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Operator: Ladies and gentlemen, welcome to the Schaeffler Group Q3 2025 Earnings Conference Call. I'm Sergen, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Heiko Eber, Head of Investor Relations. Please go ahead. Heiko Eber: Thank you, operator. Ladies and gentlemen, I'm very happy to welcome you to today's call on the financial results Q3 2025. The press release, the following presentation and our interim statement has been published today at 8 a.m. CET on our Investor Relations web page. And for sure, after the meeting, we will provide the recording and the transcript of this webcast. As a quick reminder, please note that all figures for 2024 are pro forma figures unless they are marked separately as reported figures, and the mentioned pro forma figures 2024 and related information are unaudited. As always, Klaus Rosenfeld, our CEO; and Christophe Hannequin, our CFO, have joined the conference call to guide you through the key information in our presentation. And, of course, afterwards, both gentlemen will be available for our Q&A. Now, without further ado, let me hand over to our CEO. Klaus Rosenfeld: Thank you, Heiko. Ladies and gentlemen, welcome to our Q3 call. You all have the presentation in front of you that we distributed this morning. You also saw the 3 press releases we published. I will start immediately on Page #4 with the summary. Good performance in a soft market environment is the headline. You see sales growth of plus 1.3% in Q3. I will go into a little bit more detail there. Gross margin at 20.3%. Please read the footnote. This is the gross margin excluding an extraordinary one-off loss of EUR 100 million due to the depreciation of SAP licenses. It's a comparable number to the 19.1% in Q3 previous year. So you see a quarter-over-quarter improvement there. EBIT margin at 4.5%, nearly a percentage point better than Q3 2024, also sequentially, clearly pointing in the right direction. Positive development and free cash flow, EUR 175 million in Q3, really points also in the right direction, also led us to upgrade our free cash flow guidance, as you saw in the last days. And then EPS is negative, in particular, due to the one-off restructuring, but also due to the depreciation of SAP licenses on an adjusted basis, it is positive. Now with this, let me quickly go through the business performance. You see on Page 6 the usual breakdown of where is the growth coming from. And we can basically say that except for the flattish development in Powertrain & Chassis overall, all divisions and regions contributed here. Europe is a little weaker than we would like to see it with minus 1.6%, also driven by Powertrain & Chassis. You see some of the unusual developments. Strong growth in Asia/Pacific is the same trend that we explained last time. It has to do with the shift of an important project from China to South Korea. And Americas with 18.4% in E-Mobility is new contracts that are now starting to perform. Vehicle Lifetime Solutions was 2.3%, weaker than in the previous quarters. But we always said this 2-digit growth is not going to continue. So with strong growth in Americas, also in the 2 other regions, Europe here, again, is the reason why this was not as strong as before. And Bearings & Industrials with 2.2%, I think, is in line with market. So a trend from our point of view that should not surprise anyone with 1.3%. At least the Q3 was a growth quarter despite all this turbulent environment. Page 7 then gives you more detail in our OEM business, auto powertrain, that's what we promised to give you, the breakdown by powertrain type both for the outperformance number and also for order intake and book-to-bill. And what you see is a continuation of the trend that we showed you for the first 6 months. 9 months, plus 13% outperformance in BEV shows that we are well on track there. And HEV is, for these 9 months, still below market. The same with ICE. The number has come down a little bit. Key for going forward is not what we are pointing today, but the order intake and the book-to-bill, and there you see that BEV and HEV are more or less on the same level with 1.8x. Let me say here, as we outlined also during our Capital Markets Day, we have a significant order book. Our key priority is to deliver that order book. We appreciate new projects, but only if they make sense and also drive our profitability. E-Mobility, next page, Page 8. As you probably expected, sales growth on the positive side, 4.7%, clearly driven by Americas and Asia/Pacific. Order intake in that quarter was EUR 1.2 billion, slightly below the second quarter, but still on track. That also leads to a book-to-bill in Q3 of 0.9. What really counts here is, from my point of view, the full 9 months. What is on the positive side here is the continuous improvement of the gross profit margin, plus 3 percentage points in Q3. And this also excludes the impact from the SAP licenses that for E-Mobility would have been EUR 24 million. You see 2 examples for new products -- for new projects. And with the development that we see here, we feel good that we are on track to deliver what we promised for the midterm. Powertrain & Chassis, slight sales decline. Gross margin continues to be strong and further improvement, 1.2 percentage points. Good order intake, but clearly with a book-to-bill that is below 1. As we always said, you need to, at the end of the day look at these 2 divisions somehow together, in particular when you think about the Powertrain business. And our idea that these hedges each other is clearly paying off. Vehicle Lifetime Solutions, I already said it, lower growth compared to previous quarters, in line with market and gross profit margin further improving. We always said it's not going to grow every quarter by 10%. But I'm really proud to say that our gross profit margin stays at a very high and satisfactory level. Bearings & Industrial Solutions, also here, we decided to improve our guidance a bit. The 5% to 7% was after a further improved third quarter. It's little bit outdated, so we moved it up to 6% to 8%. And we feel good that the business is further improving due to the various self-help measures, but also due to growth, in particular, in aerospace, but also in construction, agriculture, machinery, 2-wheelers and the new emerging area of medical equipment. Let's wait for the fourth quarter and see where we end up there. Capital allocation, Page #12. We continue our course here. Capital allocation schemes are known to you. We are very disciplined here. You see the reinvestment rate at 0.5x for the whole year -- for the whole business, excuse me, and that clearly means we are releasing capital at the moment. That is important to bring the SVA number back on track. We are now slightly below previous quarter with EUR 12.3 billion. And we will manage capital tightly. Let me also say this does not mean that we have restricted any type of growth because there's enough cash flow available to fund the projects that we're seeing. But as you know, we are restricted and want to bring SVA back to where it should be. Last page from my side before I hand over to Christophe, a short follow-up on the top 3 priorities that I explained during the Capital Markets Day. First is delivery of our order book. Again, we have seen a prominent SOP of electric drive products for a Chinese OEM. Again, an interesting player who is a pure play on the new energy vehicles. Several other SOPs, one in Europe for a premium European OEM and another one, again, for a European OEM and a Chinese OEM in chassis, rear wheel steering. So happy to say that the delivery of the order book is on track. The size is big and challenging, but we are learning. We are moving forward. And we are seeing good results from these 3 examples. Synergies is also on track. You'll remember what we said in the Capital Markets Day. We have more or less finalized our program that we call our Program Forward. Here is more detail on the plant in Steinhagen that was already in the numbers that we showed you. We will finish production in the year 2026, the portfolio. We consolidated into another plant, headcount in production is outlined, and at the moment, negotiated with workers' council. And I can tell you that this cooperation with employee representatives has always been an asset. It's painful for everybody, but it's the right track to -- it's the right step to streamline in particular our German operations. And last but not least, you saw the press release. We promised to streamline the business portfolio and reallocate capital. We said during the Capital Markets Day, there are 10 portfolio elements in the pipeline. This is now a first example. We have yesterday or this morning closed the contract with a Chinese specialist in turbocharger technology that requires our turbocharger business in China. It's a business that we inherited through Vitesco. It made EUR 100 million and is at the moment in a structural decline. So it makes a lot of sense to get rid of this. The agreement is signed. Please understand we're not disclosing more details, but it's a proof point of our promise to streamline. With that, I hand over to Christophe and -- for the financial performance. Christophe Hannequin: Thank you, Klaus. Good morning, everyone. After looking at the division look, let's take a step back and look at a single group level. Starting with sales. We delivered a strong quarter of growth once you adjust for foreign exchange. That growth, I'm happy to report, is profitable, as you can see on the gross profit evolution on the right side, EUR 119 million worth of volume effect. That's further proof point to the roadmap that we drew during the CMD. If you look at that EUR 119 million, close to half of it is driven by E-Mob. So we are growing, and we are growing profitably. The rest comes from the other divisions. We are also improving our cost structure or operational performance. That's the EUR 111 million that you see there. E-Mobility, again, displaying some improvements, about EUR 20 million worth of improvement linked with E-Mob. The bulk of the improvement actually comes from Bearings & Industrial, close to EUR 90 million quarter-over-quarter, demonstrating the measures, both for structural and in terms of operational performance, are paying off and are improving our gross profit and thereby our bottom line. A little bit of what I would call background noise on the next column with a mixture of inventory valuation, customer claims and a little bit of a restatement issued to be 100% transparent in the EUR 109 million. Foreign exchange, EUR 45 million, reflects the evolution year-over-year and our exposure to the different markets. All in all, from 19.1% to 20.3%. Again, this is corrected to neutralize the SAP license and not pollute the reading. If I go to the bottom line and now look at EBIT, this is even clearer, 1 full point worth of improvement from 3.5% to 4.5% of EBIT BSI year-over-year. You find again on the right side the strong gross profit improvement, excluding foreign exchange, the very controlled approach to R&D, some negative impact on SG&A, which is mostly driven by integration impacts. And foreign exchange, you can actually see here that the foreign exchange impact is lower at EBIT level than it is at gross profit level, thereby showing that the group has a little bit of an internal hedge even though the impact is still negative. And again, this drives a strong quarter at 4.5%. If we spend a little bit of time on each division, E-Mobility, as I mentioned, growing by almost 5%, improving its profitability by over 2 points, growing across all divisions and doing so in many regions, double digit in North America and some strong growth as well in China. So, again, the roadmap that we have announced quarter after quarter, we are delivering on it. On the PTC side, comment is one that you will hear, I guess, quite often from me in the next few quarters, it's all about balancing some slightly negative impact on the top line. There we see a slight decline. It was expected. It's linked to the phaseout business. But it is being balanced by an absolute laser-like focus on cost structure and restructuring to ensure that we protect margins and that we deliver the bottom line. In this quarter, the unit actually does more than that. And the improvement is over 1 point worth of EBIT year-over-year. Also, interesting to see that some business divisions are still in positive territories, so Engine & Transmission Systems at 3.4%. And when you look at the details, this is actually also driven