the pilot stores here in the U.S., you said that you're going to give us some news before the year-end. But could you share anything with regards to how these insights into the consumer preferences, as you stated, have -- like what feedback have you gotten? It basically implies at least that you've gotten some positive feedback. Katarina Tell: So it's very much about learning how is the best mix, how are the consumers' behavior in the store and so on. And this is, of course, important when you roll out a concept to have those learnings going forward. Laura Lindholm: Adrian and Valentina, it seems we have no further questions from the lines. Could you confirm that? Operator: We have no more questions from the phone. Laura Lindholm: Thank you very much. Then we move over to the chat. Speaking of the U.S., we have a question from Danske Bank. The U.S. market size, how large is the U.S. as a percentage of your total sales? Frans Rydén: So we actually shared for North America is what we've shared, and I think we'll stay with that when we have the Investor Day. So in 2024, it was about 3% of our total sales that we had direct sales in there. Of course, products tends also to enter maybe in a more indirect way to the U.S. market, but we have 3% sales. And since then, as you know, we've been growing in double-digit numbers. So simply put, should be north of 3% sales. Laura Lindholm: Thank you, Frans. And then a second question also from Danske Bank about raw material costs and margin outlook. With raw material like sugar and cocoa down year-to-date, how do you see this impacting your cost and sales in 2026 on this, all else equal, do you expect margins to be stronger or weaker going forward? Frans Rydén: Well, so our midterm target is to reach at least 12% by 2027, and we're not there yet, 11.4%. So obviously, we are intent to improve on the margins. And as I mentioned, on the Branded Package segment, we used to be above 14%. So it's -- this is not greed. This is actually recovering the margins that we have lost, and we will do that by continuing to invest behind our brands and in innovation. And it's a critical part of the new strategy is about stepping up our marketing innovation. I think it's going to be a win-win-win again for us, for our customers and for the consumer. So the margins will improve. Then how does the raw material and pricing go into this? So we'll stay with what we said before here, which is that we will price for the cost. And of course, in the past, we've also lowered the prices at times when they have come down, but we have to look at the whole portfolio, and we have to also look at the variance versus when we took pricing the last time in that market because the pricing is not -- let's say, it's not always exactly going at the same time in each market. It depends on the contracts. So we will price for cost. Laura Lindholm: Very good. And then the next question also from Danske Bank is about the IKEA global partnership. How has your global partnership with IKEA developed? Do you think which refers to the quarter? Katarina Tell: Yes. So the cooperation progress according to plan. So the last year, we had an agreement with IKEA in Sweden, but it was only limited to IKEA Sweden. And this year, we signed a global contract with IKEA. I said, it's progressing according to plan. And in the next quarterly release, we will give you a more detailed update about how it's progressing with IKEA. Laura Lindholm: Thank you, Katarina. And then also 2 more from Danske Bank. First one is about the M&A pipeline. How does your acquisition pipeline look like? Are there any companies you are currently in discussion with? Frans Rydén: Number one, [ Emmanuel ] thank you very much for asking a lot of questions. It's a lot more fun. But now unfortunately, obviously, we can't get into any specifics. But I think the most important aspect here, and Katarina emphasized it in the beginning as well, which is that M&A for us is an accelerator. We can deliver these financial targets without an M&A. So we're not going to jump into something unless it really makes business sense, and it helps drive the strategy forward. So -- but of course, we are open to it, and we're being approached and we're looking at things, but we're not going to just jump on to something. Laura Lindholm: Very good. And then the final one from Danske Bank. On Pick & Mix, how much is volume growth versus price? Any particular market you want to highlight during Q3? Frans Rydén: So what we've said in the past is that we don't separate price from other things. And part of the reason for that is -- and Pick & Mix is a great example because the pricing model will look different between customers depending on what type of assortment they have contracted with us to carry. For example, if there's more chocolate or less chocolate, it has to do with how often they want our merchandisers to refill and clean the shelves, if this should happen over weekends to have continued strong sales on Saturdays, not only on Fridays and whatever -- like there's a very complex setup. And if I would give you a price number, then every customer who had seen a lower price increase than that will be happy and they will be silent. But everyone who thought that they got a higher price increase than that, they will be calling us and complaining. So it's not really a fair number to give. I think what I can say, however, is that Pick & Mix, and we said this before, is clearly on consumer trend. It's about individualization. It's about plastic free, it's in-store, arguably entertainment. Consumers spend a lot of time in front of Pick & Mix shelves when they pick their fruit and their meat, where cereals and stuff, you just throw that into the cart when you're shopping. So it is a fantastic segment of confectionery and there is volume growth. There's real volume growth in there. Laura Lindholm: Thank you, Frans, and thank you, Emmanuel, at Danske Bank. We move over to DNB Carnegie. How do you see the impact from the lower cocoa prices in terms of lag or total impact going forward? Frans Rydén: Yes. So again, so obviously, when we are having conversations with our customers, we do that based on the world market prices. But then you have the different thing, which is how long time does it take to get the pricing, how much inventories do you hold, what kind of -- what have you contracted? And I would assume it's the same thing for all our other peer companies out there. And so this will vary. What we will do is we will continue to build our margins, and we will continue to execute fair pricing. Laura Lindholm: Thank you very much. Frans, I think there's another question on Pick & Mix, but we, I think, have answered that already previously through to the Danske Bank question. Good. Operator, any last questions from the telephone lines? Operator: No more questions from the phone. Laura Lindholm: Thank you. That concludes our event. And we take, of course, the opportunity to remind everyone of our upcoming IR events. Our next report, the Q4 report is published on the 4th of February, and that's followed by an investor lunch in Stockholm arranged by Danske Bank on the 5th, the following day. But before that, quite a lot is happening. Next week, we attend the Berenberg Pan-European Discovery Conference, U.S.A. and then also after that, have a planned visit to Ljungsbro in Sweden together with Danske Bank. It's time to conclude. And before we meet again, we, of course, hope that you get the chance to enjoy our wide portfolio of confectionery products during many joyful occasions. Thank you for today. Frans Rydén: Thank you. Bye-bye. Laura Lindholm: Thank you. Bye-bye.
Operator: Welcome to the Medicover Q3 2025 Report Presentation. [Operator Instructions] Now I will hand the conference over to the speakers, CEO, John Stubbington; and CFO, Anand Patel. Please go ahead. John Stubbington: Good morning, everybody. John here. Welcome to our Q3 report. And I'd like to start with thanking all of our people for producing a really good result. So thank you for all your hard work. Q1, I described as strong. Q2, I described as stronger. I think Q3, what we're seeing here is a really good, solid, consistent and healthy performance. If you look on the right-hand side, you can see growth is a good performance at 12.1%, especially when you consider that Hungary no longer is in these numbers. So that's quite a pleasing position for us. If you look at EBITDA, it's very respectable increase of 32%, which is really, really positive for us. And you can see that coming through with the adjusted margin of 17.2%. Moving up by 14.6% is really, really solid and quite an impressive performance by the team. We'll talk about that a little bit later on because there's some other sort of factors that are pushing that forward and pushing that back, and we'll try and give you a bit more context on that. Operating cash flows, again, very healthy at EUR 98.8 million, a positive movement of 36.7%, which is, again, really pleasing for us and good to see is what we need. So that's really, really good. And as predicted, we talked about our leverage that as we did the acquisitions that, that would come down. And we see that, that is coming down despite the fact that we did our 2 biggest deals ever in Q2 and which has been very positive for us. So Healthcare Services being driven by high organic growth and the improvements coming through the fact that we've put so much extra capacity on in this area, the utilization of the assets is starting to be seen. When you start, you put all the staff on, you put all the facilities on, you're ready to take customers. But it takes time for customers to come. And more importantly, it takes time for customers to come back, and we did that in many different places across the world. And Diagnostic Services is really, really pleasing to see their performance. They've had quite a lot of headwinds that have affected them and they're navigating them really well, and I'm really pleased with the team to be able to see them do that. And I note to the bottom about our greenhouse gas emissions that we've had those validated, which is a good part of that journey. So if we forward -- and if we move forward and look at our revenue positions, basically, if you look at the bars and look at the percentages, really good solid growth there, 19.5%, 19.8%, 12.1%, which looks a little bit lower. But again, we need to take into consideration Hungary and the fact that we've got a bigger base. So we're really pleased with that progression, and we're really pleased, most importantly, with the consistency of that. If we look at our revenue by country, there's some slight mix change here. Some of this, again, driven by Hungary. I seem to be saying Hungary a lot and a little bit driven by currency from an Indian perspective. And then revenue by payer, relatively consistent, a little bit of a change in terms of the growth rates. The consumer segment, 58% is a really important part of what we do. And of course, at times with consumers, you'll find people being very active, times being a little bit cautious, and we're watching those particular conditions. As we go to Healthcare Services, Healthcare Services revenue growth of 9.6%, feels really strange to be able to talk about Healthcare Services and see single rather than double digit. But of course, if you adjust that for Hungary, we go back up to 12.4%, which I think is good, steady growth. Revenues at EUR 406.5 million, which is very respectable revenue by country. It's pretty pleasing across the board that you see Romania, 16%, Poland at 17% and India, again, affected by currency. So it looks a little bit different. Strong development in terms of sport and wellness and in our ambulatory clinics in Poland, which contributed to the drive of the revenue in fee-for-service. And we've got good progression in terms of the public revenues that we've got in Romania and some of the Polish hospitals. We launched a new hospital in Hyderabad. And of course, as we launch new capacity, that has an impact in terms of the profitability. Again, we're investing in the staff. We're investing in the facility. We're putting out the capacity before the customers come. And whilst the growth in India is a little bit lower than some people may have expected at 8.8% in local currency, some of this is driven by a conscious change in terms of the way that we're steering the business in terms of having less governmental pay, which puts that down. But our underlying trend in India in terms of doctor recruitment is really, really strong. And that's one of the reasons why we've decided to pull forward the planned hospital for next year into this year because we feel that we've got good momentum in terms of the recruitment. We can take advantage of that, and we can get faster growth. So we'll see that come through in Q4. And again, that's 2 new big hospitals that will go on to the -- on to our network and having those through will have an impact in terms of a little bit of drain on our profitability and margins. One word of caution, we talked about the strong margin. Part of that is created by our funded business where there's been a slower phasing of recruitment of doctors. That happens from time to time. There's nothing that is particularly unusual for us, but we will catch up on that. That puts a little bit of extra power into the margin, which will adjust as we go through Q1 -- Q4 and Q1. And that's one of the reasons why we've talked through that, that might happen over the next coming quarters. Membership is okay. Membership is pretty good. If we look at it from a -- without having Hungary involved, we've got growth of 2%. But at the same time, we want to balance this by sharing with you for the first time the number of relationships we have because you can see our fee-for-service line is much higher now in terms of its percentage of our business. And it's really about relationships as well as what being about memberships for us because if we can establish a relationship, we get people that come to us sometimes funded, sometimes through fee-for-service and sometimes through paying out of pocket. And you've got a mix here of different relationships being funded NFZ, some of our benefit customers for loyalty, et cetera. And we'll continue to publish this number so that you can see how that progresses. This doesn't affect this quarter, but you can see that there was a strike in Andhra Pradesh in India in October. That meant that all the hospitals in that location were not taking inpatient stays for governmental pay. Obviously, that will have a slight effect on us in the fourth quarter, but was probably needed to be able to make sure that the government did pay some of their bills, which can take quite a bit of time to settle. All the indicators on the right-hand side from our Healthcare Services are pretty good and a positive progression from the team. So thank you very much. Diagnostic Services, they continued with their strong momentum across the business. And as I say, I'm really, really pleased with the team. Revenue increased by 17.8%, which is pretty impressive. So well done to them. Organic growth at 12.4%, which is still solid and really good for this segment. Strong demand from fee-for-service, which is very positive for us because that's the big part of our revenue stream. Germany, which everybody has been concerned about, worried about and watching with a close eye. We continue to watch it with a close eye, but the team have navigated that really, really well, and we're seeing increasing volumes there, which is helping us adjust as well as our initiatives to be able to drive efficiency. And overall, we've got an increase in tests, which, again, is quite impressive, and that's really positive for us. So revenue, EUR 191.7 million, very pleasing. If you look at the progression by country, there's strong percentage growth there in each of the countries. So congratulations to the team. And I know Germany is 5%. Considering the reform, I think that's pretty good for them. Margin, great to see some improvement here. We've got operational leverage. We'll continue to get that operational leverage if we continue with the lab growth, very solid number of tests. And again, really pleasing strong and good growth in the fee-for-service segment. You can see at 24%. So overall, pretty good. I'll hand over now to Anand, who will talk you through some of the details of the financials. Anand Patel: Thank you, John. Good morning, everyone. So pleased to report on another good quarter for Medicover building on the momentum and themes of prior quarters. So as a reminder of those themes, one, we've got double-digit organic revenue growth again; two, margin expansion across all profit measures; three, strong and consistent performance across both business units. We've mentioned previously from John that we've normalized leverage back down to 3.2, so in line with the guidance we've given in prior quarters. And in the quarter, we've also seen an improvement in our ROIC numbers and in our cash. In terms of overall, so from an organic growth perspective, so I'll talk about organic growth to kind of strip out the Hungary effect, and Hungary will obviously impact our numbers in terms of year-on-year growth overall for the next 3 quarters. So organic revenue growth was 12.4%, which is very pleasing. In terms of EBIT, particularly impressed and pleased with that number internally. So we've got EBIT of EUR 42.8 million with a margin of 7.2%, a lot higher than last year. You'll remember in Q3 last year, we did some impairments. But actually, even if you kind of do a like-for-like comparison, putting back in the impairments for want of a better phrase, we still got healthy margin accretion across the EBIT lines. So very pleased with that, and that actually flows through to our EPS pretty well. From an EBITDA perspective, growing faster than revenues, as you can imagine, due to the margin expansion of 260 basis points. So EBITDA at EUR 98.2 million. And finally, as I mentioned just previously, the earnings per share was very strong in the quarter as well. Again, we've seen consistent growth in earnings per share during the year, and we further did that in Q3 as well. In terms of Healthcare, again, 12.4% organic growth, price driving 7.5%, but still strong volume growth as well as you can see. EBITDAaL growth I'll talk about EUR 50.5 million, which is up and margin rate is up 260 basis points year-on-year. I guess the only other thing I'll talk about on this slide, particularly is the loss from the immature hospitals. So you can see that actually the loss in Q3 is EUR 2.7 million. That is the same charge as we had in Q2. But we've seen really healthy underlying performance in the like-for-like hospitals. What has happened in the quarter is that we've opened a new hospital in India, which is additive in terms of making a loss. But actually, there's been a really strong improvement in the flow and profitability build of the other hospitals. And finally, going back to what John's point was with regards to utilizing our capacity, you can see that flowing through in terms of the medical cost ratios coming down as well. In terms of Diagnostics, I think John touched on it, so really pleasing performance again. So again, organic growth of 12.4%. Here, price accounts for 3%. And as you know, due to the German reform, we've got price reductions in Germany. But actually, overall, even in Germany and across the whole of Diagnostics, we've got strong volume growth is what I'd say. In terms of the other measures, I'd say EBIT growth, again, pretty strong in Germany and in total DS. So we grew to EUR 20.6 million with strong margin rate accretion. And the pleasing thing to note in Germany, because Germany is roughly 50% of DS, that actually, as I said, revenues were up, volumes were up despite the margin contraction -- sorry, the price reduction and overall margins in Germany were up year-on-year as well. So with all the challenges, I think the team are doing a really good job in managing that. In terms of other metrics, I've mentioned leverage. We'll talk about guidance for the full year on the next slide. Tax rate is in line with prior expectations. So previously, we've said our ETR will be between 26% and 30%, and we remain in line with that guidance. Strong net cash flow driven by the improvement in margins flowing through into the cash in our business. So we're pleased about that with a really good performance in free recurring cash flow, which I'll talk about in the next slide. But actually, in the quarter, recurring cash flow was 9.4% of revenue, which is a lot higher than last year. And finally, in terms of ROIC, as you can see, 12.3%. You'll remember at year-end '24, we reported a 6.7% number. So really strong improvement through the year. In terms of CapEx, you can see in the quarter, we had spend of EUR 46.3 million. That is 7.8% of revenues. There's a bit of a catch-up you would have seen in prior quarters, but the numbers were lower. So there's a bit of catch-up in Q3. In terms of full year guidance just to manage now, we kind of say that the number will be between 6.5% to 7%, but broadly in line with what we've said previously. We have mentioned that actually there is kind of clear blue water between our free cash flow as we improve that versus our organic growth investment. So that's pleasing to see and hopefully we'll build on that in the future. In terms of the split of CapEx spend, so you can see in the quarter, the lion's share of the CapEx spend was spent in Healthcare Services. We have in the hospital, there's some land. And overall, the medical space we've got at the end of the quarter is 988,000 square meters. And the final slide from me. So in terms of guidance for the full year and our targets that we mentioned previously, our position is unchanged. So obviously, with the quarter to go, I'd hope it would be. So we've previously said we're going to beat the target, and we continue to say we're going to do so. So as a reminder, we will beat the organic growth revenue numbers of EUR 2.2 billion, the adjusted organic EBITDA of EUR 350 million. We will have leverage below 3.5x and you have seen that we're kind of guiding to, that's what we were 3.2x at the end of Q3, and we'll be below 3.5x at the end of the year. And in the bottom corner, you can see the metrics that we gave in terms of EBIT and adjusted EBITDA, and we'll beat those as well. So in summary for me, a really good quarter, and I'll hand back to John. John Stubbington: Thanks, Anand. So key takeaways. We continue to deliver solid organic growth driven by both divisions, which is really, really good. We've got consistent margin expansion driven by the improved utilization. Customers are coming to users. Customers are coming back. On top of that, we have got a number of efficiency initiatives that are really needed in health care to be able to manage the way that people want to consume more. The maturity in our network can be seen in the hospitals. The fact that we're putting 1 or 2 more on, I think that if you look back at the average losses per hospital, it will probably help you model that as you go forward. Our leverage has normalized, so as promised, as committed to and starting to come back into our guidance. There's some mild headwinds that we're seeing. There's nothing unusual in those. We're commenting on them so that you're aware of them, and we fully expect to be able to navigate through. Thank you very much. Operator: [Operator Instructions] The next question comes from Julia Angeli Strand from Handelsbanken. Julia Strand: Can you hear me? John Stubbington: Yes. Julia Strand: Yes. So my first question relates to India. So what made you change the mix to a more private segment? Is this just to reflect changed consumer behavior? Or is this strike related? John Stubbington: No. I think that over the course of our discussions as we've developed things, we've always said that we wanted to get more cash, more insurance and start to manage some of the ROCE to appropriate kind of levels. Everybody knows if you operate in India, the payment cycle from the governmental pay takes a little bit of time. We will -- it's an important part of Indian society to be able to provide these services. So we will continue to provide these services. It's just that as we grow our network and we grow our doctor capacity, we have the ability to change that mix while still being good providers of that service. And we're just seeing the beginnings of that starting to flow through. And that's just affected the mix and therefore, affected the growth. I mean we could accelerate growth very fast by doing much more ROCE. But again, that would affect our cash flow. So it's a conscious decision as we move forward with our plans to accelerate. Julia Strand: Okay. That's clear. And then on the strike, where do you -- do you think that this strike could come back? Or has this been resolved? John Stubbington: This is not unusual in terms of the health care community taking action because the government payment cycle can be infrequent and can be lengthy. And sometimes it goes too far. When it goes too far, the people take action. I think we've seen this once before in our time there. So it's not something that happens particularly frequently. This was in one state. So we should point out to one state. I can't remember whether I stated it was in one state, but it's only in one state, Andhra and now is resolved in terms of they're no longer on strike, but it was there through October. So we'll see that being a little bit of a setback for us. It shouldn't be massive, massive, massive, but it's there. Julia Strand: Okay. Understood. And then just lastly, before I get back into the queue. The EBITDA loss in Q4, should that stay on the same level as in this quarter? Or should it be higher considering you're doing more openings? John Stubbington: Yes, it's going to be higher. You're talking about -- currently, you see an opening in Q3, but of course, you haven't got a full quarter of that opening in Q3. And then we're going to add on another hospital. And when you put the hospital on, you have a period where you actually recruited the staff before you've even opened the hospital. So you'll see some of those expenses start to come through for the next hospital as well as a full maturity of the new hospital. And whilst the -- we fully expect the other hospitals to do well, I would be surprised if they cover that off. You've now got a good history in terms of this particular line where we shared quite a bit of data. I would imagine that from a modeling perspective, you should be able to put that through your numbers in terms of averages because I think it would be appropriate to use that if you want to guide it. Operator: The next question comes from Mattias Vadsten from SEB. Mattias Vadsten: I have a few. So first one, you talked about early indications of a more cautious sort of consumer behavior. I think this needs to be captured a little bit. If you could provide the details, what you're seeing? And more generally in the business, would you say sort of double-digit organic sales growth is still doable as we move into 2026 and the general trajectory for Medicover? That's the first one. John Stubbington: Yes. I mean we are a little bit more cautious on the consumer line. That's only because we're seeing a bit of consumer behavior in some of our product lines, which is not dramatic, but there's enough there for us to be able to feel that we should share that with you. It's not unusual for us. So we're not sitting here saying we're seeing something that's a massive change that we need to adjust to, but we always have to adapt. So when we see these things, we have to adapt our pricing. We have to adapt our promotions. We have to adapt the way that we push things through. So we'll probably see us dealing with that over the course of Q4, Q1. And as we move longer term, we fully expect that a healthier -- the normal kind of Medicover cycle starts to come through. You asked about double digit. It'd be interesting for us to see, but we'll be around that mark, I would have thought in terms of the performance. We've got the Hungary adjustment, which does affect us whether we like it or not and 1 or 2 other things. So we'll have to wait and see what happens. Mattias Vadsten: And the next one relates to Germany. So long question short, do you see less competition in that country now? Or is this sort of yet to materialize except that there are fewer actors in the market? John Stubbington: I've said all the time about reform that there's good and bad things about reform. Reform kind of like drives you to do more efficiency, and we've done all that kind of thing and reform cuts off the tail. And as it cuts off the tail, bigger providers are there. I still think it's too early in the cycle to be able to see all of that. We're in the third quarter of this reform. But what you are seeing is an increasing volume. If you're seeing those increasing volumes, I think that kind of indicates the shift in the market conditions that we kind of expected to happen related to what you're intimating. But I think in terms of doing an analysis that demonstrates statistically that, that has happened, it's a bit too early. Mattias Vadsten: And jumping on to my next question relating to margins. If we look on the lease adjusted EBITDA, EBITDA margin, it's up by a significant 2.1 percentage point in the first 9 months, 2025. I appreciate this is not the nature of the business to be able to perform each year. So I fully understand it will moderate. I'm just after what you mean by this comment. And then if we look into 2026, just throwing out something like 0.5 percentage point margin expansion. Is this something that is doable? I mean I appreciate that this rate that you've shown this year is not possible to sustain. So what do you mean by those comments? Anand Patel: I'll start and I'll let John finish. So look, I think what we have seen consistently this year is margin expansion, let's say, in excess of 150 basis points per quarter. Yes. So we kind of would assume that's a sensible number to aspire to in Q4 at the very least, I guess, in terms of the short term. So we saw no underlying changes in the momentum of those themes. There's still capacity that we can fill in terms of the space. So John said previously, I've said previously, there's still clear headroom in terms of us upping our utilization levels, and we can still maximize those facilities. I guess in the short term, it depends on your take on the moderation numbers. So John is talking about a strike in India that's kind of happened in Q4. That will moderate revenues naturally, which means the flow-through in Q4 won't be as much as it was before and a slight change potentially in behavior from a consumer perspective. So does that mean that 0.5% margin rate accretion in 2026 is a sensible number? I think it's probably a little bit more, but we're just being cautious in terms of we see kind of a little bit more headwinds, I guess, in the short term rather than in the longer term over 2026. We've still got ample opportunity to grow our margins is what I'd say. John Stubbington: Yes. To add that, I don't think that we -- in terms of talking about the future, we don't give future guidance other than what we've given. Our underlying model is still strong. We're just seeing 1 or 2 little signs, mild headwinds and little operational things that we need to sort out. I don't think that affects our underlying -- the underlying strength of our overall model. And one of the great things about Medicover in terms of our model is our diversity. And because of our diversity, we can do things like India and move everything on. So the business is sound. Mattias Vadsten: I think that is a very good answer. I will probably squeeze in one last one. I mean price health slightly less in Q3 vis-a-vis Q2. This is a development we have expected for some time. Will this development continue in Q4 and into 2026 with less price contribution? John Stubbington: Yes, I think we've got a good price volume mix in our divisions. It's slightly different at the moment in the current cycle. There's higher price in Healthcare Services and lower price in Diagnostics, higher volumes in Diagnostics, lower volumes versus Diagnostics and Healthcare services. That's kind of a natural cycles that change over periods of time. We've had, as you know, going back in the short-term history, quite a lot of inflationary factors that have been higher than a normal kind of cycle. And I think all you're seeing is that those inflationary factors are coming down. So you've seen that in the price impact. And it's health care. Health care has a hell of a lot of people that want health care, and there's a limited amount of people that can deliver health care. And those limited amount of people will always be saying, well, I'm adding value to society. You need to give me to pay me what I'm worth and those pressures will always be there. So I would expect that we will come down and then those pressures will hit again, and we'll start to adjust as appropriate. You know as a team, our position when it comes to pricing. We feel that we're really good value for customers. We believe that we deliver a really good service considering the prices that people pay. And to be able to do that consistently, we have to be able to adjust our pricing so that the medical profession and the people delivering this get an appropriate pay to be able to stay with us to deliver this for the long term consistently. Operator: The next question comes from Kristofer Liljeberg from Carnegie. Kristofer Liljeberg-Svensson: Two questions, I think. Coming back to your comment here about margins in the Q4. If I phrase it like this, you have the phasing effects, hospital opening strike, et cetera. So maybe if you could give us some more help how much lower margin we should assume in Q4 than third quarter? Do you think it will be more like what you saw in Q1 or somewhere between Q1 and what you have had in the last 2 quarters? Anand Patel: Yes. I think Q3 is clearly an outlier, I would say. Sometimes you have a great quarter. I think somewhere between Q1 and Q2 are probably sensible in terms of an assumption in terms of margin rate accretion year-on-year for Q4. Kristofer Liljeberg-Svensson: Great. And also coming back to a previous question here, growth outlook for next year. I noticed that you mentioned Hungary being a negative impact, of course. But if we were to adjust for that, would that make you more confident to be able growing double digits in 2026 over 2025? John Stubbington: Yes. I think we're not sitting here sending a big message that's saying our business has fundamentally changed. We -- I've sent a message, which is just saying over the next couple of quarters, there's a few things that we just need to navigate. But I don't think that affects our long-term position. So we're a growth company. Everybody knows we're a growth company. We're a much bigger company now, of course. So those percentages are tougher to get. But I would fully expect us to over that period, be in a zone that people are used to. Anand Patel: Yes. So just to add to that, we've always said we're very focused on organic growth, and that clearly excludes acquisitions, that clearly excludes disposals. So if you look at the organic growth numbers, which excludes Hungary for Q3, the numbers are 12.4%. And we'll carry on reporting against our organic growth numbers. And I think rather than look at the total growth, which is a bit muted in the month, as John says, nearly 10%, 9.6% for Healthcare Services, the organic growth number is more pertinent. That's all we're saying. Kristofer Liljeberg-Svensson: Okay. Good. Could I -- just one more. As CapEx investments are going up here a bit again, how should we think about depreciation as a percentage of sales? It has trended down somewhat from the peak 2 years ago. Will it continue down or even out at current levels? Anand Patel: Yes. So look, I'm not going to talk about next year's depreciation charge because at some stage, we'll give guidance for 2026 CapEx, which we're not going to do today. I think I mentioned earlier that our CapEx this year will be 6.5% to 7%. So there'll be some spend in Q4. You can do the math on that. But there will be minimal flow-through from that. I would thought it's just a timing effect from '25 into '26, and we'll talk about next year when we're ready to talk about 2026 and future targets. Operator: The next question comes from Kane Slutzkin from Deutsche Bank. Kane Slutzkin: Just on target, just wondering the sort of '23 to '25 target is obviously quite stale now. I'm just wondering, will you be unveiling sort of fresh midterm targets maybe for '26 to '28 when you report year-end? And then just can you provide some color on the acquired businesses, how they have been performing and the synergies you may or may not be getting there? John Stubbington: Yes. I mean we've never -- we've been pretty consistent about guidance saying that we want to hit the numbers that we need to hit first. Once we've done that, we'll make the decisions about when and where we issue the new guidance, but we're fully aware that everybody expects us to do so. So we hit the number and then we'll share. So that's the same as we said in the past 2 quarters, I think. And then in the acquired business is very positive for us, a little bit slower with SYNLAB because it's a bit more of a difficult integration that you have to do, whereas the Healthcare Services side in terms of CityFit it's almost immediate. So the fact that people were going to -- going to their gym locations and now going to the same locations that we own the business makes the synergy come almost from day 1. So that's performing really, really well. SYNLAB, there's a number of countries there. So as you would expect, as you're doing different things in different countries, some of them have gone really, really well. Some of them take a little bit more time. But the maturity of that will start to come through. There's nothing that we're sitting here saying that is a negative from these businesses perspective. It's a positive contribution to our model and the team are doing well in terms of pushing forward to get the synergies that we planned with just a slight delay. Anand Patel: I guess the only thing I'd add to that, if you look in the Q3 report, what we have done somewhere at the back is split out the revenue and the net profit from the acquisitions group together. And what you can see is actually if you calculate the margin rate, which I'm not going to do for you, it's accretive versus company levels, which we said it would be anyway. So we're pleased. I said there's always more we can do. We haven't split out in the report, just to be very clear. But you can see in the pack that yes, it's contributing on a healthy basis to our business and is margin accretive. Kane Slutzkin: Great. Sorry, just one last one. Could you just remind us where you are on the potential listing of the Indian business? Is that still in play? John Stubbington: Yes. I mean we've -- I mean, your questions are going to get more and more intense as we go through each quarter from this point forward. We -- December 12, I think, announced that we would explore this. At that stage, we said it would take up to 2 years. Obviously, we're approaching the anniversary of December 12. So people will be expecting more. It's one of those things that it takes a bit of time in India. We're doing our prep work. The team are doing well on that, pushing forward. Now we need the performance to accelerate a bit. We're at the business end of that. So we've had a few setbacks, as everybody knows as we've gone through the year. But as I said earlier, our underlying trend of recruitment in India has been strong, and that's one of the reasons why we opened Sangeeth. It's one of the -- sorry, one of the reasons we opened the hospital in Q3. One of the reasons why we have pushed forward opening another hospital into Q4, which originally was planned for 2026, which again, as a consequence of that, will create some losses in our Q4. But we think it's the right thing to do because we've got some good momentum. So strike doesn't really help us again. Currency doesn't really help us again in terms of positions, but nothing has changed from our perspective. As soon as it does, we will inform you. Operator: The next question comes from Bram Buring from Wood. Bram Buring: Most of my questions have been answered, but I wanted to ask about admin costs in the quarter. I was a bit surprised to see that they were down Q-on-Q. Is that -- is there something specific behind that? Or should we continue to expect admin costs to be closer to this 3Q level than what we've seen more recently? Anand Patel: No, no, I would assume it's a seasonality thing. There's nothing specific. We did admin costs in Q3 per se, I would say. So I would look at the 9-month number and assume that's a better trend for the full year. Operator: The next question comes from [ Bola Dimmer from SurePath ]. Unknown Analyst: Two questions on India, please. You mentioned you're changing the share of this private pay in India in your revenue. Can you tell us what is your current revenue split between private pay and public pay in India? And what is your target split in this regard? Anand Patel: Yes. So look, we don't disclose that information. I think the one thing I would say is that the reason -- one of the reasons for Medicover being totally successful in the past and present is due to the diversity that John mentioned. So it's good to have an even split of fee-for-service versus insured versus public pay. So that means that when one area has a downturn, then the other kind of has an upturn normally. So we don't guide on that, but we're building the right split for us to make sure that we can not be subject to any specific area. Unknown Analyst: Okay. Also, when I look at your peers, which operate in the similar regions in India like Aster DM or KIMS, their revenue per bed is twice higher than yours. Could you share, I mean, your thoughts on the reason behind this big gap? Is it just the question of maturity effect or location or actually the split between public and private? John Stubbington: Well, you've kind of answered your own question, which is really good in terms of there is maturity. So you tick on maturity and there is location that takes into a factor. I mean, if you go back in time, I think we have shared and said that one of the approaches that we've got for India is to try and do more of our operations in Tier 1 cities and more of our operations in larger hospitals. If you're in Tier 1 and if you're in larger hospitals, you will find that the types of things that you can do are more comprehensive and the pricing of being in a Tier 1 city versus 2 and 3 is very, very different. And one of the things that people should find attractive about us as we go through the IPO is the fact that we're behind, and therefore, that's going to mature up. So you kind of answered your own question. I'm just confirming what you said. Unknown Analyst: Okay. Great. And the last one on the CE, I assume. So you mentioned this more cautious consumer. Could you, I mean, kind of elaborate, is this slowdown mostly visible in the funded private pay or public pay? John Stubbington: No, no. It's very much related to out-of-pocket fee-for-service line where people are deciding themselves whether they pay or whether they don't pay. We're seeing some signs in certain lines, not in all lines, some are going really, really well, really, really strong. And we've shared it with you so that you're aware of it. And from our perspective, it isn't anything that's particularly fantastically new that we haven't seen in our 30-year history or I haven't seen in my 15-, 16-year now history with Medicover. It's just that we -- when this happens, we have to get a little bit more creative. We have to repurpose a bit and we have to do things with our pricing and our proposition, which we will do. But usually, if that trend kind of continues, it will take -- we'll probably see a little bit of softness maybe in the Q4, Q1 as we move forward. But from a long-term perspective, from our business perspective, we have got a really solid business with a very broad base of propositions that we offer to people. This is not something that is a major concern for us over the long term. Our business hasn't fundamentally changed. We've just shared a little bit more information with you. Operator: [Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any written questions or closing comments. Hanna Bjellquist: Thank you very much. We have a few questions in the chat. And the first one is how do you see the outlook for 2026 for the Polish market in context of the savings announced by the ministry. Apart from the impact on public revenues, do you see any impact in other areas, laboratory diagnostic subscription? John Stubbington: Yes. There's going to be a lot of noise from the ministry currently. There's a new Minister of Health. She's looking at lots of things and has got a good track record in some of the things that she's done. So there's going to be lots of noise of different statements and different positions that are taken. It takes a bit of time usually once a statement said, even if they then say they want to do it, it takes a little bit of time to filter through into market conditions. Also, I think some of this was announced this morning or just recently in terms of looking for savings within the NFZ spend. Versus competition, we, in terms of our mix, have less than most of our competition because our focus has always been on other lines not related to governmental funds. So even if there is adjustments there, we won't be affected as much as our competition. And historically, we've always found ways if the government are paying less, the underlying demand is still the same. You can't say to yourself, I haven't got a health issue. You can't ignore it, but often that means that the health issue gets bigger. So these kind of things will happen. We're used to them happening. I don't see it as being a fundamentally big shift for us. Hanna Bjellquist: I think we have been through mentioned about the consumer behavior. We have also talked about India and the mix. Could you remind us about the background of Hungary? John Stubbington: Yes, it's just a historic position for us. We withdrew from Hungary a long, long time ago. And when we did, we offered -- we carried on with a partnership that we had together from an insurance perspective that we always knew would come to an end. They've scaled considerably. And as a consequence of that, wanted to move in a direction where we were no longer the partner, and we've always planned for that. So it's been a planned position, probably lasted longer than we thought and was a very fruitful partnership with a really good team, and we wish them the best of luck, and it helps us because now we've got more management time to focus on other opportunities that we have. So it's a good thing for us. We mentioned it a lot today because the figures are affected by it. But as we go forward, that will wash out, and we'll just move on. Anand Patel: And from a cost perspective, all these costs were dealt with in Q2. So there's no impact in Q3 numbers. And actually, it was, let's say, a small profit as a consequence of the transfer. Hanna Bjellquist: And we have talked about the Indian strike, but we do not want to give you any numbers, state any impact on the revenue and EBITDA, but we have mentioned it before. John Stubbington: Okay. Well, thank you very much, everybody. Today, we shared a little bit more in terms of some of our thinking around Q4, Q1. And from a 2026 perspective, we are a really solid, strong business. If you look at what we've delivered in Q1, Q2, Q3 this year, they're really exciting numbers. They're really positive numbers. There's a degree of consistency. You can see our operational leverage coming through. A bit of that is going to be affected by the fact we're doing new openings. A bit of that is going to be affected by the consumer caution we talked about and a little bit by the need to increase supply for our funded customers, which is absolutely the right thing to do. We have to look after our customers. They come to us for health care, and we intend to deliver good health care. And if that means we need to invest more, we will do it, which is great. So we're on a good trend. We anticipate that trend will continue, and we look forward to sharing how we do in Q4. Thank you very much.