by China, which is encouraging in terms of balancing our exposure. Vehicle Lifetime Solution, on the next slide, growing, still growing, slightly less than what you had seen in the past, but the environment is a little bit different. Nevertheless, delivering solid 2.3% worth of growth, 1.3 points worth of improvement in terms EBIT. Again, the interesting part there is where is the growth happening. It's happening outside of the traditional geographies for VLS, so strong growth in the Americas, which is still very much a conquest territory for us. And it's also happening if I look at it in terms of business division outside of the core Repair & Maintenance Solutions business division, but in the Specialty business in the Platform business. So resistance in, I guess, the home turf for VLS while the unit growth in terms of geography or in terms of product offering to the customer. Pricing, also on the favorable side, driving some of the EBIT improvement quarter-over-quarter -- year-over-year. Bearings & Industrial, if you go back to my initial comment, some growth, very -- double-digit growth in our Aerospace Bearings, plus 20%. Even more interesting, in my mind, positive growth in Automotive Bearings in a complicated automotive context. The division is still growing in that sector by 2%. Combining this growth with the very, very strong work done in terms of, a, restructuring, and b, focus on operational performance delivers an improvement of 1.4 points in terms of EBIT, almost at 8%. You can see the 7.9% for Q3 2025. This all translates into positive evolution of our free cash flow generation year-over-year, so we see almost a little bit more than EUR 0.5 billion worth of improvement from Q3 '24 to Q3 '25. I draw your attention on the bridge on the right side in echo to what Klaus said before to the EUR 244 million linked with CapEx, which is essentially us managing our CapEx spending to match it as close as possible to the need and the actual ramp-up of the different programs that are going through SOP and trying not to be too far ahead of the curve, not behind either in order not to put our customers at risk. So some really, really fine steering there in terms of pacing the spending and then also some steering in terms of focusing the spending where we create value. On what would be the last slide for me, our usual slide on debt profile, you can see the leverage ratio peaking in 2025 during Q2 at 2.4, now slightly improving in 2025. On the right side, our usual maturity profile, you can see that the 2025 topic is taken care of at this point through the bond issue earlier this year. Also, happy to report that the RCF facilities have been all extended as per our contracts all the way to the end of 2030, which is an interesting check in the box to have. When you look at 2026 and 2027, you can see that this is all quite manageable given the current conditions of the bond markets either this year or early next year. At this point, I will hand back over to Klaus to conclude on the guidance. Klaus Rosenfeld: Christophe, thank you very much. Ladies and gentlemen, I will be brief. You've seen that page. Just to repeat the basic logic, we increased guidance on free cash flow and also for Bearings & Industrial Solutions in those numbers. Let me finish with one more page on the other announcement we made today next to our numbers and also the little transaction in China selling turbocharger business. We announced this morning a cooperation agreement with NEURA. NEURA is, as most of you probably have heard, a leading German high-tech company active in the humanoid space. They don't -- not only do humanoids but other things as well. And we have agreed a partnership with them that will allow us to supply innovative actuation technology to them, which are, as you all know, key components for humanoid robots. NEURA and their founder, David Reger, are well known to the capital markets. It's the European player from our point of view. We're very proud of this -- for this agreement. Second, that's already digested, I think, last week, October 29, you heard about the U.K.-based robotics innovation company called Humanoid, also something where we are active. We completed a proof-of-concept phase with them with what is called the pre-alpha robot, also a specific design. And we are now moving into a second phase. This is just to show you 2 examples that will help us to grow into that new ecosystem. We will continue to report on this. It's clearly an attractive growth opportunity where Schaeffler is very well positioned to conquer a significant space as a technology provider and a supplier of choice. I'll leave it here. The last page is then the financial calendar. We are going on road show, separating West Coast and East Coast next week. And then there are the usual conferences for year-end. We also look forward to seeing some of you then in the new year in Frankfurt, New York and elsewhere. March 3 is our earnings release, and I am confident that we will bring the year to a successful close despite all the challenges that we have around us. With that, back to you, Heiko. Heiko Eber: Thank you. So operator, we would be ready for the first question, please. Operator: [Operator Instructions] And we have the first question coming from Horst Schneider from Bank of America. Horst Schneider: My questions, I would ask them one by one, please. The first one relates to this ongoing underperformance in automotive, which is driven by the phaseout of some of the Vitesco business. Can you maybe say how would the business have grown without these phaseout effects? And how long these phaseout effects still continue? So just try to get a feeling how long this drags down basically the outperformance. Klaus Rosenfeld: Horst, thank you for the question. I'm not 100% sure what you're referring to when you say outperformance. I mean, E-Mobility grew by 4.7%. Powertrain & Chassis is, as I showed on Page 6, more flattish. Yes, we are -- we were selling business, as I said, but that's a new thing. Maybe you can repeat or give a little bit more color on... Horst Schneider: Sorry, Klaus, I'm referring to Slide 7, which is a year-to-date perspective, to be honest. Maybe the effect is already over. Yes. Klaus Rosenfeld: Okay. You're saying the -- okay, now I understand it. It's 7, where you're saying ICE is below where market growth is. Well, I mean this is, from my point of view, a situation that clearly comes from a phaseout of certain things. I mean, this is a market growth for the whole ICE powertrain portfolio, and it's a function of how present are you with what kind of customer. As you know, we are strong in dampener technology. We are strong in the sort of old classical Schaeffler technologies, but there's also business here from Vitesco that drives us to some extent, but I don't have more detail at the moment. Horst Schneider: Yes. Okay. No worries. The next question refers more short term. Maybe if you can shed some light on the outlook for the fourth quarter. I know you have got your full year guidance in place, and that looks also fine. I just remember Q4 can be sometimes a tricky quarter, right, because unforeseen things can happen, as we experienced last year in industrial. So maybe it's also difficult for you to answer this question. But what trends do you see now in the fourth quarter? So I would assume that E-Mobility gross margin because the reimbursements come in and the highest share of that happens in Q4. And then Powertrain & Chassis, I was surprised about the good margin in third quarter. Is that something that continues also in the fourth quarter in that trend? And then, am I right to assume that industrial usually is a weak quarter in quarter 4? Klaus Rosenfeld: Well, I would phrase it like this. Q4 is typically a weaker quarter than the previous quarters because December, in particular, also is not as vibrant than before. Your description for E-Mobility, I think, is pretty spot on. I think that they will further grow and further improve because that's the trend. PTC, I just spoke with Matthias this morning in our preparation, and he said the call-offs are stable. That's a positive sign. He also clearly said that China is developing better than expected, what is also something on the positive. And when you look at tariffs, I think it's also fair to assume -- you're mentioning reimbursements on the E-Mobility side, classical situation, more Vitesco driven, but there is a synchronization benefit on the tariff side. We always said this, that will also support a little bit. So I think PTC, E-Mob will also benefit a little bit from this. Yes, Industrial is clearly a little bit of a question mark. If we wouldn't be confident that this quarter continues in the right direction, we wouldn't have raised guidance. The 6% to 8% is not a big move upwards, but what we see so far is with all the headwinds that are existing in that business, looking like a solid fourth quarter, let's put it this way. And in aftermarket, aftermarket is clearly something where I would expect that we don't get back to 2-digit growth numbers. But also there, the underlying fundamentals are continuing strong. So let's see what October brings and then we know more, but I would be cautiously optimistic that the fourth quarter is okay. Horst Schneider: Okay. That's great. The last one that I have is typically... Klaus Rosenfeld: For next year and all of that, that's clearly something that there are some unknowns and there are some uncertainties. Horst Schneider: That's great. The last question that I would have refers to E-Mobility because Valeo talked about negotiations with OEMs to get reimbursement on some contracts where the volume expectations have not been met. Do you see the same? Could that be a driver going forward that we have not yet in our forecast? Klaus Rosenfeld: Well, for sure. I mean, if you ask contracts where volume assumptions are massively under cut, then you seek compensation. That's a normal part of our business. But yes, that's -- there's nothing that we do not factor in. That's normal course of business from my point of view. But you all know that there is -- in the U.S., things have changed more dramatically because of the -- also the regulatory environment and the decisions that President Trump has taken. But in the other countries, that's not the case. But for the U.S., you clearly have a little bit of a shift in terms of how important is e-mobility going forward. Operator: The next question comes from Vanessa Jeffriess from Jefferies. Vanessa Jeffriess: Just wondering if you could please speak a bit more about the E-Mobility book-to-bill. I know you said you look on a 9-month basis. But with those customer postponements, are you seeing any exacerbation in those over the last few weeks? Klaus Rosenfeld: This was very difficult to hear. Can you -- madam, can you please repeat this? I don't know where this is coming from, but if you could speak a little slower, that would be good for us, excuse me. Vanessa Jeffriess: Sorry. Just with the E-Mobility book-to-bill and the customer postponements, I was wondering if you're seeing more postponements over the last couple of weeks, if that's exacerbating throughout the quarter. Klaus Rosenfeld: No. I think we have seen what, in particular, the big U.S. customers did, but there is no increasing trend of people giving back business. That's not the case. But any adjustments are part of our normal course of business, but I wouldn't. Christophe, maybe you have more insight. I don't know anything that points to a bigger trend towards the year-end, where we lose contracts or where volume goes back. Christophe Hannequin: Usually, our business tells us that the customer decisions are not always synced up with our communication deadline. So to have some volatility quarter-over-quarter during the year, it's not unusual. But as Klaus said, no underlying strong trend that we can detect on this. Vanessa Jeffriess: Okay. And then just on B&IS, just to be a bit more specific on what you said before. I know you said there might be some headwinds in the fourth quarter, but it seems in your new 6% to 8% range, it would be pretty difficult for you to get down to 6%. So I was just wondering your thinking around that and if there's anything specific in terms of headwinds. Klaus Rosenfeld: I would call it a cautious approach. We have -- you have seen that the last 2 quarters were all pointing in the right direction and above 7%. You saw what happened in Q4 2024. So we are certainly positive, but to increase it even further would have not been, from my point of