Unknown Executive: Ladies and gentlemen, thank you very much for joining us today, taking time out to presumably busy schedule. Now, we would like to begin TMC's FY '26 Q2 Financial Results Briefing. I am [indiscernible] from Corporate Communications, pleased to be your MC today. Now I would like to invite our Chief Financial Officer, Kenta Kon, for his presentation. Kon-san, over to you. Kenta Kon: Good afternoon, ladies and gentlemen. Thank you for the introduction. I am Kon. Before I begin, I would like to start by sincerely thanking our customers around the world, who love Toyota cars; our shareholders, who support our efforts; our dealers and buyers and our other stakeholders. Here is a summary of Q2 results. Our operating income for the first half of this fiscal year was JPY 2 trillion. Despite the impact of U.S. tariffs, strong demand supported by the competitiveness of products has led to increased sales volumes, mainly in Japan and North America and has expanded value chain profits. The full year operating income forecast is JPY 3.4 trillion, despite the impact of the U.S. tariffs, we have continued to build upon our improvement efforts, such as increasing sales volume, improving costs and expanding value chain profits. We are steadily translating comprehensive future investments into improved productivity and increased returns with a strong focus on improving the breakeven volume. As for shareholder returns, to reward our long-term shareholders, the interim dividend is raised to JPY 45 per share, and the full year dividend forecast is JPY 95 per share. As announced at the Japan Mobility Show 2025, we will clearly define the 5 brands of the Toyota Group with clear directions. A diverse range of products, meet the needs of each individual customers and thereby expanding choice for our customers. I will now delve into our financial results for the period ended September 2025. Consolidated vehicle sales for the first half reached 4,783,000 units or 105% of the same period last year. Toyota and Lexus vehicle sales totaled 5,267,000 units or 104.7% compared to the previous fiscal year. Thanks to a strong demand from customers around the world, vehicle sales increased mainly in Japan and North America. The ratio of electrified vehicles rose to 46.9%, driven mainly by strong HEV sales in regions such as North America and China. Consolidated financial results. Sales revenues of JPY 24,630.7 billion; operating income, JPY 2,005.6 billion; income before income taxes, JPY 2,478.1 billion; and net income of JPY 1,773.4 billion. The factors that impacted operating income year-on-year, are shown on the slide. Next, the geographical operating income. In Japan, operating income decreased mainly due to the impact of exchange rate fluctuations and increased expenses in North America, it decreased because of the impact of the U.S. tariffs. Other regions saw an increase, mainly due to higher sales volume, improved model mix and other factors. Our China business saw increase in operating income and share of profit of investments accounted for using the equity method. Operating income in the Financial Services segment increased largely due to an increase in loan balances. Now, we will move on to the shareholder returns. We will raise the interim dividend by JPY 5 compared to the previous fiscal year to JPY 45 per share. The forecasted full year dividend will also be increased by JPY 5, reaching JPY 95 per share. We will continue to increase dividends in a stable and continuous manner to reward our long-term shareholders. As for share repurchases, in June of this year, we passed the resolution to establish a repurchase program of approximately JPY 3.2 trillion as part of taking Toyota Industries Corporation private. Therefore, no new share repurchase program will be established at this time. We will continue to conduct flexible repurchases of shares, considering factors such as common stock prices. Next, I'll explain the forecast for the fiscal year ending March '26. Consolidated vehicle sales remain unchanged from the previous forecast. Toyota Lexus vehicle sales has been revised upward by 100,000 units to 10.5 million units. Through the strong competitiveness of our products, we will capture even more robust demand, particularly in North America. Next, let me explain the full year consolidated forecast. We have adopted the full year ForEx rate assumptions of JPY 146 per dollar and JPY 169 per euro. Our forecast for the full year consolidated performance are sales revenues of JPY 49 trillion, operating income of JPY 3,400 billion, income before income taxes of JPY 4,180 billion, and net income of JPY 2,930 billion. The factors impacting operating income year-on-year are as stated on the slide, despite the impact of U.S. tariffs amounting to JPY 1.45 trillion improvement efforts such as increasing volume, model mix, cost reductions and expanding value chain profits are expected to result in a positive impact of JPY 0.9 trillion. To maintain and strengthen our earnings power, we will work with all stakeholders, including suppliers and dealers to leverage results of the strengthening of our operational foundations to further improve productivity. I believe, everyone here has seen the models we unveiled at the Japan Mobility Show. These cars speak more for themselves than I ever could. Each and every product is something that could not be created overnight. Toyota is a company managed through its products, which are the results of long-term efforts built up by many people. Our products were created by our development teams, production teams, suppliers, dealers, and of course, our customers and the market. The first half financial results reflect these efforts, and our cars have generated solid profits. And now, in addition to Toyota, Lexus, Daihatsu and GR, we are able to introduce the new Century brand. By having each brand take on clearer roles within the Toyota Group to form complementary relationships, we can expand customers' choices even further with a diverse range of products that meet the needs of each individual. We hope you will continue to have even higher expectations for the Toyota Group moving forward. A diverse range of products supported by such strong brands has led to 150 million units owned by our customers worldwide, and the value chain business has expanded to the order of JPY 2 trillion in operating income. This is the result of the efforts by our teams on the front lines in service, sales finance, used car sales, insurance, and other areas to maximize the value of each vehicle, supported by product strengths, such as ease of repair and strong supply of parts, as well as high residual values. The new RAV4 is the first to adopt Arene, a platform designed to efficiently develop software. RAV4 is our best-selling global model, with annual sales of 1 million units. We deliberately chose to lead with this challenging model. By utilizing the vast amount of data collected from roads and vehicles across the world, we will develop and refine SDVs together with our customers. By adding our SDV strategy to the virtuous cycle of the new cars and value chain businesses, we will further strengthen our profit foundation. Over the past two years, we have grappled with certification issues and lack of capacity head-on, carrying out to reinforce our operational foundation. As a result, we have thoroughly focused on safety and quality while securing additional capacity, leading to a stable production. On the other hand, investments in human resources and future-oriented investments have expanded, and, combined with the impact of U.S. tariffs, our break-even volume has risen significantly. To bring our break-even volume back onto a downward trend, we are launching a company-wide initiative. We will review the allocation of people, materials, and capital, and turn the results of the reinforcement of our operational foundations into earning power. We will pursue waste-free, value-added work and improve productivity, and also continue to focus on improving the break-even volume. This concludes my explanation of the financial results. Thank you. Unknown Executive: Thank you very much, Kon-san. Now we would like to open the floor for questions. Let's prepare the stage. Unknown Executive: [Operator Instructions] Your questions will be addressed by our Chief Financial Officer, Kenta Kon as well as our COO, Takanori Azuma from the accounting group. Please allow them to be seated as they respond to your questions. [Operator Instructions] In the second row in the middle section, please. Unknown Analyst: I am Taguchi from Nikkan Kogyo Shimbun. Two questions. Number one, first of all, for the past several years, you are focusing on earning power. There must have been various external factors. But how have you raised your earning power with those efforts? And how has that been reflected in these Q2 results? Now 15% in September is something that we heard about the U.S. tariffs, as determined. And further, throughout the year, how do you plan to minimize the impact? I am sure you're working in various fronts, but probably you can tell us your directions. Kenta Kon: Thank you very much for your questions. Well, earning power. So the first question was how our efforts have delivered, and that certainly is a question about our financial results themselves. As I mentioned in my presentation, JPY 2 trillion and JPY 3.4 trillion in operating income is what we have announced. We do have external factors, of course, but we do have global customers with very strong demand for products. And we feel that day in, day out, because of the high quality and the power of our products, which has been the result of our accumulated efforts. Regionally, North America, as you know, because of the impact of the tariffs, the situation is not rosy although I cannot share with you other than North America, for example, China, Europe, Asian markets and Africa. These markets, although the situation is not easy, but in terms of both revenues and sales volumes, we have seen some healthy situations. Brazil experienced some typhoons and hurricanes, but yesterday, we announced the restarting of the production. Actually, that has been brought forward by tremendous efforts made on the -- in the front line of our business, and that certainly is a part, a very important part of our earning power. In terms of our value chain, JPY 2 trillion annually is the revenues that we can expect for 150 million cars being owned, of course, is the basis of that value chain revenues. But once again, that represents the power of our products. Residual value of used cars, for example, is maintained very high. And also, Toyota vehicles are often said as being very easy to repair, because that concept is already built in, in the design of the cars. The repair personnel is involved in design so that easy to repair is an important part of our product, although it is not visible from outside. All of those components put together have been integrated into our earning power and that's the Q2 results. As for the second question of your is about the impact of the U.S. tariffs, how we responded successfully. I think I showed you some slide about that. Did I? Well, JPY 1.45 trillion is the impact from the U.S. tariffs. At the beginning of the year, our President, Sato-san talked about this. We really should not panic and try and respond hastily by raising prices of the cars. That's not our way. For each vehicle, each model, each region, we will scrutinize the competitive landscape and the market, and we carefully determine the price point. And as you can see on this slide, and of course, the efforts were not solely made to respond to the tariffs, but as you can see on the right-hand side, our improvement efforts amounted to JPY 90 million -- excuse me, JPY 900 billion, JPY 900 billion. And of course, that includes strong sales reflecting the strong capacity of the product as well as the value chain revenues. Do you have anything to add? Probably not. Thank you for your question. Unknown Executive: So next to the previous questioner. Mizuno from Yomiuri Newspaper. Mizuno Tetsuya: My question is to Kon-san. The Chinese semiconductors, the Nexperia, they shift Nexperia. What sort of countermeasures are you taking against that shortfall? Has it impacted you? And what sort of measures do you intend to take going forward, please? Unknown Executive: Mizuno-san. If you could ask 2 questions at once? Or are you satisfied with just one? Mizuno Tetsuya: Just one is fine. Kenta Kon: Well, most recently, we have not seen any impact so far, but we do know that there's a risk. Therefore, we're trying to scope the impact and the areas where the impact would be felt, and we are currently monitoring the situation very closely. And of course, this is not only for Toyota, but it's, I think, for the entire supply chain, and we're looking for alternatives and what other options have available. We are researching such alternatives, and also monitoring very closely the impact situation. Unknown Executive: May I have the person with the white jacket in front? Unknown Attendee: I'm [indiscernible] from TV Tokyo. I have two questions, for Kon-san. Number one, about the U.S. market forecast. For the entire year, you have made some changes or not, no, you have not made any changes. But according to researchers, after October because of the tariffs, car prices could rise in the general U.S. market. So how do you view the North American market going forward? The second question is about what you mentioned in the second part of your presentation, earning power in order to regain the downward trend, the all-out efforts will be made. What sort of efforts will you be making in terms of breakeven volumes, for example, what level would you like to bring it back by what time frame? Kenta Kon: Thank you very much for your questions. As for the North American markets going forward, as you mentioned and very rightly so the volumes that we expect have not been changed from the previous announcements. As we hear from the U.S., we see lots of very strong demand for our products. You may know this, the sales incentives tend to be really low, reflecting the strong value of our products. Still, we can barely cover the demand, and our inventory level tends to be rather low. And of course, on the front line, they are doing their very best in producing the number of cars needed. In terms of sales, therefore, we expect very healthy situations going forward. Now about the breakeven volumes in our earning power. I said that we will be making an all-on efforts involving different and various activities and initiatives. There are so many, I don't know, which one should take the highest priority, but enhancing the value-add work, eliminating wasteful tasks. For example, wasteful time of meetings with lots of people involved without much contributions. And of course, we'll be very careful in determining price point and increased sales certainly reduces breakeven volumes, our value chain revenues as well. We do not have the clear goals in terms of quantities, but we have seen this trend of increasing breakeven volumes, and we would like to see it decline. Unknown Executive: Second or third row from the back, yes. Unknown Attendee: Chikauka from Nikkei CrossTech. I have two questions as well. First question about hybrid. Hybrid is growing quite rapidly. So going forward, do you have any expectations about the future growth of hybrid going forward? As for EV, in 2030, 3.5 million units, I think is your base volume and you don't intend to change that base volume? That's the first question. Second question is about the price pass-through of tariff costs, tariffs basically speaking, or in essence, should be borne by the U.S. side. That is my recognition. If so, well, you mentioned that there's a strong demand for Toyota, which means that perhaps 15% of the entire tariff could be passed through to prices, and then for Toyota and for your cooperating companies that would lead to increased profit and would be beneficial for both. So would you say this is not as simple as that? Could you tell me your thinking on this point, on this issue? Kenta Kon: Yes. May I? Regarding hybrid vehicles, it is growing very rapidly. And would that continue going forward? I guess is the gist of your question. Well, we believe that growth will continue. And I can't say, but from what I hear of from my observations of the market, the request for increased production toward hybrids and the demand from customers for hybrids is very strong. So we would like to accommodate such requests through production -- through increased production and accommodate the customers' requests, thereby increasing our volume for hybrids, I believe. As for BEV, well, we're looking at the actual demand, and it seems that compared to our initial estimations, things are actually declining. That is -- there's a shortfall against our expectations. And therefore, we have to look at the customer and market situation to at an appropriate timing, deliver good products that meet their needs. And the next one was about the price pass-through of tariff costs. Well, if you say that because you have such competitive product, if you increase your prices by 15%, it will be beneficial for all you said, but for many years, in the case of Toyota, we have many cars that's really been loved and used by our customers. For example, Carola, Hilux, Surf, or 4Runner in the United States or Highland Cruiser -- these -- we have many, many different models, and many customers are loyal to these brands. They continue to use them for many, many years, and many of our customers are fans of our cars, which means that for us to price these vehicles out of the expectations of customers is very difficult for us to do. So we want to enhance the value of these cars in order to charge the customers an appropriate price that meets that value, because if you outprice the customers' expectations, you can really lose their loyalty. So our method would be to take it step by step. As for hybrids, in 2025, I think somebody said it will reach 5 million units. Perhaps it was a goal that somebody mentioned, I'm sorry, I'm not quite sure about this, but 5 million in 2020-something, do you have a goal like that, a numerical target? You mean hybrids. Yes, hybrids. Really, well, at least I don't have any numbers firsthand on when we will reach 5 million, but the hybrid ratio amongst our -- sorry, 4.46 million units this year, that's about 200,000 unit up from last year. So this pace of growth, I think, we will -- we should maintain this pace of growth going forward. Unknown Executive: Now person in the second row, in this section, please. Unknown Attendee: I am Nakano from Nishinippon Daily. Now I have two questions. The first question is about Kandamachi in Fukuoka Prefecture. The battery plan for EVs. In April, you were to be -- to sign the MoU with the Prefecture, but now it has been prolonged and postponed to autumn. What is the progress? And also, 2028 start of operation that has been planned as well as the production capacity? Have there been any changes to your original plans? The next question is about taxes. Under Takaichi -- Prime Minister Takaichi, the tax treatment Minister has been appointed and some special measures could be taken in terms of taxes. And what is the view on that situation? And also, with the outlook for any preferential tax treatment. Do you have any outlook for that? Unknown Executive: Thank you very much for your questions. As for the first question, Fukuoka Kanda battery factory, ongoing study continues. So I heard that is. Now we are talking with the Fukuoka government and stakeholders in Fukuoka Prefecture currently. As for the taxation, well, we have seen the changes in the administration in this country. Now there are various taxes involved in automotives and revising and changing of those taxes have been something that JAMA and other organizations have been advocating towards the government, Well, when it comes to taxes, we have to consider how we may be able to maintain monozukuri in production in this country in a healthy way. It's very important for the entire industry, not only for the automotives. I hope any form of taxes will be able to enhance domestic demand for the industrial products. Therefore, it is my belief that JAMA will continue to advocate for that. Unknown Executive: Then the person in white at the very back of the room. Unknown Attendee: From Kyoto, my name is Tokumitsu. I also have two questions. First question, the Japan Mobility Show is now on, and I saw the exhibit there. And the Century branding has come to a milestone, I think, but I think that some of these pilot cars are also viewed toward mass production. So do they represent the future production plans of Toyota. The second question is about the impact of tariffs? You said it was of JPY 1.4 trillion, but now that's been increased to JPY 1.45 trillion. So a slight increase. And in August, the -- you had calculated on a reduction in auto tariffs, but you did make that modification after the imposition of the actual tariffs in September. Is that the reason for this slight increase is the question? Kenta Kon: Regarding the Japan Mobility Show, thank you very much for coming to our booth at the Japan Mobility Show. As you said, well, I don't know if we intend to mass produce all of them. But of course, several of these models overall be marketed in the future, at least I believe they will be. And I think this attest to the strength of our product competitiveness. That's it in a nutshell, but especially the Century brand was launched. We were able to launch a totally new brand called Century, which I thought was a very big step forward, because currently, new car names, new models are very hard to come by. But to start from starting a totally new brand, I think, was a major initiative in the company, and it's also a big message from us. The launch -- you may have heard the presentation to launch Century, our Chairman, Toyota said this is the pride of Japan. He said, Century, the car and the brand is the pride of Japan, he said. So from that perspective, it goes beyond just car model. I mean, I think, in Toyota, it represents not just a model, but something beyond that. So I do hope that you will take it as such. Regarding the second question, may I address that question? In the first quarter, it was JPY 1.4 trillion, but now we've added 5 million. And as you said, from mid-September, there was a 15% tariff imposed. That is a tariff level was decreased. So this is based on the recalculation of the impact of tariffs and the tariff impact will hit not only Toyota, but also our suppliers and about 70% of part and components -- well, the components and parts manufacturers account for 70% of the market. So we want to work together with them to overcome this. When I visit the suppliers, each supplier has, for example, embarked on labor-saving and also changing their processes, et cetera, to challenge new initiatives to address the impact. So in addition to the product competitiveness, we would like to master our forces together as a manufacturing industry to overcome the tariff issue. Unknown Executive: The person on the left, please. Unknown Attendee: I am Toyoshima, WBS TV Tokyo. Kon-san, I have some questions for you. As a result of the U.S.