view, responsible. Operator: The next question comes from Ross MacDonald from Citi. Ross MacDonald: Klaus and Christophe, it's Ross from Citi. My first question, Klaus, you mentioned Nexperia briefly in answering Horst's question. Can you maybe summarize where we stand on that issue as of today? I'm aware there's been some news flow over the weekend around potential exceptions. How do you see that situation playing out from here? Is it effectively resolved from your vantage point? Klaus Rosenfeld: It's definitely not resolved yet. But I can say for Schaeffler, so far, we have been -- not really been forced to stop any customer. I can praise the agility of our teams here, the risk management work when this came in. And we're clearly benefiting here from the strong experience and the insight that the Vitesco colleagues brought here to the table. Again, we have so far managed through this, knock on wood. It's different than the crisis that we saw some years ago because it is driven by this specific and certainly unusual Nexperia situation. It's, like before, a little bit of a race for where do you get a second source, how much do you have as inventory, which customer is asking for what. You need clear rules internally how you allocate what you have, and you need to be very quick to open up new purchasing channels. So far, that has worked well. But again, we are managing through that shortage like any other supplier as well. And I do hope that we get out of this with -- again, with not too much trouble. So far, that's okay. But we manage it on a day-by-day, week-by-week basis. But you need to look at that a little bit in a broader context. They agreed that certain export control restrictions will be relaxed. But the Nexperia situation is a little bit unusual. So you can't just simply apply this on Nexperia here because you have the insolvency situation in the Netherlands, you have the Chinese reaction to this. That's a specific situation that we need to handle separately. The agreement between the 2 presidents is clearly pointing in the right direction, and hope -- our hope is that this relaxes other situations as well. Ross MacDonald: Very clear. My next question is -- 2 questions really. But first one on the humanoid, and obviously, very nice to see continued momentum for that business. A lot of investors are asking around the volume implications, let's say, for '26, '27 on the back of these partnerships. I'm not sure if you can give any soft guidance on what we should expect in terms of growth for that start-up from here. Klaus Rosenfeld: Ross, it's one of the most relevant questions in that ecosystem, how many humanoids will be produced in 2030 or 2035. You have different projections. And again, we are a supplier in this situation. We think about this as a business where we can show our industrialization strengths. So the number of the volume per robot -- sorry, the volume of robots is critical here, as critical as our content per robot. Don't forget there are different types of robots. This is not only one design, but there are several designs. When you talk to different players, and take David Reger, for example, who is clearly one of the most prominent ones, he normally says 5 million. That's a larger number than what we are expecting at the moment, but it's good to be cautious here. But it's also good to know what you do when this really takes off quicker. But we are at the beginning. It's not that we can show you already numerous volume contracts. But the interest in this and also the interest in Schaeffler as one prominent player who is able to scale is definitely increasing, and that's shown by this contract. But I'm not in a position to give you an accurate prediction of what will come. That's the nature of the game. But what I can say is we will and want to be prepared for the next year and the year thereafter. I think we'll see more clearly in the next 12 to 24 months. I can also say we are looking at this from the 3 main regions, both U.S., China and NEURA is the main -- the top European player. Christophe and myself will be in China end of November also to look at our humanoid factory that we're building there, not to produce humanoids, but to deploy humanoids to see how they can help us in production. So this whole ecosystem is emerging. It's a very interesting play for us, and we will stay on top of the development. But I'm not in the position to give you now an accurate number how much robots you will see in 2030. We are cautious, but are prepared for a steeper ramp-up. Ross MacDonald: I actually have 2 more questions, but I promise to keep these very brief. The first one, actually from an investor, just thinking about the U.S. business for Vehicle Lifetime Solutions, we've seen a bankruptcy in that space with First Brands recently. Do you see that as an opportunity for Schaeffler to potentially gain some market share in the aftermarket tactically? And then my second question for Christophe on the free cash flow, just a housekeeping question, there is a significant benefit in the third quarter from the Other bucket, a positive EUR 91 million contribution. Could you maybe just give us some breakdown of what's driving that? How much is one-off in nature versus potentially carrying forward into the coming quarters? Klaus Rosenfeld: I will be brief on the first one. I mean, First Brand is an unfortunate situation, but it doesn't really affect us. I mean, your question was more on M&A type of growth, I would assume. The focus here is clearly on organic growth. Jens is at the moment in Las Vegas for the AAPEX show, a significant potential, and as we said, broadening our spectrum. You saw, I didn't comment on this, in the deck, also the NOx sensor. That's a great example for portfolio extension and tackling the truck and bus part. So I would not think about our growth predominantly being external growth, but internal growth. That doesn't mean that we are not looking at opportunities if they are there, but we will be very careful. Christophe Hannequin: On the cash side, I wish there was an easy answer to this one. It is a very long list of plus and minuses centering around restructuring from one end, incentive payments, payroll and taxes. It's leasing liabilities. Again, I struggle to give you a summary answer, happy to get into details offline after if you wish to, but there's no real one topic that we would point to. If we had to pick one, it maybe around the pension side. But even that, it's only tackling one part of your answer -- of your question. Ross MacDonald: Okay. Christophe, I mean, maybe it would be interesting just to understand if potentially on the restructuring costs you've sort of guided us to whether those are coming in below expectations, and therefore, you're able to write back some of that free cash flow, if that's an element of this or whether it's really just a big, commingled list of pluses and minuses, as you said. Christophe Hannequin: No, we're not signaling restructuring costs lower than expected. What you do have is some timing issues quarter-over-quarter. I mean, restructuring cash flows, it's as much of an art as it is a science. So we do have some movements quarter-over-quarter from 1 year into another potentially, but no signal so far that there would be less cash outflows related to restructuring. Operator: The next question comes from Michael Punzet from DZ Bank. Michael Punzet: I have 1 question on your special items. Maybe you can explain in a bit more detail what you have booked in Q3, especially with regard to the impairments? And maybe you can give us any kind of guidance what we should expect for the full year? Klaus Rosenfeld: I think it's on the SAP. Christophe Hannequin: The main one in Q3, again, it's the fact that we are moving from an on-premise solution to SAP to a cloud-based solution. So we're not able to apply the same accounting treatment that we would have in the past. So you have EUR 204 million being written off for that topic alone that's flowing through the adjustment line. The other ones are the usual ones that we have had from the previous quarters related to the merger of the 2 companies and the restructuring that come with it. The big ticket item this month for this quarter, it's SAP. Klaus Rosenfeld: And it's driven by the fact that we're moving into the cloud and that we have to give up the utilization rates that we were assuming so far. That triggers this. It's a little bit of an awkward situation that was heavily discussed with auditors. But it's not a classical impairment in a sense that you have an asset that doesn't function anymore, that doesn't produce value. We are changing here the way we are treating it because we are moving from on-premise what we had so far into the cloud. Christophe Hannequin: This was heavily discussed with our auditors. We are not the only group out there that's facing the situation. I'll just say that the accounting standard there is a very conservative approach to the topic. Michael Punzet: Okay. And what should we expect for Q4 or the full year in the overall figures for the special items or one-offs? Christophe Hannequin: For the SAP, there will be a little bit of it, just to close that topic, impacting October. But we are talking single or -- single-digit or low double-digit amount that's done for the rest of the year. For the other topics, again, the usual suspects that you find in every quarter since the merger and the announcement of restructuring programs. Operator: [Operator Instructions] We have a follow-up question coming from Horst Schneider from Bank of America. Horst Schneider: I have got follow-up questions. The first one is related to Defense business. We saw this week that the first German auto supplier says he wants to get into drone production. I just want to get an update where you stand on that, if that could be something for you as well. And maybe you can talk about the outlook of your Defense business maybe in that context. The second one is a follow-up on the Humanoid business. I know you cannot share a lot of details, but could you maybe say, given the order intake that you got so far, where you see the main business potential for you? Is it more in the U.S.? Or is it more in China? Or it's all over the world and you cannot say? Klaus Rosenfeld: Let me tackle -- take the last one. As I said, we want to play in all the 3 regions that you mentioned. There is a -- the jury is out there who comes with the first volume contract, and you clearly need to define what that is. It's, at the moment, not clear what's happening there. We see the U.S. there with the prominent names probably as the leaders because there is more concentrated on one prominent company. While in China, there are many, many players at the moment, where it's a little bit more difficult to distinguish who are the ones that we maybe should bank on. NEURA is, I think, the most prominent player here. At the end of the day, of course, this is all depending on the end customer demand. And I can only say this Amazon announcement that was also well received, we need more of these kinds of players to articulate their needs. And that will then flow through the Humanoid OEM and also through the supply chain. I personally think that the U.S. will drive that first phase, and we'll then see significant competition between U.S. and China. When you go to the 5-year plan, it's obvious that the industrial automation in China is key to the next 5 years in China. There is massive support there. But on the short term, my view is that we will -- we need to watch out for what's happening in the U.S. They will drive it. Yesterday, when David was here with us, also in the Board meeting, he gave us a little bit more insight. And it looks that the next 1 or 2 years will be decisive on who is going to be ahead. Maybe it's a little bit a statement that is more diplomatic, but we need to see how it unfolds. In terms of Defense, let me quickly put that in perspective. We have said at the Capital Markets Day, Phase 1, that the basic decision that we want to play in defense or play more in defense is taken also with our shareholders from the family side. We are now in Phase 2. Phase 2 has 3 main deliverables. The one is a more articulated product, sales and also industrialization strategy. Without saying too much detail, we are today in a situation where we are looking at the key opportunities for us, for sure. Flying objects, let me call it like this, are super interesting because there is scale in that area and there is a product that is needed in particular when you think about high-performing electric motors. That's also where the fact that we are automotive and aerospace helps us. There is opportunity in everything that are vehicles for us. There is opportunity also in some of the high energy weapons. There's also opportunity when you think about spare parts and repair solutions. So we're looking at focused areas with dedicated customers. We have a lot of calls, a lot of demand, a lot of people that are coming, can you help us with your supply chain experience, also from the start-up side. But we are, at the moment, still in that selection phase. The second phase will last probably until Q1 2026. What is key then if you want to really turn this into a solid business? You need a structure. You need a legal entity. You need to have the right certification, qualification, in particular, if you want to play at scale. And that's a second key element that we are working on. So all good in that second phase. More to come when we are finished with this phase and have decided where do we really want to play in terms of products and application. Operator: There are no more questions at this time. I would now like to turn the conference back over to Heiko Eber for any closing remarks. Heiko Eber: Thank you very much. So with this, we would like to close today's call. Thanks to our speakers. Thanks to everyone dialing in for your questions, your interest. And, of course, thanks to the team for the preparation. As always, if there are additional questions, please reach out to our IR team. And I would already like to draw your attention and block your calendars for January for the CES. The formal invitation to visit us at our booths in Las Vegas will be sent out shortly. I guess you have it on the radar anyhow. Thank you very much. Have a good rest of the day, and talk to you soon. Klaus Rosenfeld: Bye-bye. Thanks, everyone. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Sota Endo: Thank you for joining us for NTT DATA's briefing session for the 6 months ended September 30, 2025. I will serve as your facilitator. I'm Endo from IR. In terms of today's documents, please refer to our IR website presentation materials. First, let me introduce the speakers. Representative Director, President and CEO, Mr. Sasaki; Representative Director and Senior Executive Vice President, Mr. Nakayama; Director and Executive Vice President, CSO, Mr. Nishimura and Senior Vice President, Head of Finance Headquarters, Mr. Kusakabe. These are the 4 speakers. Today, we will skip the earnings presentation and start with a Q&A session. Sota Endo: [Operator Instructions] First, we will take questions from the floor. On the first row on the right-hand side from my side, please. Unknown Analyst: SMBC Nikko Securities. My name is [ Sakiguchi ]. I have 2 questions. The first question is regarding the domestic public and social infrastructure business. There was unprofitable projects is what I've heard. So with the -- there is an unprofitable projects with the government agency-related type of projects, it actually drags along. So what amount of this unprofitable project amount is recorded for the second quarter and the overall scale of the project and that what's going to happen of that for the second half of profit line for the public and social infrastructure. Well, Public and Social Infrastructure recently was performing strongly. So there was one way of looking at it that it probably did increase to a peak, but there was more orders after that, but also including the treatment of unprofitable projects, what is your outlook for this business segment is what I'd like to know. Sota Endo: So Sasaki would like to answer your question. Yutaka Sasaki: For the second quarter, what we posted for unproduct -- it's unprofitable business for public area was JPY 3 billion in total. Basically, in the past cases in several large-scale projects, and within over several quarters, there was a track record that we have posted this unprofitable amount. But this time, we have actually have visibility all the way to the risk. So for the third quarter and fourth quarter, our assumption is that there are no further losses that will be made. And how we look at the market, we believe that it's going to be still strong for the central -- this public and social infrastructure is central government and the local governments and also the telecom utility. And we believe that this is going to continue to steadily grow strong. So we would like to continue to bring in that demand and further grow. But as you have pointed out, for this fiscal year, on a year-on-year basis, profit-wise was a negative number. That means that it requires some measures to be injected. The SG&A that is spent towards the second half, we would like to thoroughly look into it and thoroughly so that we will be able to turn around for the remaining year and next year. And 2 projects and JPY 3 billion, looking at your scale of the business and comparing to the past, it's something that shouldn't be that worried about. Unknown Analyst: The second question, overseas, especially North America, you have quite a few orders of large-scale projects was explained. What is the content of that? Recently, the continuing project of the existing customers, but also there is the expansion projects receiving the large-scale orders was the explanation. So if that is the same way of thinking, so how are you evaluating the orders that you have received this time? And at the last press conference, you said that you want the contribution from these orders to come about from the third quarter. But around what timing is that going to be recognized? Yutaka Sasaki: Well, NTT DATA Inc. overall, there's a Chief Growth Officer person that is appointed now and acquiring the large-scale projects or targeting the large-scale accounts. To surely acquire them is the activities that is conducted under this Chief Growth Officer. And one more thing we're working on is a global practice, meaning they're not saying that to each region to do your best, but looking at it more like a global-wide perspective like global security or digital workplace. These are several offerings and solutions, the offerings that utilize the Indian resources, accumulating the know-how of that, and we wanted to roll that out to several large accounts. And this initiative has been worked on in a full scale since last year. And finally, we have the CGO and the global practice initiatives are being well combined. And especially in North America, it has enabled them to acquire large-scale orders or projects. So what's the content of it? Like in cloud and security is the large-scale project to cloud migration. It's one case. And the contract period is 3 to 5 years, multiple years. So it seems that the order received amount is larger. But from the second half of this fiscal year, it is going to be booked as net sales. So from the third quarter net sales for North American region, it is going to exceed what it has achieved last fiscal year. So the North American turnaround based on these orders received, we would like to surely pursue it. And by having the net sales being recorded or posted, that means the gross profit is also going to increase. And in North America, thorough initiatives are conducted in terms of reducing the SG&A. So they will be able to surely accumulate the profit. If that is so, the expansion growth, so that means new orders you're receiving, yes, quite an amount. Sota Endo: Next question from the floor. Over there, please. Daisaku Masuno: Masuno from Nomura. I'd like to ask about overseas data center. In the press conference, I asked the question, why don't you accelerate even more than the current plan? And you said that you will carefully select partners and consider the approach in a balanced manner. But I feel like now we are at a stage where you can take on more risk. So what are your thoughts regarding taking on further risk to accelerate? What kind of reference do you take in order to make that decision? And now that you are 100% subsidiary, rather than relying on the cash from the REIT -- sales to REIT, I believe that you can take on more risk in that perspective as well. Yutaka Sasaki: So becoming a 100% subsidiary of NTT, we are able to take action based on a bigger balance sheet, and we have the room to make investments with more leverage. I understand that. On the other hand, for cash allocation, there is data center and there's also M&A and also investment into pure assets. So there are different investment targets. And especially with regards to M&A in the age of AI, the rules of competition are changing. And so what kind of company should we acquire in order to win in a global competition is something that we really need to strategize on. Over the next 1 to 2 years, the competitive landscape in the age of AI will start to emerge. And so we don't want to just bet on data centers. We would like to also consider M&A opportunities to have the optimal cash allocation. On the other hand, as you said, we have a REIT, and we're able to do a cash cycle based on that. And we're also studying possibilities for utilizing third party in making investments. So rather than leveraging our balance sheet, how much we can expand our investment. That is something that we continue to study. Daisaku Masuno: So in terms of considering the allocation into data center, what are the indices or the environmental factors that do you look at in order to make the decision? Is it the investment into North America? I also heard that India is more profitable. So is it the demand from India? Yutaka Sasaki: Well, we have placed much importance on our communication with hyperscalers. The team's head is in North America and the North American team is talking to the big techs on a day-to-day level. And so we're able to grasp the demand going forward very directly. And the team is making various investments. And we also look at other areas where we can complement that team and make the investment decision. Sota Endo: Are there any questions from the room, from the floor? If you do, please raise your hand. It seems that no further questions from the floor. So we would like to ask those of you participating online, if you have any questions. First of all, Ueno-san from Daiwa Securities. Makoto Ueno: This is Ueno from Daiwa Securities. Can you hear my voice? Sota Endo: Yes, we can hear you. Makoto Ueno: The previous person asked the same question regarding Page 7, excluding the 2 projects that are unprofitable, which shows the operating profit trend, that was JPY 3 billion. But with that, there's still a JPY 2.5 billion decline in profit. But if you look more in detail on Page 6, net sales, the Public & Social Infrastructure, JPY 22.6 billion increase in net sales. So you are securing the increase in sales, but you have JPY 3 billion of a loss. But in other areas, there's about a JPY 7.4 billion of a decline. What is the content of that remaining JPY 7.4 billion? Yutaka Sasaki: Public and Social Infrastructure up to the operating profit, I would like to break down the declining factors. About JPY 3 billion of unprofitable projects exist. In addition to that, on a gross profit basis, about JPY 3 billion is added. So gross profit in total JPY 6 billion, we experienced a JPY 6 billion decline. As you mentioned, the sales increased, but -- and there's about 15% growth rate. However, excluding unprofitable projects, it's still JPY 3 billion decline in profit. Last year, there was a onetime large-scale, very profitable projects. So that not existing this fiscal year had the largest -- that was the largest factor. And SG&A, there's an increase of about JPY 4 billion. And that also was a factor to press down the operating profit. So the JPY 4 billion in gross profit decline and SG&A increasing by JPY 4 billion and JPY 10 billion, so a total of JPY 10 billion decline. So for SG&A activities and also the orders that are -- demand is strong, we have to hire the engineers and including the agent fees that is attached to hiring the people is also included in SG&A as well. But in a full year perspective, we would like to control the areas so that we'll be able to achieve the target. Makoto Ueno: So I just want to confirm the breakdown. So profitability is JPY 3 billion, and there's additional JPY 3 billion of gross profit because no large project that you've seen last year. And then there's SG&A and that total of JPY 10 billion, yes. So the impact of this to the second half. So the gross profit, the large project not being there is okay. But this JPY 4 billion SG&A, you probably can recover that through sales increase. So if you just compare second half and second half, there's no remaining, right? Yutaka Sasaki: For the SG&A, it depends on the order situation. But in the full year, we are aiming to achieve the full year target. Sorry to be very detailed. Makoto Ueno: But just looking at the enterprise, the [ BOJ ] short-term outlook and looking at the other companies' performance, the demand is extremely strong. But for you, the enterprise net sales is that from JPY 279 billion to JPY 289 billion, a 1.4% increase. So is it just that second half is lower or you're strong at the social financial -- social infrastructure financial and you're strong. So maybe you don't expect that much growth in enterprise, but why is this growth rate so low? What is the factor behind it? Yutaka Sasaki: The one thing is maybe -- apologies for lacking the explanation. the payment where this agent to collect the payment, their rate has changed. And there's about JPY 17 billion of that impact. And excluding this -- if you reverse that JPY 17 billion, there will be increase of about JPY 10 billion in revenue -- JPY 20 billion. And towards manufacturing businesses, the demand is strong. So as a momentum, we are placed in a good -- very good situation. So the new -- the net sales from the gross, we changed to net. Makoto Ueno: So include that the enterprise is having a strong growth. Is this going to continue into the second half? Yutaka Sasaki: Yes, we do expect it to continue. Makoto Ueno: Okay. And also regarding the data center question towards holding companies and towards your companies, there's repeating questions regarding data center. Maybe this is a different angle way of looking at it. The AI, which is strong globally, honestly speaking, I think this area has risks. And honestly, you have to have a several trillion yen fundraising capability or else NVIDIA is not even going to look at you. So regarding this AI area, you're not focusing that much and the data center that's going to grow as a real business, you are focusing on the AI investment for the data centers. Is that a wrong way of looking at it? Or are you going to invest in AI as well? Yutaka Sasaki: We have an alliance with OpenAI as well. But the public giant language model, we have no intention of creating something like that. So NVIDIA's GPU buying thousands of them and us creating a large-scale learning model, we have no intention of doing that as well. But on the other hand, the private AI like Tsuzumi or Mistral AI, relatively small-sized model we think that enterprise customers will utilize that more than now, and we call it private AI. So in Tsuzumi 2, with -- it only requires 1 GPU. So as NTT already made the announcement, especially LLM that's strong in Japanese and finance and medical areas, it's already learning. And if the customers add a learning area, then the learning speed is extremely fast. So towards those customers that are in need for that, we rent out our data center space and also combine that with the public AI and to have our customers utilize AI in this combined manner. And we believe that this can be rolled out globally as well. So conducting business with the hyperscalers. But in the private AI area, the government customers or manufacturing customers or finance industry customers, we would like to provide our service to them as well. So in that sense, regarding AI, including the infrastructure, we would like to become in a way that we'll be able to provide the service in a full stack manner. Makoto Ueno: That part, I highly evaluate that like IBM and Oracle being very strong is that instead of trying to develop a huge AI, but at the customer side, meeting the customer demand is enabling you more to make money. But the AI solution like AI agent, something that will gain sales, not the data center, but AI, you're mentioning Tsuzumi. But application-wise, are you already prepared or around what timing are you going to be able to record net sales? Yutaka Sasaki: Well, the so-called AI agent, we are paying attention to that. And up to now, we have conducted many POC and there are actual orders that we have received in this area. And we believe that there will be a business growth in this area moving forward. We are sure about that. That is why even within the hand that we wrote it, we are going to establish a new company making investments in Silicon Valley. For AI agent, as several offerings, there are something that will made into a certain template, but we would like to have a thorough analysis of the customer and making and developing an AI agent tailored to our customers. So the AI services or computing services that are tailored to the customer needs will be something that we are going to provide. So it's not that simply one can -- we are going to purchase packages and resell that, a lot of them. But instead of that, we are going to be on the customer side and provide the service that is required. And as AI evolved, we will update our services also. And AI in times will actually not tell the truth or lie to you. So in order to provide a thorough service, a managed service of our services that are provided is going to become important. So we would like to establish a thorough business model to provide our services. Makoto Ueno: At Page 17, OpenAI-related business, JPY 100 billion. So in agent-related separate from them in 2027, JPY 300 billion is what we aim for agent management. I believe that you were saying JPY 100 billion for overseas. Is that true? Yutaka Sasaki: Yes. Sota Endo: That concludes the question from Ueno. Next question, please? We have passed the planned time, but we were also late in starting this session. So if there is a question, we'll be happy to answer additional questions. And if you like to ask another question for those of you who have already asked a question, we are welcoming that as well. No questions? We -- either from the floor or from the remote participants? Well, we see no hands. And this concludes the NTT DATA Group's earnings presentation. Thank you very much.
Operator: We'll now begin the LY Corporation financial results briefing for the second quarter of fiscal year 2025. Thank you very much for joining us today. We will be referring to the financial results presentation available on the LINE and Yahoo! LY Corporation website. During today's session, we kindly ask you to follow along with the material. Joining us today from LY Corporation are Mr. Takeshi Idezawa, President and CEO; Mr. Ryosuke Sakaue, Executive Corporate Officer, CFO; Mr. Yuki Ikehata, Corporate -- Executive Corporate Officer, Corporate Business Domain Lead; Mr. Makoto Hide, Executive Corporate Officer, Commerce Domain lead; Mr. Hiroshi Kataoka, Executive Corporate Officer, Media and Search Domain lead. First, Mr. Idezawa will provide an overview of our financial results for the second quarter of fiscal year 2025. Following his presentation, we will hold a Q&A session. The entire briefing is scheduled to take approximately 1 hour. We will be live and streaming this session. If there is any distortion or inconvenience in the video or audio, please try alternate server link. Takeshi Idezawa: This is Idezawa of LY Corporation. First, before explaining our financial results, I would like to comment on the system failure caused by a ransomware attack that occurred at our group company, ASKUL Corporation on October 19 and the partial leakage of information held by the company. We sincerely apologize for the significant concern and inconvenience caused to our customers who use our services as well as to our business partners. The details regarding the damage potential information leakage and recovery status have already been communicated by ASKUL. The company is continuing to work closely with external experts prioritizing a safe and prompt restoration of systems while investigating the cause and confirming the scope of impact including any personal data. LY Corporation is fully cooperating with all recovery and investigation efforts. As the parent company, we take this matter seriously, and are committed to restoring the situation and preventing recurrence and strengthen the information security framework across the entire group. Now let me explain our second quarter financial results. Please turn to the next page. First, here is an overview of the second quarter results. Consolidated revenue was JPY 505.7 billion, up 9.4% Y-o-Y. Consolidated adjusted EBITDA grew 11.3% Y-o-Y to JPY 125.4 billion showing solid profit growth. Additionally, progress in AI agentization and the expansion of LINE Official Account and Mini apps are progressing smoothly, preparations for the LINE renew are also steadily progressing. Home tab refresh scheduled within the year. We will now proceed with the explanations in the order of the agenda you see here. First, the consolidated company-wide results. Next page, please. These are the results for the second quarter. Although consolidated revenue was slightly behind the guidance due to the decline in search advertising revenue, adjusted EBITDA and EPS are on track with the guidance. Next page, please. These are the consolidated performance trends, driven by the growth of PayPay consolidated and progress in efficiency improvements at LY Corporation, adjusted EBITDA grew 11.3% Y-o-Y, achieving double-digit profit growth. The margin also improved year-on-year. Next page, please. These are factors of change in consolidated adjusted EBITDA. Although expenses increased, revenue growth in the Strategic Business and Commerce Business outpaced the expense increase, resulting in a year-on-year increase of JPY 11.7 billion in adjusted EBITDA. BEENOS and LINE Bank Taiwan have been fully consolidated since the second quarter with the 2 companies contributing JPY 900 million to adjusted EBITDA. Next page, please. This is consolidated total advertising-related revenue. This quarter, commerce advertising achieved double-digit growth driven by increased transaction value and the total ad revenue grew by 2.4%. Next page, please. This is consolidated e-commerce transaction value. Domestic shopping transaction value grew 13.1% year-over-year, supported by last-minute demand ahead of the discontinuation for awarding points for hometown tax donation program. Reuse saw year-on-year growth of 15.7%, driven by Yahoo!'s lead market growth and BEENOS contribution. Next page, please. Regarding the upward revision of the dividend forecast, we conducted share repurchase during the first half of the current fiscal year and the cancellation of these shares was completed on September 3. Consequently, as the number of shares eligible for dividends has decreased, the annual dividend has been revised upward from JPY 7 to JPY 7.3. Next page, please. This is on progress on the LINE app revamp. The renewals of the talk, shopping and wallet tabs have been rolled out in phases since September. Home tab renewal is scheduled to make a test release this year. Next page, please. This is on optimization of management resources. Firstly, on human resources, we are reallocating to growth areas such as AI agents, which will be explained later, Official Accounts and MINI Apps. We will reallocate our human resources so that by FY 2028, 50% will be allocated to growth areas. We will reduce the fixed cost by JPY 15 billion by the end of fiscal year by 2026 and build a leaner financial structure. Next page, please. From here, I will explain the financial results by segment. Next page, please. First, the Media Business. Although both revenue and adjusted EBITDA declined, continuous cost-saving efforts are yielding results, leading to improvement of adjusted EBITDA margin on Q-on-Q basis. This is performance analysis of the Media Business. While search advertising revenue contracted, growth in account advertising drove an increase in total advertising revenue. Next page, please. Account advertising continues to perform strongly in both the number of paid LINE Official Accounts and pay-as-you-go revenue. As this is an area we are strengthening alongside MINI Apps, we will provide a more detailed explanation of future strategies and initiatives later. Next page, please. Next, the performance trends for the Commerce Business. Second quarter revenue reached JPY 216.6 billion, a year-on-year increase of 7.2%. Adjusted EBITDA was JPY 33.3 billion, although profit declined due to increased promotional expenses related to the hometown tax donation program, the decline narrowed compared to the previous quarter. Next page, please. Performance analysis of the Commerce Business. The business as a whole is expanding steadily. In addition to the full consolidation