-Japan tariff agreement. What do you think of it? Well, actually, the end result was as Toyota had expected, 15%, but now you are expecting the JPY 5 million in negative increase, is it because you have taken the very conservative way of revisiting your numbers? Or is a situation really, really difficult? Well, shortly after the announcement of your Q2 results, your stock price went up a little bit, but now it began to decline. Probably the market expected more of the improvement in revenues and profit, but how do you view that? Are there any risks of downward revisions going forward or upward revisions. Any of you? Kenta Kon: Thank you very much for your questions. Well, to be honest with you, what do we review the situation? Well, they are striking the agreement itself is something that we are extremely thankful to the government officials. Without anything being decided, we really cannot plan on production in the automotive industry, which certainly is a very big industry. So uncertainties would not lead us to focus, cannot plan on cost reduction, cannot plan anything. Therefore, I really would like to thank all those people who are involved in the negotiations. And it is not a small improvement. And certainly, we will have to work on what we can do, both short term and mid- to long term in order to make further improvement, not only North America, but procurement, production, sales and marketing, all of us have to work together to bring about some positive results. Are you relieved? Or do you still see the situation to be rather difficult? Well, I would say both. Well, upward revision or downward revision possibilities. Actually, we are often called being very conservative in our projections, but I do believe we are being pretty neutral about this. But of course, towards the end of the year, we certainly do make efforts so that we can provide you with the -- even the slightest upside. Thank you very much for your questions. Unknown Executive: Now we'd like to entertain questions from participants online. And after that, we'll come back to the people in the audience for questions. [Operator Instructions] Okay. Terasaki-san from Best Car, please. Unknown Attendee: Can you hear me? Unknown Executive: Yes, we hear you. Unknown Attendee: This is Terasaki from the Editorial Department of Best Car I have two questions. First question. Well, it's been mentioned several times about the value chain and that it takes up a big portion of your operating profit. And looking at the graph, from 2020 for 5 years, you've probably increased your operating profit from value chain by double. You're doing many things. I think, of course, value of used cars is increasing. But 5 years ago, I believe the residual value of your used cars was still very high, but the operating profit doubling, I think, is something really a tremendous feat. So specifically, what pushed up the operating income so much? And you have 150 million cars in position. That's quite a large number, but 5 years ago, I think you had similar numbers. So what changed to boost the operating profit in the value chain so much over the past 5 years to the extent that you can disclose? That's the first question. Second question, since this is a good opportunity, you talked about the Japan Mobility Show, but in the booth in the Southern Hall, it was a very popular in Century. There was a 40-minute waiting line to view the Century. And so for the mobility show as a whole, I think the Japanese market will be boosted and galvanized. So if you could, Kon-san, talk about your impressions about the heat at the Mobility Show? Takanori Azuma: Yes. First question will be addressed by myself, Azuma. The value chain, well, about 7 years ago, for the employees and to the outside, the -- then President talked about leveraging on the ownership and 6,000 stores and overseas 16,000 dealership network, leveraging that strong dealership network to communicate one-to-one basis with our customers. And that declaration was made in 2017 or '16. And then we started Tinto, and about 5 years ago, the car ownership was a little more than JPY 100 million. But over the last 5 years, thanks to you, new car sales has been increasing 10 million a year. And also, our ownership of our cars has also increased. And against that backdrop in Europe, we extended our guarantee period so that we can entice customers to come to our dealers more often. And as the years go by, our -- we lose contact with our customers, but we wanted to recapture that content -- contact, sorry, to have them come to our dealers and purchase supplies and accessories. And that cycle has now begun to turn, and that's now expanding from Europe to the other regions. So that's one major initiative that led to this. And in Asia, we offer second part that is more inexpensive accessories and supplies and also financial services are provided. So we want to utilize the dealership network to extend our touch points with the customers. And just the head office telling these regions what to do, you'll not come up with good ideas, but such good practices are now being leveraged across various regions, and we are building on these good practices, sharing these good practices, and that's leading, I think, to the very good results we are seeing today. Kenta Kon: About the Japan Mobility Show. Thank you very much for your attendance. And my question about the Japan Mobility Show was your question. Well, we had such a large turnout so many customers who were viewing our cars with joy. And I was very, very happy to see the delight on their faces. The Japan Mobility Show, Motor Show, well, I think all across the world, you see regions where the scope or scale of these mobility shows are being reduced. And they're shifting toward the electronics and the electrical components of cars. But in Japan, we call this a Mobility Show. It's a show for mobility, and to have so many people come and delight in these exhibits and have fun. We were really encouraged and heartened by them. And looking at the smiles on the faces of customers, we are very, very happy ourselves. Unknown Executive: Now let's come back to the on-site journalists. In the middle section, the second row from the front. Unknown Attendee: I am [ Matsumi from Trinity Daily ]. About the United States, I have 2 questions. President Trump the other day talked about $10 billion investment for Toyota to build a new plant in the United States. So what is your take on what he had said? And have you made any changes to your investment plan in the United States? So that's the first question. Second question, the U.S. government talked about Toyota expanding its dealers network to sell other brands' cars. Is it true? And if you -- if it is, when are you starting that effort? Kenta Kon: Thank you for your questions. For one thing, $10 billion, I read that in news. Now the United States really wants to see employment increasing and customers should be served with next generation of cars and services. Therefore, we do plan sizable investment plan going forward. I cannot really say it's $10 billion, but I would say Toyota will continue to make a sizable investment in the United States. I have to limit myself to that. Now in terms of Toyota's dealership to sell imported cars, well, Toyota makes cars in the United States. So we are considering doing something about the Toyota cars made in the United States. Now how about other OEMs? Vehicles being sold in Toyota's dealers network. Well, it is not for us to decide. But if there are any demand or requests for that end, then we may consider it. Unknown Executive: Yes, the person in front of the microphone with a spectacle. Unknown Attendee: Ohira from Asahi newspaper. It's related to that. I have 2 questions on tariffs. First question. Toyota, you're considering selling U.S.-made cars in Japan and that was announced when President Trump came to Japan. But considering the briskness of the U.S. market and also the U.S. and Japan production capabilities and cost of transportation, it doesn't seem to be very economically rational. So what would be the goal or what was the motivation of doing this if you're going to do it? Also, second question in relation to that, the -- for the cars assembled in the United States, conventionally, you are procuring parts from across North America. Now these parts may be replaced by U.S. domestic made parts. Are you considering such a shift? Or have you already started such initiatives? Kenta Kon: Yes. Thank you. First question -- I'd like to address the first question about the economic rationale, what's the meaning of -- or rationale behind engaging in reverse imports. As you say, when you look at the economic situation currently, it may not be such an economically rational initiative. But it may deliver to Japanese customers products that are not easily available in Japan. And of course, the model segments, et cetera, and how to price these models, what sort of supply structure we will take, there are many challenges. So we will consider all these challenges to consider what sort of business we can make out of that offering. So we are currently making preparations now. So that's it for the first question. Takanori Azuma: Thank you. Regarding the second question about the local production in the United States, and of course, this is not just limited to the United States, but in all regions of the world, we want to produce locally and procure locally so that we can manufacture cars on that basis in each region. For example, this year, in North Carolina, we have built a battery plant, which was a major decision, and this led to increasing the local procurement rate in North America. So our plan to produce locally as much as possible remains unchanged. We would like to move -- make efforts toward that end going forward. Unknown Attendee: How about Mexico? How about replacing with the Mexican parts? Are you considering such a possibility? Takanori Azuma: Well, currently, we have no concrete plans to do that yet. But let me consider the suppliers who have already made forays into the local market and the manufacturing they do there. And of course, they are hiring employees, and they have to, of course, create a livelihood of their families as well. Therefore, I think we'll have to take all that into consideration when we make such decisions. Unknown Executive: The 2 people who have raised their hands will be the last to ask questions. Let's begin with you. Unknown Attendee: I am Fukui from Nikkan Jidosha. I have 2 questions. So your sales remains brisk because of your product competitiveness. Even the ever better cars that you have advocated for the past 10 years certainly delivered the results. Now at the Mobility Show, you announced a new brand strategy, which sounds a bit futuristic. In 2024, you experienced the certification irregularities. And at the time, you revisited your product plans altogether. And you launched various projects to do so, revisited them and some projects, I understand, have been either delayed or canceled. What sort of impact do you see now out of that because development takes 2 to 3 years? Your healthy product portfolio towards the latter half of 2020s, do you think you will be able to maintain momentum and that would impact your profitability? So I would like to learn your midterm view. In relation with that, your investment in the United States has been mentioned this year, for the year, you increased number to about -- by 130 units, but then your production plan remains at around 10 million and in United States, you have a very low inventory level because your cars are selling so well. So how do you plan on your capacity increase in terms of production? Because just increasing the capacity would only increase your fixed cost. So how do you plan to go over 10 million vehicles? Do you plan to enhance your alliance within the group and to be more efficient in procurement of components? So what's your plan going forward? Kenta Kon: Thank you very much for your questions. About the product competitiveness for the midterm future, it seems that you may have a question about that. Well, 2 years ago, we did experience the certification irregularities, and we put on lots of efforts in reinforcing our foundation. Well, sometimes we had to halt our production lines. So 2 years ago, 1 year ago, we experienced that quite frequently. That is not about the product competitiveness, but it was about the production. But certainly, those hiccups we experienced in the past, but they have decreased -- they have been decreasing very rapidly. It is still increasing the fixed cost rapidly will have a future impact. Therefore, we really have to be careful when we plan for that. For example, it may be an impact of 1 second or 2 seconds on the production line, but we have to make steady efforts in order to enhance our productivity step by step. We are not talking about thousands or hundreds of thousands of vehicles or million vehicles to increase in our production. So when it comes to the product competitiveness in the midterm, we will make sure that we will maintain that going forward. That's all from myself. Anything would you like to add? Unknown Executive: Final question, the person in the very front row. Unknown Attendee: Yao from Nihon Keizai newspaper. I have also 2 questions as well. First question. Your management is based on product and region. So one of your access is, of course, the region and you want to be the best in town. So compared to other manufacturers you have a revenue structure that's not biased in particular countries or regions. So what sort of impact do you feel from the tariffs on this regional-based sales operation? And another is related to this. You -- about maintaining the production capacity of 3 million units a year domestically in Japan. In the previous financial results, you also announced about the new construction in Toyota City of a factory, but due to increased tariffs by the United States, your export costs will increase. And I believe that you announced that you will adjust destinations to adjust for that. So how do you intend to work towards maintaining the 3 million units production capacity in the domestic market in Japan? Takanori Azuma: So I'd like to address the first question. Well, we manage our company based on product and also region, and we are also managing company based on that. And about 10 years ago, we were skewed on North America. More than half of our sales was from the United States and the remainder from the rest of the world. But if we had been imposed such tariffs with the same sort of situation, then the impact would have been much larger. So we have to think first about the customers in each region to engage in our business operations, and that's done by the regions. The same for revenue Lexus customers, GR customers and the mini car companies, each are attended to by each of these divisions or regions. So the regions are working hard not against each other, but in a balanced manner, and that's why we have a very good revenue structure. For example, in Africa, in the past, Africa was part of the other -- the rest of the world. Also, Latin America was the same. But these regions have been referred or transferred to Toyota Tsusho and with Zephyr I think it's being run by -- that business is run by people who think first about Africa. So they support very high revenues in Africa. And in the earnings report, Japan, Asia, Europe, Africa and the other regions, and the other regions are actually leading the revenue for us. And within Asia, India and also in Europe, there were some very difficult regions where Toyota were using these markets to polish our products, but now these regions are seeing an increase in revenue. So we're very well balanced in terms of regions. And so all of Toyota is making a global effort to accommodate the U.S. tariffs. And so we would like to ask each of the regions to actually focus on their respective regions and the businesses there. Kenta Kon: Regarding the 3 million production capacity and our strategy vis-a-vis local production, well, 3 million units domestically is a very, very important goal for Toyota. We have the field, genba, right next to the production facilities, which enables us to turn that cycle very rapidly. And that would help monozukuri or manufacturing prowess in Toyota. And so that becomes a source of our global competitiveness, I believe. Of course, to safeguard monozukuri or manufacturing in Japan, we need to maintain or retain a significant amount of domestic production because if that declines and then the supply chain will also weaken that could lead to or impact jobs and others. So we have to earn foreign currency and purchase resources to run the domestic business. I think that's how we survive. And so domestic production in Japan must be safeguarded and protected. On the other hand, local production is important too in many ways. And I think to manufacture where the customers are, to sell where there is a market for the product or to produce where there's a market for the product. And also, we must develop components and parts or vehicles that match those needs. And then that's best produced locally. So in Japan and non-Japan areas, perhaps we can allocate the production of different models. That sort of adjustment is done. But we don't intend to transfer something drastically from Japan to the United States or overseas to Japan. We're not discussing such drastic measures. We will continue as we have in the past. Thank you. Unknown Executive: Thank you very much, ladies and gentlemen. It is now time to close the session. Thank you very much for being with us today. Please excuse the presenters. With this, we would like to conclude TMC's FY '26 Q2 Financial Results Briefing. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Stefan Wikstrand: Good morning, everyone, and welcome to our Q3 earnings call. Whilst the attendee list is starting to fill up here, I just want to point out that we will do this call as usual. So, we'll start with a brief presentation of the quarter. And then we'll go into a Q&A section where you can ask questions. [Operator Instructions] I think the attendee list is done, and everyone connected. So, with that, I will then hand over to our CEO, Vlad Suglobov. Vladislav Suglobov: Good morning, everyone, and welcome to our third quarter results call. And we obviously have also Stefan, our CFO, with us today. And let's begin by giving you a brief overview of this morning's report. We are pleased with the quarter's overall performance. In USD, revenue increased 0.2% sequentially in comparison to Q2. It's been a while since it happened when we had sequential revenue growth. The change of the trend is attributed to product improvements that we made in Q1 and Q2, and the gradual expansion of user acquisition spend, which was made possible thanks to these improvements in our products, namely in Sherlock. And Sherlock was the highlight of the quarter, achieving 5.6% growth sequentially in USD terms. Year-over-year, over the last 3 quarters, it went from minus 7.3% in Q1 to minus 3.5% in Q2 and then to plus 7.9%, almost 8% in Q3 in USD terms. So, with the positive changes that we've made to the game in Q1 and Q2, we were able to increase profitable user acquisition spend, and our new management and marketing helped bring energy to this process. And now the game seems to be on the trajectory for at least moderate growth. And the game accounts for about 29% of our net revenue. It's 1 of our 3 pillars of our revenue generation. So, this is a welcome change that should help our top-line dynamic. And if we look at the other 2 pillars of our portfolio and revenue generation, Jewels' family of games had a stable performance quarter-to-quarter, but it declined year-over-year. And Hidden City was down 5.2% sequentially in the quarter and down 14.1% year-over-year. So, not as good performance as Sherlock, but again, we did the changes, successful changes on Sherlock. And so, we were able to expand user acquisition there, and the dynamic of the game has changed. And now we have to work on the other 2 pillars of our revenue generation to try to achieve the same. So, our actively managed portfolio of games together increased 2.6% sequentially in USD terms. So, this positive dynamic of Sherlock, which is quite strong, actually shines through a more mediocre performance of the rest of the portfolio. And now that we have made these improvements to Sherlock, we will, of course, turn our attention to Jewel's family of games and Hidden City to try and use the lessons that we've learned on Sherlock to try and improve the dynamic of these 2 other games. And hopefully, will help us turn around the trend in our top line. In other news, monthly average gross revenue per paying user was at a new record of USD 70.8. And again, during the quarter, one of the tools that we used to turn around the performance of the top line is user acquisition. And we increased UA spend in the quarter to 21% compared to 19% in the previous quarter and also 19% a year ago in Q3. And if you look at how our user acquisition spend was evolving over the last few quarters, we kind of hit a minimum outside of our -- or very close to the bottom bracket of the range we previously communicated. And from there, with the help of the changes and the new management and the marketing and adding new advertising channels, we started increasing the spend, and we went all the way up to 21%, which is very close to the upper bracket of the previously communicated range, 17% to 22%. And during the fourth quarter, we think that we will have to go outside of that range, but probably not higher than 25% of revenue, most likely not higher than 25% of revenue. So, our goal is to continue this momentum and expand user acquisition to invest profitably in the growth of the portfolio revenue through existing and new games and primarily Sherlock, in order to turn around the top-line dynamic. The gross margin reached a record 71.2% in the quarter, up from 68.8% last year, thanks to the continued success of G5 Store. And we remain debt-free and continue to have strong, solid cash flow, and something we are very proud of. Now let's take a closer look at G5 Store, which continues to show remarkable growth. As you know, one of the key advantages of G5 Store is lower payment processing fees, which are in the low single digits. That's quite a contrast to the 12% to 30% fees typically charged by third-party application stores. The cost efficiency directly contributes to our improved profitability and the expansion of our gross margin. G5 Store is our third-largest source of revenue. And during the quarter, it accounted for 24.7%, so almost 1/4 of total net revenue of the company, up significantly from 17.1% last year. And it's a great milestone for us when we launched G5 Store some 5 years ago. I don't think we really thought it will be responsible for the quarter of all revenue generation in the company. And yet here we are, and it continues to grow quite substantially. Gross revenue growth in USD terms was 30% year-over-year in G5 Store and 6% sequentially. In addition to the G5 Store, we've also seen steady growth in our web shop. And web shop is a module that allows our players on mobile platforms to pay directly to G5 through their browser, through our payment processing, which obviously dramatically lowers the payment processing fee because mobile application stores, they charge the highest processing fees. And during the quarter, the revenue flowing through web shop accounted for 3% of total net revenue from mobile platforms, an improvement compared to 2.6% in Q2. We believe and we are optimistic that this percentage can continue to increase in the coming quarters, boosting our gross margin further in addition to the effect that we're getting from G5 Store. And last quarter, we mentioned that G5 Store will start to scale its revenue by licensing and distributing third-party games that are or were successful in mobile platforms. We have signed a few of these deals, and we aim to release the first game from other developers on G5 Store before the end of the year. This will bring much desired incremental revenue to mobile game developers while further expanding the reach and scale of G5 Store operations. And now G5 Store is 25% of our business, it is at a size where its strong continued growth may start positively affecting the overall top line dynamic and help us with the plan to turn the situation over to growth, obviously. Now let's look in a bit more detail on the quarter, leading up to a record gross margin. Own games accounted for over 73% of net revenue, and active own games accounted for 66% of total net revenue, up from 63% last year. Gross margin reached a record high of 71.2%, up from 68.8% a year ago, primarily as we discussed, due to the continued growth of G5 Store and with some help from the G5 web shop. Monthly average gross revenue per paying user reached a new all-time high of USD 70.8. This is compared to the last year's figure of USD 64.9. So, this continued growth of this particular key metric reflects the continued trend for the improvement of the underlying quality of the audience. We are in a situation where a relatively small number of high-paying users, high-paying players in key countries, drives a substantial part of the revenue, while acquiring other types of players in other countries is not economically justified. And so, the overall player numbers, therefore, decline. But as long as that gold cohort remains with us, as long as we can refill it with user acquisition and retain them for a long enough period of time, the fundamentals of the company will be healthy. So, in the future, you may see a situation where there is actually growth in revenue, but the audience metrics are still trending down. That would not be something abnormal. And G5 Store is another factor which affects these numbers because generally in G5 Store, we have higher paying players compared to mobile and overall smaller player numbers than on mobile to generate the same amount of revenue. So as G5 Store continues to become a larger and larger part of our revenue, the overall user numbers shrink. But again, this really doesn't mean that there is anything wrong as long as we have our golden cohort of users, and we know how to find them, and we know how to retain them and we know how to monetize them. As you remember, in free-to-play games, there's only a small number of people that actually play for the experience. So now let's look at the operating profit for the quarter on the next slide. And operating profit for the period came in at SEK 12.6 million compared to SEK 22.9 million last year, and this resulted in an EBIT margin of 5.5%, down from last year. The lower EBIT was only marginally impacted by foreign exchange revaluations. More importantly, we have deployed more capital into user acquisition during the quarter, which increased, as I mentioned, 2 percentage points compared to both previous quarter and as well as compared to last year. And this obviously had a negative impact on EBIT. However, as mentioned before, the positive changes we've made to Sherlock made it possible to expand profitable user acquisition from lower levels and turn around the game’s revenue performance. The long-term vision here is that as long as we can continue to acquire users profitably and increase the acquisition of users profitably, it does make sense for us, obviously, to do that. And we will grow back gradually to a higher profitability through that, through increasing our top line, but also with the trends in the G5 Store and G5 web shop, we'll also see in the future the expansion of the gross margin. It's been happening very reliably over the quarters, which will also help us restore profitability eventually once we have fixed the top line trend situation. During the quarter, the net capitalization impact on earnings was SEK 0.6 million compared to minus SEK 5.4 million last year. Now let's turn to talk about our