of BEENOS, Yahoo! Shopping and subsidiary growth contributed to increased revenue. Next page, please. performance trends for strategic businesses such as payment and financial services. Revenue continued to be driven by PayPay consolidated, reaching JPY 109.7 billion, a year-on-year increase of 35%. Adjusted EBITDA also continued to grow, reaching JPY 22.9 billion, an year-on-year increase of 52.1% with margin remaining at a high level. Next page, please. Performance analysis of strategic businesses. Payments and financial services are both growing steadily. Furthermore, the full consolidation of LINE Bank Taiwan contributed to increased revenue. PayPay consolidated business overview. Each service is growing smoothly. Our number of payment per user and unit price, those KPIs are progressing smoothly. As a result, consolidated sales has increased Y-o-Y, plus 30.4%. Consolidated EBITDA was more than doubled. So the second quarter showed a significant strong growth. Next, from here, I will explain our key strategy going forward. Next page, please. As our company-wide key strategy, we will advance as 2 wheels that agentization of all services and the enhancement of Official Account and MINI Apps. In agentization for the 100 million users using our services, we will provide services like search, media, finance and commerce more conveniently via AI agents. And for corporate clients such as businesses, companies, stores and brands, we will provide customer contact points and business support function through our function enhances Official Accounts and MINI Apps by improving the value provided to both users and clients and by seamlessly connecting both via AI agents, we will realize new service experiences and expansion of revenue opportunities. Please turn to the next page. First, regarding our initiatives for AI agentization. First, our goal is daily AI agent used by our 100 million users in Japan, aiming for 100 million DAU. Currently, in October, DAU for AI services is 8.6 million, especially AI answers on Yahoo! JAPAN search and LINE AI Talk Suggestions are used frequently and user numbers have begun to expand. Also for AI Talk Suggest, user billing has started and monetization efforts has also begun. Going forward, we will promote AI agentization of each service and aim to expand users. Next page, please. Next, regarding the enhancement of OA, Official Account and MINI Apps. But before talking about the specific initiatives, I'd like to explain the structural transformation of the Media Business. Earlier, I explained the revenue decline in search advertisement in the Media Business, while steadily bolstering the conventional search and display advertising businesses, we will achieve sales and profit growth by further growing OA and MINI Apps where we can provide our original value. Over the next 3 years, we will increase the share of high gross margin OA and MINI Apps to about 40% and aim for an adjusted EBITDA margin of 40% to 45%. First, regarding the performance of OA, Official Accounts in Japan over the last 3 years, our track record, the number of paid OAs improved by a CAGR of 14% and ARPA also improved. And as a result, OA revenue also grew 16% annually on average and sales have grown to the scale of JPY 100 billion in Japan and JPY 140 billion, including global. Please turn to the next page. On top of this OA growth foundation by further building a MINI App platform and adding a SaaS-like store support solutions, will create a multilayered revenue structure and aim to double sales in 3 years. This fiscal year, as I mentioned, doubling the JPY 140 billion to JPY 280 billion. In this fiscal year, we will first focus on expanding MINI Apps based on OA and launching the SaaS business. Important KPIs for the revenue models of each areas are shown in the lower section of this page. MINI Apps are -- our scale expansion is very important for KPIs in the growth phase. In OA SaaS, we set ARPA improvement as KPIs. But we think these KPIs as leading indicators to monitor our business goals. Next page. Let me explain structurally. First, there is an OA, Official Account as a base. Currently, there are 1.3 million active Official Accounts used in Japan, in which number of paid Official Accounts are 310,000. We see the target accounts for future expansion such as businesses, companies, stores and brands at about 5 million. So we can still grow the number of OA accounts, and we will also further increase the ratio of paid accounts. The second layer, MINI Apps to OA using companies and stores, we will propose a customer contact point via MINI Apps, expanding MINI Apps numbers, growing users and creating businesses like payments and ads within them. The third layer is SaaS solutions, developing specialized support for high affinity industries like Store DX or reservations, aiming to raise ARPA. Service launch planned for 2026 first half. And we'll have more new solutions at the right timing when we can introduce them to you, we will. We will provide services more broadly and deeply and provide a deeper solution via SaaS by industry to expand our sales. Finally, regarding the recent growth of MINI Apps, as you can see on the left-hand side graph, number of apps has increased by 1.5x and the number of users has increased by 1.6x, steady growth. And we are strengthening our sales structures. We are enhancing proposal to bigger companies and installation at large enterprises like these are beginning. As you can see, and as a measure to strengthen inflow, we are leveraging LINE touch, which allows users to instantly launch MINI Apps at stores and the LINE apps revamp focusing MINI Apps will also begin. So we will further expand both the number of apps and the users and build a situation where businesses like advertising payments that can be provided. Let's turn to the next page. And finally, a summary of the Q2 financial results. Sales and profit expanded steadily. Our company performance was -- experienced a solid growth. Going forward, centered on AI agentization and Official Accounts and MINI Apps, we will accelerate the growth. We will promote AI agentization across all services, offer AI services to 100 million users and create new value. Also, we will enhance OA and MINI Apps. And while transforming the media portfolio, we will achieve growth and improved profitability. This concludes our Q2 financial results explanation. Thank you very much. Operator: We would like to now begin the Q&A session. [Operator Instructions] First from Goldman Sachs Securities, Munakata-san. Minami Munakata: I'm Munakata from Goldman Sachs. I have 2 questions. My first question is on search ads. In the first quarter and also in the second quarter, the impression I got is this business is quite tough. The degree of toughness, is it correct to understand that it's the extension of the first quarter? Or are there any additional reasons? And on search ad, what would be the realistic guidance towards the second half? That's my first question. Ryosuke Sakaue: Thank you for the question. I am Sakaue. I'm the CFO. Let me reply to your question. Second quarter year-on-year is worse compared to Q1. One of the factor is one major client budget allocation was weak, and that continued into the second quarter. And in addition, in other clients, the budget reduction happened. This I'm referring to large EC companies in Japan and vertical companies declined, and that can be called additional from Q1. So that was the additional factor for Q-on-Q deterioration. And Q3, Q4, I think the degree of negative -- negativity is same as Q2. For Q3 and Q4 as well, that is our forecast. Minami Munakata: I have a follow-up question. There are other clients with quite reduction. Is there any structural reason such as shifting in-house or revisiting ROI of advertising? Is it more of an economic trend? What is the nuance? Yuki Ikehata: This is Ikehata. Let me reply to your question. This is Ikehata. I would like to add some more comments. In addition, there were some industry -- well, in addition to prior quarter's reduction trend in other industry, partially, that is -- there was a reduction in ad spend for search ad. The concept of ad placement, I don't think that is such a reason. But overall, LINE Yahoo! search ad performance is being monitored and the advertisers operate. So based on that, there is -- there was a decline in ad placement. We will continue to work on the performance improvement of search ad, and that would lead to getting these customers back. So rather than any unique circumstances, we are to continuously work on performance improvement of search ad. Minami Munakata: I understood fully. Another question is on MINI App. This time, various figures were presented and outline was explained, and I was able to learn. Thank you very much for that. The portfolio shift -- this chart has been shown. Just to reconfirm display and search, basically, it's very difficult to grow these areas. Is that the assumption you are setting? And JPY 140 billion to be expanded to JPY 280 billion, that has been rather difficult. And what is the pathway you envision? For example, from the first half of 2026, you're going to start SaaS service. So from the second half of next year, do you expect the sales to accelerate? Takeshi Idezawa: This is Idezawa. Let me answer your question. Display, search, naturally, the measures to revamp or to boost them, we are taking measures. And also thanks to the organizational change that we have implemented, we are able to implement activities to work on recovery. But structurally speaking, I don't think this is an area where we can expect high growth rate. So from that perspective, we will support the baseline for the display, search. And then apps will drive the growth. And we have the target of Official Account doubling and CAGR-wise, it has been 16%. And so we have this growth of OA, Official Account as a basis. And to add on top of that, we are going to provide MINI Apps and SaaS services. So we will be pursuing the target by having breakdowns or compositions in mind. On MINI App, it's not a linear growth, but when we have a certain number of clients, then we can expect a significant activation. So the MINI App platform will be stronger in the later half. And then that would be the overall picture. Operator: Next question from SMBC Nikko, Mr. Maeda, please. Eiji Maeda: This is Maeda from SMBC Nikko. I have 2 questions as well, please. I'll be recapping the previous comments regarding search linked ad. Together with popularization of GenAI, the negative impact to queries. And when I look at the performance, some of the clients looks like ad placements are declining in numbers. So because of this GenAI, the performance is having a negative hit on the flip side. If you could please share more on the recent trend? And also for the market, we -- there is still a concern that GenAI rise can be a negative for a search-linked ad. If you could please share your outlook, that would be great. Ryosuke Sakaue: Thank you, Mr. Maeda. Sakaue, I will start, then possibly Kataoka will follow up. At the moment, Yahoo! Search, 10% of query comes from AI search. And at the same time, the answers from AI search are business query where there is no opportunity for search-linked ad, like questions and answers. Those are the search keywords that we get. So it doesn't have much impact to our revenue and profit making. But at the same time, mid- to long term, regarding those business query, I would think that the there will be more use on use of GenAI. So media and search, we expect the next 3 years to be flat plus extra. Hiroshi Kataoka: This is Kataoka speaking. As Sakaue mentioned, number of queries for search have not resulted in significant decline in the number of queries. There is no major time shift in the search trend. And ad performance itself hasn't deteriorated. So within this big global trend, there's more use cases from GenAI are increasing. And I'm sure more of our clients companies are considering to further use GenAI. We believe that there will be opportunity, the monetization business opportunity when it comes to GenAI-led search as well. So we are considering various different means to monetize. Eiji Maeda: Second question, regarding Commerce Business. In second quarter, each services growth on the Page 8. Regarding Yahoo! Shopping, the hometown tax, I wonder how much of that impact is included. I wonder in the second half, there can be a significant decline in the growth as a reversal factor. And if you exclude the BEENOS impact, what is your true growth opportunity? So the growth in the