cash position. Capitalization impact on cash flow was minus SEK 23.2 million, less than SEK 25.5 million last year. The movement of working capital was negative SEK 1.7 million compared to positive SEK 27.2 million last year. And total cash flow during the third quarter was SEK 10.4 million, down from SEK 53.3 million last year. Total cash at the end of the period stood at a strong SEK 247 million despite the buybacks of SEK 8.4 million that we made during the quarter. All right. Let's move on to the final slide and discuss some final thoughts on the outlook from here. So, we will continue to implement our core strategy of improving the metrics of our active games of our existing revenue pillars, which will make expanding profitable UA possible in order to turn around the trend of the revenue of these pillar games and through that, our portfolio. We also see positive momentum going into the seasonally strong Q4 and Q1. So hopefully, we'll have some help from that. In Q4, because of this, we may go as high as 25% of UA reinvestment from gross revenue. The increase will help us optimize for growth while maintaining profitability. That's the aim. And as we've said before, we will notify the market when we venture out of the range of 17% to 22% of UA to gross revenue, which is what we now plan on doing, and that's why we are communicating it clearly. During the quarter, we made 14 iterations on several games in our new game pipeline. Among notable developments, there was a discontinuation of 1 game after it failed to reach sufficient metrics, while another game passed early soft launch with promising metrics. This new game is moving forward to more advanced stages in the funnel, and we look forward to seeing further development of this concept in the next quarter. Twilight Land is now in the late-stage soft launch phase. And we have achieved very good early metrics and good midterm metrics in this game, but we need more work on the long-term metrics, and we need more observation of these long-term metrics and a few more tests. And tests at this stage of soft launch take a little bit more time because you have to wait for the players to get to the point which you're trying to measure. So, we expect that over the next several months, we will gradually increase user acquisition on Twilight Land while still doing some more tests and doing some iterations on the game. Then this increase in Twilight Land is another reason why we think we will go to a higher level of user acquisition expenses in the Q4. And through our recent initiative to expand the G5 Store with the distribution of third-party games on the platform, we have made agreements to bring third-party games to G5 Store. The teams are actively working on preparing their games for release on G5 Store and the first release, as I mentioned, is set to happen before the end of the year. And as I mentioned again, both the size of G5 Store and the speed of expansion will continue to have a positive effect on our top line dynamic. And now the store is much bigger, so it will be much easier for this effect to sort of shine through the overall revenue mix to the top line dynamic. The G5 Store growth and also growth of the flow of payments from mobile users through G5 web shop will continue to help us boost our gross margin. And we will, of course, continue to focus on operational efficiencies in development and marketing, including continued integration of generative AI where it makes sense. And it actually makes sense. Tools are getting better. Throughout all of this, we maintain strong financial discipline. We continue to generate solid cash flow and maintain a strong net cash position, which gives us the flexibility to execute on strategic initiatives that will strengthen the foundation for future growth. I'd like to end the presentation by thanking you for following G5 and also thanking the whole G5 team for their outstanding efforts in delivering this quarter's result. This concludes our presentation, and let's open the call for questions, which I think we already have. Stefan Wikstrand: Yes. And I will just repeat if you want to raise a question verbally, you raise your hand. We have already -- I will get back to that in a minute. You can also ask questions in the Q&A box that [indiscernible] has also done already. We'll get back to that one as well. But I will start by inviting Simon Jönsson from ABG to ask his question. Simon Jönsson: Hope you can hear me. I want to first off revisit the UA spending and the guidance you provided for Q4. Of course, very interesting. And I understand that the increase in Q3 was mainly Sherlock, but the further increase you expect in Q4, is that also Sherlock primarily you think? Or is it primarily other active games? Because, yeah, you said Twilight Land needs more time, so that shouldn't be the main UA driver, I think, at least. Please correct me if I'm wrong. Vladislav Suglobov: That is right. The primary driver will be -- is Sherlock. And then number two is likely going to be Hidden City because the games are quite close in terms of the genre and the mechanics. And so, we've tried, so to speak, transferring some of the successful things that we've done on Sherlock to Hidden City, and the game is quite responsive to that. So, we expect that this will continue, and we will be able to spend more on user acquisition in Hidden City. It is more difficult with Jewels family of games, Jewels of Rome, specifically, our experiments of transferring our findings from Sherlock to Jewels of Rome did not really work out. But over the next few months, we will be trying different approaches. It may or may not have effect on Q4 user acquisition, probably not. It's a short period of time until the end of the year. And then a little bit is Twilight Land. And then we don't know exactly how much, but we felt that it would be prudent to communicate that we might be exceeding the range. We basically do not want to be held back in Q4 by the 22% or having to deliver exactly 22%. And as we said, we will communicate if we think that we will exceed the range, and we think we will exceed the range for these reasons. Simon Jönsson: All right. And a follow-up on that. Since you have made changes to Sherlock earlier this year that sort of prompted this growth, have you already done similar changes to Hidden City? Is that correctly? Vladislav Suglobov: It's in early stages. So, the report covers Q3, so we discussed mostly Q3. But it's quite straightforward that if you have fixed one hidden object game, you might actually be able to fix another hidden object game as well. So, it's natural to think that we would try to do that, and we have some encouraging signs. Simon Jönsson: All right. Makes sense. Just on a final note on new releases since you said you need some more time on Twilight Land. Should we still view Twilight Land as sort of the main upcoming game, you think? Or are there others that have sort of catch up? Or yes, what's the near-term outlook coming quarters? Vladislav Suglobov: Yes. Well, it's the most complete and the most ready of the new games. Another game that was probably the second by completeness was discontinued during the quarter due to not having reached the metrics. And then the 2 other games, 1 of them already successfully passed through the initial soft launch stages with great results, I would say, unprecedented results for us. So, we're quite optimistic about this game, but it's still in the early development stages. With regard to Twilight Land potential or the potential of early -- of other games that are in earlier stages, it is -- again, it is hard to say. We try to only allow the games that have a chance of scaling to certain benchmark that we have of meaningful monthly revenue. So, in that sense, Twilight still -- we've not given hope on this game. So, it has some really good things going about it, but we have to work more on the certain longer-term metrics. And that's the situation. And we will find out in the next few months, I think. Stefan Wikstrand: Then we have Hjalmar from Redeye. There we go. Hjalmar go ahead. Hjalmar Ahlberg: Maybe just first a quick follow-up on Twilight. Would you say that, I mean, there's a small chance that the game is not being launched or that's rather a thing about when it's being launched? Vladislav Suglobov: That's a great question. I think there's still some chance that it will not be launched, and it always exists. I think until we are totally happy about the metrics. I would say, to be totally honest, I think there's still a chance that it will not be launched. But also, I think that so far, we have achieved really good results with the game on the early and medium-term LTV progression that there's also a very good chance that we will resolve the rest, and it will be launched. But we will have to wait and find out. I'm also not the person actively hands on working in the game. I know the overall situation and what is good and what is holding up. But it is difficult for me not being on the team to know exactly the chances or how they feel about that. And if you work on games for a long period of time, you always get attached to games. So, I reserve the right to say, well, this is not good enough or if we cannot reach the metrics that we think we should be reaching, and it takes too much time. But at the same time, I still -- part of me believes the team can turn this around, and we will find out which reality is going to happen. Hjalmar Ahlberg: And with your new guidance, so to say, for UA in Q4, I guess it's -- I mean, difficult to say how top line will respond in the short term. But other than that, would you say that you aim to remain stable in terms of other OpEx and so on, just to get some flavor on what to expect in terms of EBIT margin in the short term. Vladislav Suglobov: Yes. I think we are quite stable in terms of OpEx and other parameters from quarter-to-quarter. So I think there are no big changes are expected. Hjalmar Ahlberg: Right. And also, regarding the launch of third-party games, I think this was asked in Q2 as well, but have you decided how you will report this? Will it be similar to your own games in terms of gross margin, UA and so on? Just to understand how it will look financially. I guess it's a small impact in Q4, but if you can give some information and update on that. Vladislav Suglobov: Yes, it's probably a small impact in Q4. But yes, we'll be reporting exactly the same way that we report on our existing games. Hjalmar Ahlberg: All right. And also, regarding this kind of new UA approach and more focus on higher paying users. Are these kind of players that are coming from other games? Or is it like a growing user base overall? Is that something you can have any insight to? Vladislav Suglobov: Well, this is the -- the way I think about it, and we are discovering more about our user, about this golden cohort, so to speak, is the -- this is the audience that sometimes has been with us for a very long time and played several games. And sometimes this is the audience that we have acquired relatively recently. But the key differentiator for us is that the person not only plays the game for a long period of time, but they also fall into this schedule of repeated purchases that are aligned with their play cycle or every week or every couple of weeks. And some people wait for like very special deals and then buy in bulk. Some other people are more like impulse buyers. But in the end, one uniting characteristic is that they can afford to pay in these games. It's not that much money, by the way, taken on a per week or per month basis. And they are -- they seem to be okay and happily doing that for quite a long period of time. And the way our games are structured is that you can enjoy them for years. So, I mean, these users, they're mainly from the United States and Western Europe. This is where there's the highest concentration of them. But this is also where it is quite difficult to acquire organic traffic, right? Because these are highly valued users and advertisers of the whole world are after them, whether on PC or on mobile platforms. And then if you look at other countries with lower value per user, we sometimes get the influx of people from countries where historically, we cannot really find these gold cohort users. And then these players may not be as engaged or they make payments, but those are relatively small, but they inflate our user numbers and user metrics without bringing any substantial contribution to the company's revenue. And I think the overall situation in the mobile marketing ecosystem is that it evolves towards fully valuing the user, right, for the product that can make -- justify paying for that user and making profit on them. And so, we can justify paying and be competitive in the market and paying for these users and then turn a healthy profit on them. And we cannot actually justify buying in cheaper geographies, at least for now, in many cheaper geographies, the users are way cheaper there, but they also don't fall into this pattern, so they don't recoup the investment. So naturally, we skew towards buying fewer but more valuable and profitable users. And I guess, in the countries where our games don't work as well, then those users are better sold, so to speak, to some other business that can extract better profit from them, right? So, kind of that's the way the -- I think the ecosystem evolves, and it's natural that when we go from the times of receiving a lot of big numbers of users in early days of mobile gaming. But over time, we're sort of looking at consolidating the user base towards the type of users that actually is driving the revenue of the company. So at least this is the view from my perspective, looking at how mobile marketing is evolving. And yes, and then if we look at the demographics of these users, again, we discussed the countries, but they are predominantly female players of age 35 plus or even higher depending on the platform, we tend to have even more pronounced characteristics on G5 Store, where these tend to be players and payers who are even older and are even more -- skew even more female. Hjalmar Ahlberg: All right. And also, can you give some -- I mean, you indicated that 25% of UA for Q4 and that you will be in the higher end of your range. Is that kind of an indication for 2026 as well? Or will you change depending on how you perform in the coming quarters? Vladislav Suglobov: I would say that if it works out and the aim here is to kind of bottom out now, right, and then to grow out from here, we'd be happy to keep UA spend at that level if we can be certain that we are driving the growth that will make us profitable eventually. I would rather not be reducing that. On the other hand, if we feel that we are unable to deploy this much capital in Q4 for whatever reason, be it the market or the fact that we weren't able to continue improving the characteristics of games, then it will be good news for the margin in the short term, but this would also mean that maybe long term, it's not the best thing in the long run, right? Because the way out of here is expanding the acquisition that is fundamentally profitable and that will drive the increase in the top line. Hjalmar Ahlberg: Got it. And also, a final one, I forgot if you can give any information on the third-party games. Are those games that are already available on other platforms? Or is it completely new games? Vladislav Suglobov: Yes. Those are games that already exist, that exist on mobile that make good enough money there and the developers are looking to make incremental revenue, and we believe that they can make good incremental revenue that makes sense for them to port these games over to G5 Store. So, the good thing here is that the timeline of bringing this game to G5 Store is way, way shorter than developing a game from scratch, which can last years. In this case, we are talking months. And then the -- it's not as capital intensive, obviously, compared to creating a game from scratch from 0. So, we look forward to the first releases. We -- again, G5 Store continues growing. We see we are achieving amazing results like 25% for our games on average, 25% of revenue is coming from G5 Store, any developer out there would like to generate 25% extra incremental revenue, right? Wouldn't they? Even if this extra 25% are shared with the distributor, it's still an amazing deal in the market where it's difficult to find new users. It's difficult to find growth. And so, all this incremental revenue basically becomes also your incremental margin. So, I think it's a great opportunity for developers and for us. And again, the first games are coming to G5 Store relatively quickly. So, we'll see how it works out, but we're optimistic. Stefan Wikstrand: [Operator Instructions] We have 2 questions another popping into the Q&A. Vladislav Suglobov: We have 3 now. Stefan Wikstrand: Now, we have 3. Vladislav Suglobov: Okay. Let's start from the top. So, [indiscernible] is asking sales and marketing, excluding user acquisition, decreased to SEK 9.7 million from SEK 15 million. Why did the costs come down? Is the new lower level the new normal? We should expect to continue going forward. Stefan, can you remind me, does that increase -- does that line include the staff also? Stefan Wikstrand: Yes. Vladislav Suglobov: It does. Yes. So, we've done -- so user acquisition expenses went up year-over-year, 19% to 21%. But in absolute terms, I think they actually declined by 7% or so, right, because the revenue is smaller. So, user acquisition was larger last year, not as a percentage of revenue, but as an absolute number, at least in SEK. That's what I saw on the first page. I think it was minus 7%. But Stefan, correct me if I'm wrong. And then another important thing that has changed year-over-year is that we've done the rightsizing of marketing somewhere between Q1 and Q3. I think we finished with that this year. Obviously, the company has seen times where we were much larger, so we needed more people to manage this complexity. And with the decline of top line over several years, we thought that it's a good time to rightsize marketing and also with the change of management to sort of make it more efficient, more focused, more energetic. And I think it worked out given the results in Q3. But the -- yes, that basically explains the numbers, right? Stefan, am I missing? Stefan Wikstrand: No, I can only concur with that. And those changes that Vlad mentioned on kind of rightsizing the team occurred primarily in Q1 and Q2. We saw some effect in Q2, but the full effect is kind of seen in Q3. So that's why it's kind of on a lower run rate. And I think, yes, you should expect these levels rather than anything else going forward. Vladislav Suglobov: That's right. Okay. Let's move on to the next one. This is from Erik. And the question is on the G5 Store, obviously, gross margins are favorable, but do you see any difference in KPIs versus the traditional platforms in terms of user retention, ARPU or other? Yes, we do. I think we mentioned that the metrics of G5 Store across the board are way better than on mobile platforms. We have higher revenue per user. Even the difference in the processing fee does not explain the difference. So, like the gross amount is also higher. And then we retain a larger portion of that. We see higher retention rates as well. And those are 2 main things for us, right? The -- how much people are paying the average check and how well they are retained by the game. And that's why we are deriving quite a substantial revenue from G5 Store, having substantially smaller number of people actually playing through G5 Store. There seems to be a double effect here. There's obviously some selection effect where we feel that -- and we can track that some users who are very loyal to G5 games, they may begin playing on other platforms, but eventually, they will settle on G5 Store, and we make sure to incentivize players to transition to G5 Store as much as we can because it makes sense for us to have this direct connection to the player. Not everyone does it, but people who do it, they seem to be the most trusting and the most loyal customers of the company. And therefore, it's natural that they sort of inflate the overall metrics. But there also seems to be conversion of our earlier users into G5 Store by means of ways that we cannot even track. We just noticed that players were playing some time ago on other platforms and some other games and then they have decided to try and download from G5 Store. We also see people -- we also see new players converting to G5 Store. But another thing that we see is that even accounting for that, the metrics still seem to be higher. And this is where we continue to have the explanation is that our games, the type of games that we make, these very high-quality, high-resolution games with a lot of stuff happening on the screen, they appeal to older demographic and older demographic or more mature demographic, however you put it. And they, on average, prefer to enjoy this game on a large screen. It's a more premium feeling. You have more justification for spending money. You enjoy it way more. And this is really -- large screens is really where our games shine and where they are really competitive as an experience compared to games made for mobile with the scale down, let's use the word more primitive graphics. It's really a different experience on a large screen. And so, there's -- we think that this premium effect explains the difference in monetization and retention as well. So, the next question is, you mentioned in the report that Jewel's family of games likely need 6, 8 months to refresh the product. Is this something that is required before you can scale UA for the franchise? Well, nothing will prevent us from trying to scale UA for the franchise in the meantime. But the effect of that would be most pronounced if we were able to implement the changes in the game that would be -- that will improve the metrics. One of the challenges that we have is that in order to be able to conduct multiple tests and measurements, you need enough users, and you need enough players. And with this trend towards smaller number of high-paying players, we need larger cohorts of these to make conclusive decision whether or not the change in the game was positive. Or I would just say that we will be able to do these changes, iterations in a more educated and faster way if we had enough inflow of new users. So, we might actually increase user acquisition spend on these games sort of ahead of the improvements in our efforts to make the iterations and have measurable results faster. Okay. We have next question from [indiscernible] again. If you release a game on G5 Store, will you own the customer data? Will the gamer be able to transfer progress to mobile? Or will he or she lose progress if he or she switched to mobile? So, look, we're getting into the details of our contracts with the developers. I wouldn't like to do that. They're confidential, but we obviously are thinking about these questions, and we're trying to make a fair deal here, which would make sense for us as the party bringing users to the table, but as well to the developer and their main interest is incremental revenue, really, not user data. So that's the way I see this should work, and we try to align the agreements in accordance to these principles. And once again, I think the -- if you think of smaller developers, it's great to have that business, but it's also not so great in the sense that you have to -- you are very dependent on Apple or Google or any distribution stores, but you're also very dependent on advertising companies and incremental revenue is very hard to find. So, they really want that incremental revenue, and we can give it to them. And I think that's an important point in the discussion when we have it with them. The next question is, is the company focused on releasing in U.S. and Europe? Or are there any plans to translate and release current and future games to Asia, Japan and China? So, first of all, all our games are localized in Japanese and in Mandarin and Cantonese. So, they're not unavailable there. They are available. Historically, we had some big successes in Japan. Unfortunately, we were not able to replicate them later on. We are working on bringing our games to China. And hopefully, there will be some announcements in the coming quarters, but there's not much that I can say now. Yes, that's the end of the list. No more hands, no more questions. I think that's it. Stefan Wikstrand: I think that's it. Vladislav Suglobov: All right. Stefan Wikstrand: Okay. Well, then, any final remarks before we wrap up? Vladislav Suglobov: No. Thank you, everyone, for spending your morning with us. And thank you for following G5. We'll talk soon. Stefan Wikstrand: Thank you. Bye.