cruising pace and growth from a one-off reason, if you could please share for the results in the first half and what you expect for the second half, please? Unknown Executive: Okay. Sakaue would share some figurative indication then -- and I'll have my colleague, Hide to provide additional information. And regarding Yahoo! Search -- sorry, Yahoo! Shopping, for second quarter, the growth was about 19%, 1-9, so quite significant. And hometown tax, late high single digits, mid-single digit to high single-digit growth. And for Reuse, this includes Yahoo! Auction, Yahoo! Flea Market and BEENOS as to be about 15% growth. So excluding BEENOS, we do have mid-single-digit growth. Second quarter has this last-minute demands for hometown tax. So that led to this significant growth rate. Makoto Hide: This is Hide to provide additional information. Regarding Yahoo! Shopping, a significant impact from hometown tax. This is something that was happening at the end of the year in December time. So it's a front-loading of that demand now. Compared to the last year, Q3 growth rate will be stagnant, will slow down. For Reuse, excluding BEENOS, I do see the trend continuing. In other words, Yahoo! Auction growth is quite steady and Flea Market is growing significantly. So when you take the weighted average, our growth is mid-single digit. I would think that for the second half, we can expect a similar growth, and we'll have a synergy, as you can see on the right-hand side, to have a more significant growth in the midterm. Operator: Next, Okumura-san from Okasan Securities. Yusuke Okumura: This is Okumura from Okasan Securities. Can you hear my voice? Unknown Executive: Yes. Yusuke Okumura: I have 2 questions. On Page 26, you have been explaining on the account ad and MINI App expansion and double the sales from this, I would like to reconfirm Official Account, the platform part based part, the assumption is the current growth rate. And through MINI App several dozen billion will be added on top. Is that the assumption? If this becomes a reality, it's wonderful. But what is the background for being so bullish at the time of launch, the assumption of the MINI App or MAU in order to achieve your assumption, what kind of measures and scale of investment you're going to make in order to achieve your strategy? That is my first question. Unknown Executive: Firstly, the growth image of official apps, I would like to explain and the strategy to grow will be replied by Idezawa-san and Ikehata-san. The existing OA part, the current level of growth can be maintained. To be more specific, 10% to 15%. Currently, it is growing at nearly 15%. So maintaining the same growth level. The paid accounts can be expanded in this pace, but that will not bring us to double. So the gap will be compensated by MINI App and SaaS. The strategy will be explained by Ikehata. Yuki Ikehata: Thank you for your question. Let me just add some more comments. In your question, you said that it's still the starting phase and this forecast may be bullish at the starting phase. But right now, we already have Official Accounts and MINI Apps, although partially we are not monetizing yet to many customers, similar solutions are offered and being used, and it's been -- the customers are satisfied. So for MINI Apps, we will increase the number. And at the same time, we will focus on monetization. That is for next year and beyond. Official Account SaaS solution already, including third-party solutions, we are collaborating with various companies and various solutions are already being utilized. So our strategy is to monetize them from next year and onward. We haven't been able to try or something that does not fit the market to start from scratch. Well, that is not the case. We already have existing foundation of Official Accounts, and we are offering various services, and we will expand and further monetize. So that is the basis of our assumption to achieve these targets. Yusuke Okumura: What about the scale of investment? JPY 10 billion was the media investment for this year. What about the investment going forward? Unknown Executive: The details will be discussed, but we are working on the awareness strengthening through advertising for MINI Apps and we are going to focus on promotion and PR. And regarding manufacturing or production, as shown on the slide, we are to reassign human resources to these growth domains to speed up the launch of products. Yusuke Okumura: My second question, on LINE, you are going to implement AI agents. I would like to ask about that. ChatGPT has instant checkout and strengthening the functionalities, and they are expanding partners, the user side rather than ChatGPT, why do they use LINE's chat or AI agents? What is the value that you offer in the future? The relationship is that parent company is -- has strong ties with OpenAI. And what kind of positive influence will that relationship with OpenAI has with your company? Takeshi Idezawa: This is Idezawa. Let me reply to your question. Our company does not have our own LLM. So we use OpenAI solutions or other solutions. We pick and choose. It's not just LINE, but within our company, we have a variety of services, news, commerce, finance, auto, so each service will be agentized. That is what we are working on right now. And like Yahoo! and LINE or integrated agent will be created. So that is the perspective of our user interface. We do not have LLM ourselves. But on the other hand, we have a lot of touch points with so many users and services. So within one ID, ours can be used in a seamless manner. That is the value we offer. So that is why we are working on agentization of various services. Operator: Next from Mizuho Securities, Mr. Kishimoto, please. Akitomo Kishimoto: My name is Kishimoto from Mizuho. I have 2 questions too. Both are about LINE Ads. The first is commerce functions of LINE SHOPPING functions. I would think that it will be launched quite soon as a new platform. I know you've done some testing. So I wonder what is lacking in order to have a full launch? That's my first question. Makoto Hide: This is Hide speaking. We are providing bucket test. We have already launched the test launch for this within the LINE SHOPPING tab. We are not offering any service actively or making a big sales promotion. We are testing system stable operations. Then within this test bucket, we are trying to expand our product and services or to enhance sales promotion activities so that we'll be able to have 100% full launch. We have been working together with various internal stakeholders. The situation is a bit different from the users of shopping -- Yahoo! Shopping, where they already know what they want to buy or they want to buy certain things. LINE, we need to propose what is appropriate and right that would resonate to the LINE users. Once we know that right business model solutions, then we will be able to launch under such use case and sell products as well. So there's a great opportunity, and we've been testing at the moment. Akitomo Kishimoto: On Page 27, please, you mentioned about second tier, third tier. I'd like to ask you a question about the capability for the third tier. I understand that you have been reallocating your staff together with AI agents. I wonder whether you'll be able to run all these initiatives under the current manpower? Or are you going to strengthen your perhaps sales capabilities with more new recruits? Is this something you can do with the current resource? Unknown Executive: I'm sure it's based on the selection criteria, but thank you for your question. Your point, recently, we do have a certain amount of resource that we had to allocate that we had to secure from other departments to this department. So as mentioned on this page, we are going to have 50% of this existing business to new domain or the focus domains. So we will be shifting our business focus as well as resource allocation as well. And we also are considering more partnership, leveraging outside resources as well. We have many different ideas. Operator: Next, Nagao-san of BofA Securities. Yoshitaka Nagao: Can you hear? Unknown Executive: Yes. Yoshitaka Nagao: This is Nagao speaking. My first question is on MINI App MAU is to be increased from 25 million to 75 million and from 35,000, the KPI direction is being presented, the price charging per app or how you consider retention. What are the methods you're going to take? 60% comes from OA and 40% comes from MINI Apps. So proactive monetization will be necessary. So can you explain concrete ways you have in mind for monetization of MINI Apps. Yuki Ikehata: Thank you for the question. This is Ikehata speaking. Let me answer your question. Right now, well, MINI App numbers are to be increased, and we are to increase the number of users significantly. That is the plan. So on MINI Apps themselves from LINE application, there will be a lot of touch point from the users. So we are increasing touch points by linking with LINE app and LINE media to increase the opportunity for as many people as possible to touch MINI App. On the monetization of MINI App, the payment function and also advertising within MINI App and receive ad placement fee. So those are 2 monetization sources. The application that can generate fruits in terms of profitability is what we are planning to build. The sales force, we are strengthening right now so that as many people as possible will utilize MINI App and open Official Accounts. From next fiscal year and beyond, we expect monetization of revenue. We already are seeing the account openings by many on Official Account. So we have confidence. Yoshitaka Nagao: My second question is related to Page 24 of the material, the target of EBITDA margin, 40% to 45%. Right now, 37% or 38% is the Media Business margin. Official Account and MINI App domain overlaps SaaS domain. So when you expand the scale, the sales staff or development cost will be heavier upfront. And I have a concern that the profitability may decline. The existing search and display ad by the sales of that part decline will affect the overall margin. So what is the overall ad margin? And in achieving 40% to 45%, what would be the contribution of OA and MINI Apps? If possible, could you disclose those information? Unknown Executive: Rather than speaking on the concrete number, it's more of a guide, the search, the basis is that profitability is not that high, and we have been communicating that from before. There's a certain fee that we pay to Google. So the search margin originally is low. And adding with display, it's shown as flat, but the search will be down trend and display, we achieved certain growth in Q2. So the ratio of display will likely to expand. So the margin on the lower part will increase -- will improve. And on display, as you know, there is a commission with the agents that is included in the COGS. So it's -- that is the margin structure. OA the margin will be similar to display. The SaaS part, it will be dependent on the pricing structure, but vertical MINI App or SaaS peers, when we look at them, the profitability is quite high. Compared to ad business, it's low, but still, it's high enough to be able to support. On top of that, MINI Apps, the ad on MINI Apps and within MINI Apps, we will place ads in a network style. So that's the type of ad business that we would like to deploy within apps. So we expect that we can secure profitability on a certain extent. Yoshitaka Nagao: One quick question on Page 11, the JPY 15 billion reduction plan is shown in the medium term, the Media Business ad expense, in some part will increase, in some part it can decline, but the fixed cost of the Media Business will it be unchanged? Unknown Executive: This slide is the company-wide figure. This fiscal year, JPY 10 billion for LLM cost will be incurred. And next year and beyond, LLM expense will continue to rise. But through various programming, we can expect improvement of operational efficiency. So JPY 15 billion, even LLM commission rises next year, we intend to reduce the fixed cost, even including that JPY 15 billion, the promotion expense and advertising for commerce, it is linked with GMV. So that is not included in this figure. And on Media segment, there are subcontractors and some of the human resources cost through use of AI, we can create a leaner structure. So those are combined to set the target margin at 40%. Operator: Next, from Nomura Securities. Mr. Masuno. Daisaku Masuno: This is Masuno speaking from Nomura. Can you hear me? Unknown Executive: Yes, we can. Daisaku Masuno: I just have one question, please. Renewal