Trond Fiskum: Okay. Then I think we start again. So welcome to everyone participating here at this live event at Arctic. And of course, welcome also to those participating online. Sorry for the technical difficulties that we had here. I want to thank Arctic as well for allowing us to have this earnings call at their facilities. So we jump straight into the key points for the quarter. We have had good EBIT growth and significant cash flow improvement in the quarter in spite of the challenging market. As most other players in the market, automotive industry, Kongsberg Automotive has faced also a challenging situation with the market. And as a consequence, our revenues are down around 10% comparing to third quarter last year. So we had EUR 162.9 million in turnover in Q3 versus EUR 181.6 million last year. And this is a direct result of the market situation in the global vehicle industry. The largest impact is in the market in North America due to the ongoing tariff situation there. That has caused higher costs, market uncertainties and therefore, also a lower demand. And in spite of those lower revenues, we see an improved EBIT of EUR 4.9 million in the quarter. This is up from EUR 1.1 million same quarter last year, which is a solid improvement from both previous quarters and also from Q3 last year. On cash flow, we see also a positive trend. We delivered EUR 6.6 million in positive cash flow, which is EUR 11.8 million improvement from Q3 last year. Cost reductions, we are moving forward with our programs according to schedule. On tariffs, we have been able to mitigate the costs this quarter and the net impact of tariff cost this year is -- or this quarter is close to 0. And then we have some challenges on warranties, and we will get back to that in later in the presentation. Here we take a closer look at the financials, comparing those in the quarter versus the last 4 quarters. On revenues, we see the 10% drop in Q3, which is, as mentioned, caused by the market situation. We also have a currency effect due to a weaker dollar of around EUR 5.4 million, which is an implication of the business that we have in North America where the contracts are in U.S. dollar. On EBIT, we see the positive trend. We do see the dip in Q2 where we had significant warranty accruals. That was the main reason for the drop, but you see the underlying improvement going back from Q3 last year until now. We also have some warranty accruals in this quarter. Erik will talk a little bit more about that later. But the positive thing here is that we've been able to improve EBIT in spite of lower revenues, which is good. It's not on the level far from where we want to be. There's still a lot of work ahead, but it's a positive indication. Free cash flow, positive trend also here. And you see the positive trend on the last 12 months. So last 12 months, we are close to 0 now due to the positive result in this quarter, a result of lower cost base reduced -- some reduced net working capital due to lower sales and also more cash discipline when it comes to investments. So overall, I would say, a positive indication on the -- trend on the profitability and cash flow that is very important for us. And as previously announced, we have the cost reduction efforts, which will give us around EUR 40 million in improved cost base and a 4% to 5% improvement on EBIT on stable revenues. The cost saving programs are moving forward according to plan. We have completed the program that we launched in '24. We have completed the program that we launched at the beginning of '25, and we are on track with the program that we launched in May, which will be completed fully by Q3 '26. We start to see the good results of these programs, which also Erik will show in the EBIT bridge later in the presentation. And also due to the lower market activity, we are also making additional adjustments in the cost base to align with the demand and to safeguard our profitability. This is mainly impacting manufacturing locations. On business wins, we report a business win with an estimated lifetime revenue of around EUR 34 million. This is lower than previous quarter and also during 2024. What we do see is that there is a lower activity in the market when it comes to new contracts. This is a consequence of the tariff situation and that the focus has been more on managing that situation and also the lower demand. We also see some of our customer programs being postponed. We have a strong focus on market activities. We keep a very tight dialogue with our customers. And we do continue with a good and strong pipeline of opportunities. And very importantly, we have not lost any major contract opportunities during '25. So it's a number that we would like to see higher, but it's also a number I'm not too concerned about due to the current situation and the good pipeline opportunities that we still have. On the business wins, we also have done the revision of our investor policy. We have had a discussion with the Board of Directors and decided that we will only announce strategically important business wins going forward, and our investor policy will be updated to reflect this. Warranty cost. This is an area that remains a concern for us. We reported in Q3 -- or Q2 increased warranty accrual. In Q3, we have a total warranty cost of EUR 2.7 million of which EUR 2.5 million is increased accruals for future expenses. And due to the situation that we uncovered in Q2, we conducted quite a comprehensive review of our exposure to warranty liabilities across our entire product portfolio and also -- and our customer base. And as a result, unfortunately, we have uncovered some additional risks on further and future warranty liabilities. The problems we see here is not primarily related to our ability to deliver quality products. The challenge here is historically unfavorable contractual terms when it comes to warranty and also that warranty management has not been very optimal. This is disappointing, and it may potentially impact our profitability going forward. Those that have been responsible for this are no longer a part of the company, as they were a part of the leadership change that took place in the beginning of the year. It's very hard to make any estimates on the net value of the total liabilities that we may be held accountable for. It's quite complex and a lot of different potential outcomes here. And we are working very hard to address these forthcomings. We have also implemented a much more proactive approach to warranty management and strengthened the team there. And at this point, we are -- and cannot disclose any further details due to the ongoing discussions we have with affected customers. And as soon as we have more information, we will provide that, when we have more clarity on the potential financial impact. Tariffs, we have previously communicated that we will recover 100% of the tariff cost. That has been a clear ambition for us, and we were very much aware that this was not an easy task. The process with our customers are -- can be challenging, have been challenging. They request a lot of documentation, and there are also some tough negotiations that are taking place. We have been very firm and consistent in all our customer negotiations, and that has been basically that we cannot absorb this cost and tariff-related cost has to be passed on to the end consumer. That's been a consistent message, both in the U.S. where we have the biggest impact, but also in China, where we have also some impact of the tariffs that have been implemented there. The approach has given good results. In Q3, we had 0 net impact of the tariff cost. We continue to have some costs that we have not been compensated for yet, but we have agreements in place with our customers. So it's more a question of time to get that compensation. And for those of you that follow the automotive business and industry closely, you would have heard about Nexperia, which is a Chinese semiconductor manufacturer that has put a halt on export to -- out of China because of a dispute and the situation in the Netherlands. So this caused quite a lot of disruptions in the industry. KA also have some products that are directly impacted by the semiconductors. We have been proactively managing the situation and been able to secure supply of the semiconductors so we have had no issues related to that situation. And as previously announced and communicated, the main concern here for us is not the direct cost impact of the tariffs. We have been able to mitigate that. The concern here is the impact that we have already seen materialized on the market demand. Then some other highlights in the quarter. Two of the acquisitions that we have previously announced, the first one is Chassis Autonomy, which is a transaction that we completed in the quarter. We now own 100% of the company and full integration is ongoing. It is a very interesting technology. We received a lot of interest from potential customers. So we're very excited about the Steer-by-Wire technology. This, we expect to play an important part of Kongsberg Automotive's future. The transaction and all payments of the shares were done in the quarter and the net cash effect of the transaction was positive also in the quarter. The acquisition of the 25% share of -- the remaining share of our joint venture in China with Dongfeng and Nissan was also completed. We have now full ownership of that company, and that also means all our operations in China. This gives us more flexibility and strategic options in that important market. And also this transaction was fully paid in Q3. Last on this slide is the renewal of the EUR 25 million loan facility. We have agreed to renew that. That is a loan facility we have with NordLB that was established in 2020. It was set to mature in January '26. And this we have agreed to renew with 1 more year with the same interest terms. Okay. Now looking a bit forward. We have to deal with the current challenges and also look forward, of course. And we have been working very hard during the quarter to work on a new strategic direction for Kongsberg Automotive. End of September, we had a strategy seminar with the Board of Directors. This is still some work in progress, but a key outcome of that seminar was that we decided that the business -- let's say, business unit, Driveline is no longer going to be considered as noncore. Instead, we recognize that this is a business that continue to create value for Kongsberg Automotive, and we will continue to pursue opportunities within that area to win new businesses, extend current contracts and to optimize the pricing. This is also reflected in our financial reporting. So you will see that the numbers from Driveline is not now reported separately, but reported as a part of the business area Drive Control Systems. We continue working on the strategy, and the plan is to present this on the Capital Markets Day on December 16 in Kongsberg. So you are hereby all invited to that event. I think it will be a great event with some very interesting updates about our strategic goals, our strategies to achieve those goals. And we also give you some hands-on insights and a look at the products that will be a key part of Kongsberg Automotive going forward at our tech center that is also located in Kongsberg. Let's see. We are also trying to see if we can get some opportunities for some test driving. We are checking the possibilities. We will let you know. So we also organize some transport from Oslo, and we will have lunch. So yes, I hope to see as many as possible on that event. And we will provide more practical information about this during November, and you will see that from us. Okay. We continue to stay focused on our priorities for '25. We continue to adjust our cost base, as you have seen, and we are taking the additional necessary steps to adjust the menu level further because of the market volumes. We continue to focus on generating cash -- positive cash flow with disciplined CapEx management and targeted reduction of net working capital. We have made changes in the leadership on the top level. We start from the top. We do need to continue working on strengthening the leadership teams across the entire organization. That is a very important priority for us. We need strong leaders and strong teams to -- with the right competencies, values and mindset, supported by clear structure of accountability and responsibility. We're also working on the future with innovations and profitable growth. We have a very strong focus on customer needs and very tight dialogue with them on, I would say, every -- all levels. And this is also very important for us to understand what their needs are going forward and how we can create value in that, let's say, space of opportunities. We do believe that KA is well positioned to deliver long-term and sustainable financial performance. The 2026 priorities, together with the longer-term goals and strategies will be shared during the Capital Markets Day in December. So that was the summary, and I will hand over to Erik to go through the financial updates. Erik Magelssen: Thank you, Trond. Can you hear me? Trond Fiskum: Yes. Erik Magelssen: Good. Also on the webcast? Trond Fiskum: Yes. Erik Magelssen: I was last in KA from 1999 to 2006, and it's very motivating and interesting to be back. I think what we're trying to do is to merge the best of how KA was managed and run in those days back then and then with the new best practices and processes. So I think we're trying to see -- starting to see some truth of that, and that's very motivated and interesting. I'll take you through some more of the figures. As commented by Trond, the Driveline segment is now part of Drive Control Systems and is no longer defined as noncore. And this is also the way that we, as management, run and manage that business. You see the revenue level in Q3 was EUR 95.1 million, and before the negative currency translation effect, it was around EUR 99 million and still lower than the EUR 110 million in Q3 '24. So the revenue is also lower than Q2 '25, and that is also what we communicated in Q2. We did expect the second half of this year to be weaker and lower sales than the first half year. Even though we have lower sales, we record a higher EBIT in Q2 '25 compared to Q3 '24, driven by lower operating costs and lower warranty accruals. I will also comment upon that later. The net effect of tariff cost in this quarter is 0 isolated, which is good. And I think it's the first quarter when we have that. But we still have a balance of tariff costs that we will get reimbursed from our customers, and that is ongoing work. So then on the other business area, Flow Control Systems, the revenue is significantly lower than in Q2 '25. But if you kind of adjust for the currency translation effects, it's not so much lower than Q3 '24. In this business area, we had an impairment made in Q3 of EUR 1 million so then we had an EBIT of EUR 4 million before that impairment. And the reason why we do impairment of development asset is part of streamlining our R&D portfolio and where we want to focus our resources. So it's part of that ongoing strategy process that also Trond referred to. And the reduction in operating cost reduces the effect of -- we have a lost contribution. So ending up in an EBIT of EUR 3 million in Q3. On this EBIT bridge, just pointing out some points, you see the effect of the lower operating cost compared to the same period in '24 with a plus EUR 4.8 million and plus EUR 12.4 million. And this effectively mitigates the effect of the lower volume and mix, which is good. And as I commented, the net effect of tariff cost was 0 in Q3. And year-to-date, we have -- EUR 2.9 million we're going to get reimbursement. The warranty cost in Q3, as Trond mentioned, was EUR 2.7 million. And in Q3 '24, it was EUR 7.2 million. So that's the bridge effect of EUR 4.5 million that you have there. So this is just to underline that we do have warranty costs also in this quarter in 2025. Both in Q3 '24 and in the earlier quarters, there were a reversal of impairments done. So that explains the majority of that bridge effect of impairment, then ending up from an EBIT of EUR 4.9 million then in Q3 '25, which is significantly higher than the EUR 1.1 million in Q3 last year. So coming from a negative EBIT of EUR 8.3 million in Q3 '24, with the effects we see here, we end up with a positive EBIT of EUR 1.6 million in Q3 '25, then driven by the lower -- the higher EBIT, the lower net currency loss and tax effects. And this is also, of course, driving the cash flow together with the operating result, which we'll see coming into now. So the positive result in profitability and working capital effects contributes to the net positive cash flow of EUR 6.6 million in Q3 '25. And looking back just compared to Q3 '24, we have higher cash from operations, lower investment levels and positive currency effect. And this also gives, which is very positive, a significant increase in the 12-month trend, which is now close to 0. And then in line with what we have communicated, one of our key priorities is to generate positive cash flow. And that is much more important than actually having positive results. You have to get the cash flow coming out of that. That's much more potential in Kongsberg Automotive on both on the working capital side and the whole capital employed area. So just to underline that, that we start to see here that we are moving into a positive cash flow situation. And that improved cash flow and profitability also materializes in the reduction in net interest-bearing debt and then reduction in the leverage ratio, the blue line here, which is the key in relation to the bond loan that we have where we have a covenant level. So we see we go from -- it's been increasing since Q4 '24 from 2.1 up to 3.1 and now we have 2.6 in this quarter here. Everything we do on profitability improvements, cash flow will kind of materialize in net interest-bearing debt and this -- the leverage ratio we measure here. And as to the return on capital employed of 1.7% that we have in Q3 is, of course, not satisfactory and also a key priority for us to improve. The equity ratio increased from 30.7% to 31%. And as our improvement programs continue, giving increased profitability, the equity ratio will also continue to increase. And it is kind of continued work for us to achieve reductions in capital employed. And we want this to be an integrated part of the operations in the business area and something that we do every day and that we will follow up the business areas on every day and then instead of doing this kind of -- on a kind of piecemeal basis. So that's very ingrained in us to get this as part of the daily work to get inventory down, accounts receivable down and only do the good and best investment levels. So I think, all in all, a positive quarter for us, positive results, fairly good cash flow, positive cash flow increase in the 12-month trend. We do have challenges and difficulties, but we are managing a positive result -- increased result with a significantly lower revenue level, which is kind of our -- we -- the only thing we really can control is our own costs. And then we have to manage with the market that we have. When the market picks up again, we will be positioned to kind of get a very good profitability level out of that. I think, Trond, that brings us into the summary and outlook. Trond Fiskum: Okay. Thank you, Erik. So to summarize our presentation, just quickly go through the key points again. We do see that we have the positive trend on EBIT and cash flow in spite of a challenging market. We do see that the cost reduction programs are going according to schedule and that we are taking additional measures due to the market situation. The tariff costs are being effectively mitigated. And we have the warranty liabilities that we are addressing, and we will provide updates as soon as we have more clarity on the financial impact. And we will hold the Capital Markets Day on December 16, where you are all invited and we will share some exciting news on strategic goals and the strategies. So I hope as many can participate on that event as possible. We want to emphasize the messages that we've given in the previous earnings call, that is to restore value creation for our shareholders. That remains a key priority for us. We are very much focused on that and find the balance between short-term and longer-term priorities. We do believe strongly in the future of KA, and we are very determined to succeed so we can realize the full potential of KA. And we do believe that we are on the right path. We see some positive indications here. But it's important also to remember, this is not a sprint, it's a marathon. We have a lot of work ahead of us. The numbers are going in the right direction, but they're far from where we want to be. I would say the positive thing here, we do see that there is a lot of things to work with. There's a lot of improvement opportunities. Yes, there are some challenges. But eventually, we will solve them and also with some help from the market, we will see stronger financial results. Regarding the outlook in the shorter term, we do have no changes on the EBIT outlook. We expect the EBIT to surpass both first half this year and second half last year. The rest of the year, we do see a stable outlook compared to Q3. For 2026, we are cautiously optimistic, but we are very also aware that there's a lot of uncertainties. The market scenario is very hard to predict. We don't know what is the next coming from the other side of the Atlantic. So it's something we are monitoring very tightly, and we're managing the situation, and we're prepared for any scenario, I would say. But as a base case, it's cautiously optimistic. I think that concludes our presentation, and we are ready for the Q&A. We have questions that can be done and made also here in the room and also on the web. Therese Skurdal: So let's get started with the first question from the webcast. What is the reason that Driveline is now considered no -- noncore? Trond Fiskum: Driveline, as mentioned, we had a strategic review with the Board. What we see from Driveline business is that it is a business that creates value for us. It is profitable. We do also see opportunities in that area that we can capture without too big efforts. There are also opportunities to extend profitable contracts. There are possibilities to optimize pricing. And we also see that the customer base is important for us for new products that we are developing and launching. So that is the reason why we have made that decision. Therese Skurdal: Thank you. So next question, why will KA change the new business win reporting going forward? Erik Magelssen: Yes, I can answer that. Just to underline, as we also mentioned, that we will continue to announce strategically important contracts. They can be fairly small. They can be quite small, but it depends on the market, the type of contract, new type of customers. And we will always summarize the business win in the quarterly reports and then more -- a bit more detail than we do now. But I think the fact is that KA at any given time, we'll have a number of contracts that are being renewed. Now some contracts expire and we get into new contracts, big and small, but I think that doing this change. We're doing it to get a better communication with the market and improved communication because it's better to kind of summarize this in the quarterly reports instead of kind of doing piecemeal announcements of certain business wins. So just to underline that we will continue to report strategically important contracts that will also mean very significant ones in value, and we will always summarize it in the quarterly reports. And this is also in line with our peers, and I think what our larger companies on Oslo Stock Exchange do. We're kind of aligning more with that. Therese Skurdal: Thank you. Is there any questions here in the audience? Unknown Attendee: Given the challenging market and I guess, declining revenue growth on your current revenue base, how much could you improve profitability with improved product mix, but also potential further cost improvements? Trond Fiskum: There is -- I cannot give you a number at this point, but there are obviously opportunities to improve. So if you take the current cost base and assume that we can capture both of the market and volume growth without adding much fixed costs can give a quite positive case. So that will be an ambition going forward. And then you can do the math. But -- and then it depends on the market development. What we do see is that there's a lot of uncertainties in the short term. In the longer term, we do expect growth. And then the question is how big growth that will be. I think we are well positioned to capture that growth. And we will then work very hard to maintain our cost base and not increase our cost base further. And then we can have a good gearing effect. I don't -- when it comes to product mix, I think it's more on the revenues overall. And of course, we will work to optimize both our variable cost and pricing going forward. And when it comes to also profitability, a key element here is to resolve our challenges when it comes to warranty and remove that from our current cost base. So yes, there are challenges also on the warranty, but I also remember that it has been a part of our cost base over the last years. So it also represents an improvement opportunity for us. Therese Skurdal: Any further questions here in the room? Unknown Attendee: Regarding the new business that we have bought, what is the business cases in those 3 -- sorry, 2 parts, Chassis Autonomy and the China part? Trond Fiskum: Chassis Autonomy has a Steer-by-Wire technology that has a very interesting, let's say, future. There's a big demand for it. The forecast estimated need for -- and market development for that kind of technology is very large. By 2035, the estimate is more than EUR 3 billion. And the target is to capture a meaningful portion of that market. Specific ambitions and targets, I would like to come back to you on that on the Capital Markets Day, and then we can share more information. That will be one of the products that we will highlight in that event. And then we'll talk more about how we see that market developing and what is our business case. But it's a new development. There are always risks when it comes to taking on that. But we do believe that we have both the customer relationships, we have the technology and the capabilities to take that technology to the market. And so far, I would say the interest is very strong. So it looks very promising. But we'll come back to this on the Capital Markets Day, and we'll share more insights about that on that event. On the China case, we had a situation where our joint venture partners wanted to leave the joint venture. So we decided to make the acquisition. The alternative would have not been so very positive for us not to buy that share, someone else could have done it. And now we have the flexibility and, let's say, the possibilities to look at alternatives and strategic alternatives for that market that we didn't have before. Also there, we are working on a strategy that we will be able to share on the Capital Markets Day regarding China. I don't have the exact numbers, if you were asking for that, but we will share the strategic rationale and what our plans are for both those 2 businesses on the Capital Markets Day. Therese Skurdal: So let's take a question from the webcast. Have your demand to pass on 100% of the tariff cost affected your new business wins? Trond Fiskum: The answer is no. I cannot say that. I think those discussions have been very constructive, very -- I will say, we've been very firm, but I don't see that the tariff discussions as such has had any impact on our business wins. Therese Skurdal: Thank you. How is the merger between the 2 factories in Sweden coming along? Trond Fiskum: It's moving forward. The merger between those 2 plants to move Ljungsarp plant into Mullsjö is moving forward according to plan. We have monthly reviews with the team. And the plan is to conclude that transfer by Q3 next year. So that move is going according to plan. Therese Skurdal: Any more questions here in the room? Unknown Attendee: You have proven today that you are able to manage the situation in the market reducing costs. If the market increases again or when the market increases again, will you be able to keep the cost base as you have it today? Or do you need to also parallel increase the cost so -- how do you see that in the future? Trond Fiskum: The clear ambition is to maintain the cost base as we have today. We know that there are some costs on our fixed cost base that are, let's say, semi-variables. But the clear ambition is to maintain the cost base as it is today, that we will work very hard to achieve. There are new technologies like AI and other technologies that can enable us to do that. It will be -- can be challenging if the volume increases are significant, but that will be a clear ambition to maintain the cost base as low as we can. There are further opportunities to streamline our operations so that is also work in progress. But what I can confirm is that, that will be an ambition, definitely. Erik Magelssen: Yes. Just to supplement on that, that is ambition. I think, to a large extent, we will be able to do that. And of course, we will increase cost later than earlier. So we'll kind of always drag it along and then we have to make sure that we will deliver the project in the right quality to the customer at the right time. So -- but that will be the clear ambition. That's also part of the benefit that we get from all these cost reduction programs that we will try to find better and smarter ways to work with the people and the cost base that we have, but -- yes. Unknown Attendee: I have to take the opportunity to congratulate and applaud what you have done so far. It's looking really promising for our shareholders. Trond Fiskum: Thank you. Therese Skurdal: So no further questions in the webcast too. If there are no further questions here in the room, we can conclude. Trond Fiskum: Then thank you very much for your participation. Thank you for Arctic again for hosting this for us at their facilities. That was excellent. And have an excellent day.
Operator: Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the Nexi 9 Months 2025 Financial Results Presentation. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Paolo Bertoluzzo, CEO of Nexi. Please go ahead, sir. Paolo Bertoluzzo: Good morning to everyone, and welcome to our 9-month results call for 2025. As usual, I'm here with Bernardo Mingrone, our Deputy GM and Chief Financial Officer, with Stefania Mantegazza leading IR, and a few more members of our team who may help to answer your questions as needed. As usual, we'll start with a summary of the key messages. I will hand over to Bernardo to cover the results in more detail, and I will come back for the closing remarks and, most importantly, to answer to your questions. Let me jump to Page 3 with the summary of the key messages. First of all, we continue to deliver profitable growth for the 9 months in the quarter. Revenues are up 2.8% for the 9 months and 1.8% in the quarter. As anticipated in the third quarter, we see more material effects of the extraordinary events that we had anticipated when we provided the guidance in March this year. More precisely, we are talking about the bank losses from the past and some key bank contract price renegotiation effects. These effects will peak probably in Q4 this year, and then we will start slowing down across 2026 with a more material reduction in the second half. The underlying growth, therefore, net of this effect, is at about 6% year-on-year, both in the 9 months and in the quarter. Merchant solutions revenues are up 2.7% in the 9 months and 0.6% versus the same quarter last year, with underlying growth being at around 5% to 6% in both the 9 months and the third quarter. EBITDA is growing at about 3.5% in the 9 months, with a 35-basis point margin expansion. The quarter results in terms of margin are a bit affected by the revenue mix that sees a stronger IS and some operating cost phasing. Second key message: We continue to shape Nexi for future profitable growth, 3 key points that we want to underline. We continue to progress our strategy execution in the integrated payment space, the space of convergence across payments and software. As discussed in the past, our strategy is based on partnerships with ISVs. And since the beginning of the year, we have added about 50 partners, ISV partners to our pool, that is about 500 across all our geographies. Second key message that we want to reiterate, we continue to build a stronger multichannel approach to the Italian market, obviously, deleveraging our very strong partnerships with the Italian banks, but also adding to this strong channel also complementary channels, targeting more precisely SMEs, which is our core focus. And these complementary channels by now represent year-to-date about 26% of our total new sales. Last but not least, we want to underline that merchant solutions in Germany is growing double-digit in the 9 months, with even acceleration in the third quarter, supported by customer base and market share growth. And we really want to stress this performance in Germany because, obviously, there's a lot of debate around how strong players like Nexi are in competing with the newer players focused on SMEs, the single platform, and all of that. And clearly, the performance in Germany shows very well that we can compete, we can win effectively and have accelerated growth as well. The third key message we want to deliver is that we continue to create value for our shareholders. Across '24 and '25, we did delivered EUR 1.1 billion of capital to our shareholders while becoming, at the same time, an investment-grade issuer since the end of last year. Net financial debt is now down to 2.6x EBITDA, notwithstanding the fact that we have returned in the year already EUR 600 million to shareholders as a remuneration, which is a 20% increase versus the previous year. Obviously, in March '26, we will talk about the capital allocation for 2026 on the back of the more than EUR 800 million cash that we will generate in 2025. Coming to guidance, we confirm we will land revenues in the low to mid-single-digit year-on-year growth space. We confirm that we will generate excess cash for more than EUR 800 million with a high degree of confidence. As far as the margin is concerned, for sure, it will be positive with Q3 with Q4, by the way, seeing a margin expansion better than Q3. Where it will land precisely will depend on the volumes we will see in Q4 and the business mix that we will see in Q4. In any case, we are talking about only a few million euros here and there. Let me now hand over to Bernardo to go through the results more in detail. Bernardo Mingrone: Thanks, Paolo. Good morning. Starting on Slide #5 with revenues. As Paolo has already mentioned, this quarter was significantly impacted by discontinuities as expected. This has been accelerating throughout the course of the year. You can see the revenue growth in the quarter of 1.8% is distant from our underlying growth of 6%, and this gap is widening compared to the 9 months. So, as we said, this is the highest impact we've had year-to-date, and the peak is expected to be reached in the coming quarter. With regards to EBITDA and EBITDA margin, EBITDA is growing. The margin, and please remember, we're always talking about an EBITDA margin north of 57%, suffered in the quarter from what I would characterize as a slightly different revenue mix than what we might have planned with a bigger contribution coming from issuing the merchant solutions and also a bit of phasing effect on some costs, which might have spilled over from one quarter to the other, which is impacting the margin accretion. However, for the year, we are positive at 35 basis points. Moving on to merchant solutions on the next slide. We have growth in the quarter. Again, here, this is the business unit on which the negative impact coming from the discontinuities we've talked about that impacts us the most. You can see the underlying growth is mid-single digit. Overall, I think we can point to continued growth in international scheme volumes, albeit with a softer summer. We have a slightly unfavorable volume mix, as I was mentioning earlier, as a group, but also within merchant solutions, with some pricing and mix effects in e-commerce in Poland. We're talking about -- sorry, just a few million euros here, but that makes a difference, obviously, in terms of year-on-year growth. I think more importantly, from a volumes perspective, Poland, but more importantly, also Germany, which is growing in the quarter in the mid-teens, have shown a robust performance. We continue to grow our franchise in the most valuable segment of SMEs. We continue to upsell and cross-sell the value-added products and services. And indeed, we're making progress on the ISV partnerships front with more than 50 signed in the 9 months and the year-to-date. Issuing solutions had a very strong quarter, 6.5%, 6.6% growth. This is usual. It is being sustained by volume growth, the international debit product in Italy, upselling, and cross-selling throughout the group. I think it's fair to say that part of this higher performance in the quarter than for the 9 months will be reversed in the fourth quarter. We expect it to benefit less from year-on-year project work, which, as you know, as we've discussed in the past, it's very hard to predict in which quarter they will be booked. And we're also expecting in the fourth quarter to see the first effects of some in-sourcing from a large Nordic client that we've spoken of many times in the past. This is something a decision which goes back 3 or 4 years and has been postponed a number of times is now kicking in. So, the fourth quarter is softer than the third, but a strong year-to-date and expected for the full year in any event on issuing. DBS is the business unit which has the most reliance on, let's say, project work or one-off billings. So, it's lumpier. I don't read too much in the quarterly performance. Overall, for the year, we expect growth and a good performance from the business unit. Indeed, we recently launched in October, a very important piece as part of our payments business, the verification of PE, which affects hundreds of banks across Europe. We're the largest player in the space, and this was a big success for us. From a geographic perspective, it doesn't surprise -- shouldn't surprise that Italy is the region which was impacted the most by the discontinuities, the Italian banks that we've spoken of so many times. Nordics, I would say, good performance in the low single-digit area, but benefiting from continued progress on selling value-added products and services to our client base. DACH, I would say, very strong performance in Germany, slightly less so in Switzerland, but overall, good performance from the region and CSC, which is probably the most impacted by the softer summer and what I said earlier about Poland. Finally, before handing the floor back to Paolo, on costs. Costs grew about 3% in the quarter. HR costs still showing the benefits of the initiatives which were put in place last year and continue to be implemented during the course of this year. Slight growth coming on the non-HR costs, which is the one most impacted by volume growth, by inflation, by the growth of our business in general. But as you know, we manage our cost base as a whole. And you can see the 2% growth for the 9 months is pretty much in line with our expectations, and I don't expect the final part of the year to be any different. Actually, the fourth quarter expect to be better than the third and probably better than the 9 months to date. So, I think other than the phasing effect, which I mentioned earlier, which has to do with intra-group VAT and the timing of these things. And again, we're talking about a few millions of euros here and there. I would expect strong cost performance for 2025. So let me hand the floor back to Paolo for his final remarks. Paolo Bertoluzzo: Thank you, Bernardo. Let me just reiterate Page 11, the messages that I already anticipated on guidance. We will end our top line growth in the low to mid-single-digit space with underlying growth acceleration. Cash -- excess cash, will generate at least the EUR 800 million that we committed to with a high degree of confidence. And as far as the margin is concerned, for sure, it will be positive. We expect the Q4 performance in terms of margin expansion to be better than Q3. Where exactly it will land will depend on the dynamics in Q4. But in any case, we are talking about a few million euros shifting here and there. Let me close from where I started, 3 key messages on Page 13. We continue to deliver profitable growth across the business. We continue to shape Nexi for future profitable growth. And again, the 3 topics that really want to underline is the progress in integrated payment space across geographies, the continued acceleration of the newer channels in Italy together with continued good performance of the bank partnerships as well. And last but not least, a very strong performance and improving day by day in Germany for merchant services. And last but not least, continue to stay very focused on value creation. We're returning this year EUR 600 million to our shareholders in March. We'll talk about what we will do for 2026 on the back of a strong increase of excess cash generated in 2025. Last but not least, let me anticipate and invite you actually to the Capital Market Day that we will have at the beginning of March, more precisely, the current plan date is the 5th of March. Let me stop here, and let's open to your questions. Operator: [Operator Instructions] The first question is from Grégoire Hermann, Barclays. Grégoire Hermann: Just 3 of them, please. Just on the guidance, can you confirm whether you need reacceleration in Q4 to meet the EBITDA guidance or simply the cost reversal that you mentioned that you expect in Q4 is enough for you to meet that cadence? And then I think on the revenue, the guidance still leaves a pretty wide range for Q4. Can you comment whether you expect a reacceleration in Q4 there? And finally, on issuing solutions, you mentioned some phasing effects -- would you be able to quantify this phasing effect, please? Paolo Bertoluzzo: Greg, this is Paolo. Thank you for your question. Let me just comment on guidance, and then I'll pass to Bernardo on the issuing effect. As both Bernardo and I said, in Q4, we expect to see the peak of these extraordinary effects. And therefore, it's going to be difficult unless we surprise ourselves to see an acceleration of revenues in Q4. Nevertheless, we expect to see positive revenues in Q4. And in particular, we expect to see some instead acceleration from merchant services. Again, it will depend very much on November and December that, as you know, are very much peak months in our industry. While as anticipated by Bernardo, we've seen some reversing on some phasing in issuing that instead in the Q4 will perform not as good as in Q3 and year-to-date. Let me pass over to Bernardo. Bernardo Mingrone: Grégoire, I mean, as Paolo was saying, I think let me just add to his comments. I mean, in terms of the evolution of revenues during the course of the year, I would highlight what we put in the slide in terms of the underlying revenue growth, which has been pretty homogeneous throughout the quarters. Quarter 1 was probably a little lower than Quarter 2 and Quarter 3 was similar to Quarter 1 in terms of the underlying. And that's pretty homogeneous. Where you get the big gap between reported and underlying is this effect of banks which are exiting. And I think we spoke of this other times. I mean we do our best to slow this down as much as possible to hold on to clients which are being migrated from our platform to others as much as possible. But the impact of this is that we have a longer period of time in which there's a gap between underlying and reported. And the shape of this curve, this gap is very hard to predict. I mean it really depends on our efforts and also on the banks trying to migrate these customers' efforts. So, it's very hard to call the basis point how it's going to impact. However, with regards to issuing, going back to the issuing question, we're talking about single-digit million euros of impact coming from project work, which was probably in the fourth quarter compared to the -- or gap between year-on-year fourth quarter and fourth quarter at this point compared to third quarter and third quarter because that's what we're talking about. And we have a similar impact, something which is less than EUR 10 million in a year coming from the migration away from this Nordic customer. So how quickly they migrate away from us, I mean, it's really up to them and how that impacts us in the fourth quarter, we will see. But those are the 2 impacts. Operator: The next question is from Josh Levin, Autonomous Research. Josh Levin: Two questions from me. First, any views on what PSD 3 and PSR might mean for Nexi and the broader European payments landscape? And then second of all, I guess it's refreshing to have a call where the scripted remarks don't talk about AI. But to the extent you can, are you able so far to internally quantify the impact of AI on any of your unit economics? Paolo Bertoluzzo: Thank you for your both questions. Actually, we don't talk about that a lot in the call, and I'm very happy to cover both. PSD 3, PSR, I think, we don't see any material effects directly on the business and so on and so forth. If anything, we see some positive effect because the new regulations are creating further complexities into our business. And ultimately, our company is in the business of simplifying payments for our customers, being merchants, corporates, banks and so on and so forth. And the reality is that the more complexity is around, the better positioned are large players like us versus the smaller ones that normally struggle to follow through on the complexity. So, in general, we believe this is going to be something positive for us. On AI, we are all in, in AI since, I would say, 1.5 years ago. This year, we already see the contribution across, I would say, mainly technology expenses, both CapEx and OpEx for double-digit million euros. Let me not be precise in this specific case. For next year, we are planning much more than that, and this is across technology development, software development, software testing, infrastructure management, operations, onboarding, marketing, back-office processes, general productivity. We are all over the place on this. And we really believe that this will be a great contributor to increasing efficiency across the company and also obviously enabling us to invest more into growth over time as well as supporting continued margin expansion and cash generation. Obviously, we are also very much into leveraging AI for product innovation and differentiation. And most importantly, we are deeply into the topic of Agentic commerce, which, as we all know, will become relevant over time for the e-commerce part of the business. And on this front, we are participating both on the big tech initiatives. We are one of the few European companies cooperating with Google in the setting of the new standards on the Agentic side of commerce. But at the same time, we're deeply involved with international schemes, Mastercard and Visa in setting the future rules that are fundamental in defining how Agentic commerce will work. And clearly, this will be very much also European-specific or in any case, continent-specific because they will have to be consistent with European regulation. And again, given the position we have, we believe we are in a good place to be able to shape this and be a protagonist in this space as well. Operator: The next question is from Hannes Leitner at Jefferies. Hannes Leitner: Can you give us an update on the Sabadell joint venture given the Spanish banks have been not merging? And then can you talk about the 2026 expectation? Current consensus is just looking for a slight acceleration, but your headwinds with the Italian banking contract should come out of the base. So maybe you can talk there a little bit about the expectation from project work, the issuing contract ramping down and the underlying market trend growth you see, that would be it. Paolo Bertoluzzo: Let me take both questions. Sabadell, finally, after, I think, 2 years, we have seen what has been the conclusion. Sabadell remains an independent bank. We are obviously happy to see it. And again, here, let me lay down the facts as clearly as I can, even if we discuss them in the past with many of you. First of all, we have no commitment whatsoever any longer across the 2 of us because this was an old deal that was happening in old market conditions. And therefore, there is no obligation any longer among the 2 parties. We are in great relationships. a great relationship, and we have agreed this very, very friendly. At the same time, we continue to consider Spain an interesting market for a company like Nexi. And honestly, we continue to consider Sabadell a fantastic potential partner in Spain, given how focused they are on payments, given how focused they are on SME, given how deeply entrenched into the local ecosystem they are. And therefore, we will continue to have conversations with them to see if there are new opportunities to do something together on completely new terms, potentially also completely different business model. So great relationship, still interested in doing something at different terms. We will see. We'll see where it lands in the coming months. We are very, very relaxed about it and actually happy to have the opportunity to have the conversation. As far as 2026 is concerned, obviously, as you can imagine, we are working on our budget for next year. We'll talk about it in March together with the guidance. I can only reiterate what both Bernardo and I said as far as risk is concerned, we should always remember that our performance this year is materially affected by these exceptional events. And therefore, the dynamic will really depend on how these events come into place and then unwind over time. As we said, we see these events peaking in Q4 this year, then continuing at a slightly lower level in the first half of next year and then slowing down towards the last part of the year. Therefore, we would expect this - the overall effect on a yearly basis to be probably a bit less than what we have seen this year, and this should support with our underlying growth continuing should support some acceleration, but this is a topic for March. Hannes Leitner: Maybe just a quick follow-up on German performance. Was this kind of also driven by one of your competitors basically being in the spotlight with credit downgrades? Or is that all organic initiatives? Paolo Bertoluzzo: No, no, no. It's all organic initiatives. This is growth coming from effective products in the market, competitive products in the market, a strong focus on the most valuable segments being SME and in particular, the mid- part of SMEs and the more national corporates, mid-corporates, supported by a strong and focused investment in go-to-market and in sales and honestly, a strong team in place in the market. It's all organic. And by the way, we are winning not just against, I think, the incumbent you in mind, but a little bit more across the board. Maybe coming back on your questions around guidance into next year. As I think we have anticipated in March as well, this year, a lot of the effect that we have seen from these exceptionals has to do with merchant services in Italy in particular. Next year, we should see less impact into merchant services and more into issuing given this phasing. So, let's see how it evolves. Operator: The next question is from Sébastien Sztabowicz, Kepler Cheuvreux. Sébastien Sztabowicz: On pricing environment, you mentioned a little bit more pricing pressure in Poland, if I'm right. Have you seen any kind of changes in the competitive landscape, new players being a bit more aggressive in some of your markets, whether it is traditional PSPs or some digital players or commerce platform coming to the market? That would be the first question. The second one, in terms of contract renewal, do you have any major contract renewal coming into the next 12 to 18 months to understand if there is more downside risk to your revenue on top of what you expect already from the contract ramping down at Banco BPM and other discontinuities? Paolo Bertoluzzo: Thank you for the 2 questions. On pricing pressure from new players and so on and so forth. I think what we are seeing in Polish e-commerce that again, we're really talking about a few million euros here, which just made it explicit to you and transparent to you because in the quarter and in the region. In merchant services, they have some -- a few basis points impact. But in the scheme of things, that are totally marginal. Honestly, we don't see any major change in dynamics. Obviously, there is more pressure in various countries from these newer players more focused on SMEs. We are competitive in the market. We have to stay competitive. We do what we need to stay competitive. I think the performance in Germany is showcasing it very well. Poland, we continue to take share also in this environment. Obviously, in places like Italy and Denmark where we are by far the leaders in the market, we are more attacked by these players that we are, by definition, the more visible ones. But that's the reason why we are ramping up our direct sales channels next to the -- and in partnership with the bank ones to help us remain and stay competitive versus these players that normally have a direct go-to-market as well. So, we believe we are overall well set up to compete in that space, and we will continue, obviously, to invest to stay competitive. As far as the second question is concerned on contract renewals, I think we did comment a little bit on this topic last time. We have won the renewals on 100% of the deals that were up for renewal over the last 15 months by now or something like that. I think we said 12, 3 months ago. So, I guess now it's 15%. Going forward, we see much, much less of potential renegotiations or situations coming. I think probably the one that is worth mentioning is going to be the renewal of the Monte dei Paschi distribution agreement on the book in 2027. We have a great relationship with the bank and don't forget that the book is ours. So, we're really talking about the distribution agreement because we did buy the merchant book back in 2017. So, but obviously, we will do whatever we can to continue the great relationship we have with them, and we just renewed other contracts with them only a few weeks ago. Operator: The next question is from Aditya Buddhavarapu, Bank of America. Aditya Buddhavarapu: Could you just clarify the comments on Q4? Did you say at the beginning of the Q&A that you expect an acceleration in merchant services? Maybe I didn't fully capture that. So, if you could just clarify that. And then also just related to that, can you talk about what you've seen so far in Q4 in terms of volumes? I know October is probably a smaller month, but any color on what you're seeing on volumes or the broader macro would be interesting. Second question, you talked a lot about the ISV partnerships, and you have about 500 in place right now. How big are those partnerships in terms of your overall volumes today and how fast are they growing? Any color would be appreciated. And then finally, just on the underlying acceleration you talked about in 2026. Could you just talk about again the drivers there? What should help to improve that? Paolo Bertoluzzo: Let me take the 3 of them. Q4 MS reacceleration, probably, yes. We are talking about small numbers again here. Let's be clear. We're always talking about a few million euros shifting here and there. And that should be supported by the various initiatives that we are doing, but also from the fact that at least in Italy, in terms of volume, we should start seeing some reversal of the strong impact that we had so far on MS, in particular, from the Banco now recently from the Cassa Centrale. So that should happen. As we also said, instead we will start seeing more impact on IS over the next few quarters. Then let's see what happens. If I look at the volume dynamics in October in Italy, we already see a little bit of better volume growth. So, it looks like it's moving in the right direction. But again, very early to say. Again, never forget that the fourth quarter is really, really shaped by what happens at Christmas and Black Friday. So, let's see what happens. On ISVs, it's difficult to give a number because the classification of what an ISVs versus an ISO versus an ECR provider is very, very complicated. So, we don't want to be stuck to numbers that then change over time and then confuse you. Let me just give you a little bit of the flavor here. We are talking a lot about this topic because we believe that long-term, it will be impacting our industry also in our geographies. However, this is a topic that in terms of overall impact is extremely small and fragmented across Europe at this stage, at least the Europe that we see. Nothing to do with the U.S. It's coming slowly. It's coming in a very differentiated way across the various markets. This topic of ISVs and therefore, the materiality of it is more visible in the Nordics, where this started a bit earlier. As you know, the Nordics are super digitalized as economies and therefore, also SMEs are digitalizing faster. And that's the reason why we see it there faster as a dynamic. Germany is very much behind the Nordic situation, even if we start to see obviously more focus there. In Germany, what is still big is ISOs, resellers, these types of dynamics, which are not precisely IVs. Poland, I would say, is more or less in the state of Germany. And last but not least, Southern Europe, Italy, but also Greece, Croatia and the other markets where we are present, this is really, really, really small. Obviously, we are working to take position, but you hardly see these volumes. A lot of players are trying to get organized to do this, but they are still in the process. And obviously, we are in the process of working with many of them. As far as 2023 is concerned, I can only reiterate what I said before in terms of the market risk dynamics. Again, as we said in the past, we see our underlying growth remaining solid in the mid-single-digit plus and ideally accelerating on the back of the market share gains here and there, plus the initiatives to increase value for our merchants with softer merchant financing and the various topics we discussed in the past. The profile of precise will, therefore, depend very much on what happens on these exceptional events that we discussed in the past. Again, as I said before, this should ease out, especially towards the end of 2026. If it happens the way we see it happening as we speak, the overall impact should be a bit lower than this year. And therefore, this should support some reacceleration. But again, on the back of strong underlying. Operator: The next question is from Alexandre Faure, BNP Paribas. Alexandre Faure: I have 2, 3 questions, if I may. One is going back on this commentary you made on both discontinuities having reached or reaching peak pressure in Q4. Just a little surprised because to your point, it feels like issuing will come under pressure next year. You mentioned that renegotiation in the Nordics, but I think Banco BPM was also supposed to migrate off next year? So, is this being pushed a little bit? Just trying to get a sense of the latest timing there. And maybe relating to that, how should we think of any potential lingering margin headwind if we have some of those lucrative relationships continuing to dwindle in 2026? And my last question is completely separate topic that you touched on earlier, Agentic Commerce. Just curious, Paolo, how you think about it more broadly, looking maybe 3, 4 years out? Would you view this as an opportunity to take further share away, maybe from banks who might struggle to keep up? And beyond share dynamics, how would you view Agentic Commerce impacting yields and margin. I think there's more work you need to do, maybe you'll be able to price for that. So, any thoughts there, much appreciated. Paolo Bertoluzzo: Alexandre, thank you for your 3 questions, or maybe 2 plus 1. First of all, on the discontinuities in Q4, again, we don't have full control of the phasing of all these things. You're right in saying that most of the effects from Banco issuing are expected at some point into next year. To be honest with you, we don't have a full visibility because we understand the supplier they've chosen is behind plan. We may start to see something on a part of it in the last quarter. But again, it's not just Banco. There are smaller things as well. So that is why, if you combine everything, we expect to see the last quarter this year as the one with the highest impact. And again, as I said, into next year, then from this peak, we expect to have basically the first and the second quarter starting to slow down, probably more similar to the third quarter this year, and then instead having a material reduction towards the year-end. But again, the exact phasing is not depending on us. And by the way, we fight as much as we can to make this happen as late as possible and as small as possible. As far as margin headwinds into next year, clearly, this dynamic put pressure on margin. The simple fact that we will expand EBITDA margin this year tells you that as we do all of that, we also have a number of initiatives that increase margin, that the new things we are doing are margin contributing. And by the way, we continue to do a pretty hard work on efficiency as usual, but obviously, even more in the case of the environment we're in. And that's one of the reasons why I think, as I was answering to the question of Josh, in the very beginning, we are so focused on AI and lever also to create space for margin expansion and also reinvestment. As we look into next year, this is exactly what we're looking at. I think ultimately, we're we'll be landing on margin next year will depend very much also on where and how much we decide to invest ourselves into the various topics that we have been talking about in this call as well. Agentic Commerce, listen, I think it's a super fascinating topic. Let's be very clear. I think if people tell you they know exactly what will happen, how it will happen, and so on and so forth, they may be stretching it a little bit. It's super complex. And by the way, to a certain extent, we like complexity because, as we said in the past and also today, it's always an advantage for people that are really focused on that scale with competence in this environment. But let me try to add a few comments here. First of all, never forget that ecommerce for Nexi is maybe unfortunately, a relatively small thing in the sense that we are talking about 5% to 10% of our total revenues, growing nicely. And this is clearly one of our growth engines, but is a relatively smaller part of our portfolio, point # 1. On that basis, we see, as you mentioned rightly so, this complexity potentially being an asset for us because, again, the smaller players, the banks in general, will struggle to be a part of this "Potential revolution in ecommerce". Clearly, our partner banks in Italy will benefit from our efforts, and we'll be partnering with them also on this front. I want to be very, very clear. But never forget that ultimately, we are partnering with banks in Italy, Greece, and Croatia elsewhere. Banks are competitors. And therefore, we believe that we really struggle to keep up in this space, or at least many of them. To be honest with you then, how this will develop will depend very much on customers. And when I'm talking customers, I'm talking about consumers, the ones that buy stuff. Because if you really want to be extreme version of Agentic Commerce, which is the one where not only you start the commerce activity from AI, from agents, but you complete the transaction, including the payments in an agent-to-agent dynamic, that really requires a big leap of faith from the customer that basically has to trust an agent fully for spending his or her money. And I think that this is maybe one day possible, maybe for certain verticals and product categories. But honestly, how big it will be in the future, I think, is really something that we will need to see. In any case, we are investing in this space, and we will be organizing ourselves in this space for obviously, enabling merchants in any case to be able to interact with agents, because maybe it is going to be just a small thing. But our role is to help merchants to accept any type of transaction, any type of payments, also the ones coming through agents. At the same time, we're already working on what we can do on the issuing side to make sure that our products, our cards are Agentic Commerce-ready. Therefore, we see a lot of work that we can do to enable all of this. I'm sure we'll talk about it again many times in the future. Operator: The next question is from Justin Forsythe from UBS. Justin Forsythe: Just a few here for me. I want to hit first fiscalization in Italy. If I'm not mistaken, I believe that's meant to take place and become enacted, I believe, January of next year. Do you see that as a potential forcing factor for greater adoption of software-led payments in Italy and/or potential for Nexi and Nexi's ISV partners to grow? Second question is around the Zip Pay partnership in Ireland, which I believe you helped roll out this application within your DBS solutions business. Maybe you could talk a little bit about how you won that, what the monetization and rollout timing looks like there? And just more broadly speaking, how you see the go-forward opportunities within DBS. And whether you see this as a business line that's strategic to you longer-term and add synergies across your other business lines? And maybe updated thoughts on what you plan to do with that asset, if anything? I know there's been some news on that subject. And finally, just a real quick cleanup question for you, Bernardo. If I have the math right, it seems like you had 0% growth in international schemes in the quarter. I know you noted some softness in Southern Europe. Also, I'm sure that has to do with the bank M&A as well in MS. But maybe if you could provide a normalized number there and/or also, I know we were commenting on trends in October month-to-date. Maybe you could add Germany and the Nordics to that as well, if you don't mind. Thank you very much. Paolo Bertoluzzo: Hi Justin, I'll let Bernardo take the last question. On fiscalization, yes, it's right. It's happening. It will happen in a few months, but it will happen in such a way that will not require merchants to change neither the cash register nor their acceptance solutions because the reconciliation will be done by the tax, basically authorities, the tax authority technology in basically the cloud. And therefore, the only thing that merchants will have to do is going to be to connect in the cloud, to associate in the cloud, their cash register, which is already connected. Don't forget here, maybe let me make one step back because -- so that everybody can follow this conversation. In Italy as well as in other places, there is already the obligation to have your cash register connected with the tax authorities, okay? The new news that will be implemented into next year is that there will be a connection in between what the terminal is transacting on digital payments, the point-of-sale terminal and what the cash register is registering and is transacting. And this connection in between -- clearly, this is intended to avoid certain behaviors for tax avoidance that we're playing with the 2 devices being not connected. Now this connection will happen in the cloud. And therefore, there is no need for changing the ECR. There is no change for changing your cash register. There is no need to change your acceptance solutions, your point-of-sale terminal. The connection will happen in the cloud. The merchants will simply need to register in the cloud the 2, if you like, components and associate the 2 of them. Obviously, we will be helping. We're already helping the merchants that we will be able to do it with Nexi in one click through our digital assets in the cloud, okay? Around the market, as you can imagine, you have some ECR vendors that are claiming that you need to change everything and so on and so forth. But honestly, that's a marginal, I would say, commercially aggressive behavior, but that's not -- that's absolutely not needed. So, we believe that this dynamic of digitization of merchants will continue with its own pace that in Italy so far is relatively slow. And honestly, we will try to accelerate ourselves through our partnerships with our own initiatives but should not see a material change because of digitalization. On this account-to-account instant pay-based service that we have developed with the Irish banks, I think it's a nice service. We are very proud of being chosen by them and by a number of other countries also outside of Europe. I would love to tell you it's big and growing. The reality is that it's relatively small, you don't sit into the big scheme of things, but it is something that, again, we are very proud of and we'll continue to pursue because ultimately, whenever we are chosen by central banks, and we're chosen by bank consortia is always a great testimony of the value that we can create and how deep we are into technology and modern solutions. As far as DBS is concerned, more broadly, we are where we were every single time we talked about it. There are areas of this business that are less strategic, and we'll continuously review the portfolio and pursue certain potential sales. But again, this has already happened, will continue to happen on a one-to-one basis. Last one, Bernardo. Bernardo Mingrone: So Justin, I think I presume you referred to that 1% growth of value managed transactions in the 9 months that we reported is on Slide 6. I couldn't find the 0% you're referring to. But I think your question was --- Justin Forsythe: Bernardo, just to clarify, I was just saying that international schemes in the 9 months was -- what was it, about 5%. And I think that implies something close to 0 for the 3Q. Bernardo Mingrone: Yes. Okay. Fine. I mean it's -- in general, I mean, there's a recast, as you can see in the database due to the fact that we're aligning, let's say, the -- as we re-platform across the group, in particular in Italy, we have recast some of the historic volumes just to make sure they're 100% aligned with the revenue. I mean the revenues were always 100% correct. The volumes, maybe we had more than -- we were calculating maybe more than 1x some kind of volumes because they were driving certain revenues. And that probably gives you the impact you're referring to. But in general, I think the crux of the question was about the impact of the banks that are leaving the portfolio. So, the underlying, let's say, volume. And I would say that in Italy, that weighs probably 5 percentage points more or less, and it's about half that at the group level. So, if you look at it at the Italian level, it's twice what it is at the group level. Justin Forsythe: And the last piece of that was just on the Nordics and Germany in October, if there's any additional comments there. Thanks. Bernardo Mingrone: In October, Germany, as we mentioned, for the first 9 months for the third quarter is performing very well, mid-teens in terms of growth. I think the acquiring volumes are strong. Post terminals may be lumpier. But in general, I think even October is a strong month continuing on the -- like the rest of the year. And Poland, if you look at physical acquiring and ecommerce, both volumes are strong. As I said, when we called out Poland, we're talking about more of a pricing stroke, let's say, shift to marketplaces, larger customers on ecommerce compared to smaller customers, which has a pricing effect. But on volume growth, Poland is performing pretty well as well. Paolo Bertoluzzo: I think in general, the way you should see it, Justin, is Nordics trailing around mid-single-digit volume growth, maybe a bit short of that, but around mid-single digit, which is pretty good for a market that is already penetrated where we have a strong leadership position. And instead, Germany and also Poland, by the way, in the high single-digit type of space. Operator: The last question is from Gabriele Venturi, Banca Akros. Gabriele Venturi: Could you please comment on potential risk and impacts that could arise from possible M&A developments that could involve Credit Agricole Italia and BPM or BPM and the new Mediobanca Monte dei Paschi? Thank you. Paolo Bertoluzzo: Well, listen, you know better than I do that the situation is super, super open, and there are many options that we can read in the media, then obviously, we are just spectators to all of this. The only thing I can comment is that we have a very strong partnership with Credit Agricole that has just been renewed for the next 3 to 4 years across issuing and acquiring to 2029 and the performance with them is super strong and relationship is great. Same goes on for Monte dei Paschi, where, as I said, we just renewed a part of the issuing contracts. The other part is longer-term, and we'll have in the coming months a conversation on how to extend the merchant book distribution agreement while the merchant book itself is already ours. So, both parties, we have strong relationship. You know where Banco is eating to. So, let's see, it's very difficult for us to provide any further comments. We are, I think, in a strong position with both Credit Agricole and Monte dei Paschi. Operator: Mr. Bertoluzzo, there are no more questions registered at this time. I turn the conference back to you for any closing remarks. Paolo Bertoluzzo: Well, thank you again for attending this call. And most importantly, looking forward to seeing you in early March for not just results, but for the Capital Market Day. We plan to have in the same day a quick update on Q4 results, but then obviously looking to strategy and longer-term outlook for the company. And in that context, we will provide the guidance for 2026 and also capital allocation, our commitment for 2026 on the back of a very strong cash generation this year that is expected to land with EUR 100 more million of cash generated versus last year. Thank you very much and looking forward to seeing you over the next few hours and days in many conversations. Thank you. Operator: Thank you. Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.