of LINE apps, you are -- been talking about adding a commerce tab. And I know you have been trying various scenarios under beta. Fundamentally, are you trying to transition the info traffic to service like LINE GIFTS? Or are you going to provide a brand-new shopping experience to LINE users. So I wonder what kind of inflow -- what kind of user experience are you trying to create through this commerce tab? Unknown Executive: What we are testing right now under the current version, all the products that's on LINE tabs are LINE GIFT products. Going forward, in addition to the LINE GIFT products, the stores that are present in Yahoo! Shopping, some of their merchandises we would like to post there. So not just for gift needs, LINE SHOPPING, Commerce products, we would like to offer through that tab. So comprehensive portal shopping corner is how we like this service to grow to be. So what type of stores, what type of products from Yahoo! Shopping really has to do with the previous questions and answers that we had. What kind of products will be the right fit, best resonate to the LINE user. It really depends on that. That's what we are testing right now. So we have to have a right product mix on top of the GIFT products, we've been carefully studying what would be the type of product group that is worth promoting heavily behind it on this new effort. Daisaku Masuno: Okay. So this is not a purchase intent visit. I can understand LINE GIFT. I wonder for those users who are not thinking of purchasing anything would ever be a real customer, whether they would convert by visiting the site? Unknown Executive: Other than Yahoo! Shopping, our customers right now are searching for what they want out of tens of thousands of our products with a certain purpose, compare prices and make decision-making. We have a massive number of products on Yahoo! Shopping. It doesn't make sense to put all of that on LINE tab. I don't think it will drive sales. So out of what's available in Yahoo! Shopping, those stores, we need to focus on products with more uniqueness, originality and some product group with extremely high demand once they release, always sells out. So those will be the right products, we think to be on the LINE tab. Those will be the right products for this casual shopper. Daisaku Masuno: Are you talking about hundreds or thousands? I don't think you're talking about dozens of thousands. So I just have no idea about the scale of the products that would be available through this LINE tab. Unknown Executive: That is exactly what we are trying to get to. That's why we've been repeating the test. So it really depends on the -- we don't know. There's nothing that we can share with you regarding the size or scale of the stores or the type of products or the scale of the product. Operator: Next, Kumazawa-san of Daiwa Securities. Shingo Kumazawa: On Page 11, fixed cost reduction of JPY 15 billion. This is the topic of my question. Currently, what is the fixed cost? And how much is this JPY 15 billion? And from last year, you have been spending on security-related costs. Is that included in this reduction of JPY 15 billion? I believe it's mostly outsourcing that you can reduce. Are there any major items that you expect to reduce significantly? And I believe AI agent is contributing to reduction. So from -- compared to last year, how much reduction is this? Ryosuke Sakaue: This is Sakaue. I will answer your question. LY stand-alone fixed cost is roughly JPY 700 billion. As you stated in your question, security-related costs will come down. On the other hand, LLM commission will almost offset that increase. From April of next year, we will increase the office space to accommodate a 3-day commuting of our employees, and that means the cost increase. And by using AI, we intend to reduce JPY 15 billion in total. If we do not take any action, the fixed cost will likely to go up by JPY 2.5 billion to JPY 2.6 billion. In the areas of reduction, outsourcing part and software license from outside, the system that employees use, we can make progress in the integration of the platform. So double payment can be eliminated. So that is included as the cost reduction on software license. Shingo Kumazawa: The areas you can reduce, I understand it's difficult to name the concrete name or ServiceNow or others or Salesforce. Is it possible to cut them entirely rather than specific ones? Unknown Executive: It's an overall effort, frankly speaking. And for example, there are licenses that are given to all of the employees. But if we identify the staff that really uses, then we can reduce the number of license. And also, there may be redundant functions on the software and cut one of them. Operator: Next from [ SBR. Mr. Jose ], please. Unknown Analyst: I have a question regarding capital structure and security governance. I understand in the past, administrative [ court ] instruction was given from Ministry of Internal Affairs and Communication, administrative guidance pointing out your capital structure. Now that under new administration, any risks that you foresee or any changes to the relationship with the government regarding capital structure, please? Unknown Executive: Regarding the administrative guidance, we've been responding appropriately. And from -- for the 2026 March, we are making progress toward it. And regarding the capital movements, we've been continuing the discussions, reflecting our past track record. No major changes to or the [ FY 2026 ]. Unknown Analyst: I understand. So for 2026 March, you will conclude all the measures to meet the administrative guidance? Unknown Executive: Correct. Yes on track. Unknown Executive: Now, we would like to close because the schedule ending time has arrived. I would like to now have Idezawa to offer a final reading. Before Idezawa's final remarks, I mentioned about the fixed cost of JPY 700 billion, that was a mistake. It's roughly JPY 400 billion to JPY 500 billion. Takeshi Idezawa: This is Idezawa speaking. Thank you very much for raising a lot of questions. The environment surrounding AI is rapidly changing. And our 2 core strategy is AI agents and OA, and we will continuously grow by changing our business structure. That is the message of today's presentation. I will ensure that these plans will be executed steadily, and we would like to ask for your continued support. With this, we would like to close LY Corporation's FY 2025 second quarter earnings call. Thank you for staying with us until the end. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Good afternoon, ladies and gentlemen, and welcome to the ThredUp's Q3 2025 Earnings Conference Call. [Operator Instructions] This call is being recorded on November 3, 2025. And I would now like to turn the conference over to Ms. Lauren Frasch. Thank you. Please go ahead. Lauren Frasch: Good afternoon, and thank you for joining us on today's conference call to discuss ThredUp's Third Quarter 2025 Financial Results. With me are James Reinhart, ThredUp's CEO and Co-Founder; and Sean Sobers, CFO. We posted our press release and supplemental financial information on our Investor Relations website at ir.thredup.com. This call is being webcast on our IR website, and a replay of this call will be available on the site shortly. Before we begin, I'd like to remind you that we will make forward-looking statements during the course of this call. Such statements are based on current expectations and assumptions that are subject to a number of risks and uncertainties. Actual results could differ materially. Please refer to our earnings release, supplemental financial information, and our Forms 10-K and 10-Q for more information on these expectations, assumptions, and related risk factors. We undertake no obligation to update any forward-looking statements. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release and the supplemental financial information, which are distributed and available to the public through our Investor Relations website at ir.thredup.com. Now I'd like to turn the call over to James. James? James Reinhart: Good afternoon, everyone. I'm James Reinhart, CEO and Co-Founder of ThredUp. Thank you for joining our third quarter 2025 earnings call. Today we'll discuss financial results for Q3 and update our expectations for Q4 and fiscal year 2025. I will provide an update on our perspective about the consumer, discuss ongoing innovation in our AI-driven product experiences, and end with a reminder on our compounding competitive advantages in the growing resale market, specifically how we expect new product development will increase that advantage in 2026. I will then hand it over to Sean Sobers, our Chief Financial Officer, to talk through our financials in more detail and provide some guideposts as we look ahead to 2026. We'll close out today's call with a question-and-answer session. First to the results. The third quarter was our strongest year-over-year growth in nearly 4 years and the fourth quarter in a row of accelerating growth. Revenue growth accelerated to 34% year-over-year. Gross margin was 79.4% and adjusted EBITDA was 4.6%, all of which exceeded expectations. Once again, these results were driven by exceptional customer growth and orders in our business. I said this last quarter, and I'm pleased to say it again, we acquired more new customers in the third quarter than at any other time in our history with new buyer acquisition up 54% year-over-year. Active buyers were up 26% year-over-year and orders were up 37% year-over-year. Our approach in 2025 and into 2026 is straightforward: Maintain our gross margin efficiency, gradually expand the bottom line, but largely reinvest incremental dollars we generate back into growing our marketplace through product improvements, marketing spend, and long-term innovation. Turning to the macro. We talked about the impact of tariffs at some length on our last 2 calls, so I will not belabor those points here. Overall, we believe the effect of tariffs and the closure of the de minimis loophole have been a boost to acquiring new customers and could be a structural tailwind going forward as prices rise in the apparel market. Our strategy is to take some price, but largely improve our competitiveness on a relative basis. At the same time, we remain cautious on the state of the broader American consumer and believe that price and value will be of utmost importance this holiday season. While this could theoretically be beneficial to the secondhand market by enhancing the value of comparative offerings, we think a reduction in overall holiday spending or a wallet share shift to new gifts is something we'll have to navigate adeptly. Turning to the product and customer experience. While many of our customer-facing features over the past 18 months specifically drove improvements in our funnel and margins, the third quarter was best characterized as a consolidation and clarification of our mission, vision, and value proposition. In late September, we launched a fully rebranded experience on ThredUp. The unifying theme is "Fashion, Meet Forever, which speaks to our ambitions of building a more emotional long-term relationship with our customers. ThredUp has been a brand mostly defined by logic and quantitative rigor over the past decade. And while we will never abandon that part of our DNA, we know shopping is inherently emotional. And by tapping into our customers' hearts through storytelling and cultural relevance, we can elevate both our brand and secondhand shopping to new heights. We saw the green shoots of this in October as it was the best month for new customer acquisition in our history, up 81% year-over-year, driven primarily by historically low acquisition costs. Of course, as a customer-assessed company, we did not miss the chance to launch our rebrand alongside 2 powerful new product features, the Daily Edit and the Trend Report. With the Daily Edit, every customer will receive a newly personalized feed of 100 items that are refreshed daily. This was a major technical advancement in our personalization capabilities, powered by AI models we've trained in-house that can generate real-time user and item embeddings, allowing us to better understand each customer's style preferences and serve them a fresh curated feed every day. The Trend Report is using AI to combine macro and social trends alongside internal search and customer trends, then generating imagery and style feeds in real time that help customers shop what's on trend. Now let me turn to selling on ThredUp. Since the founding of ThredUp more than 10 years ago, we've maniacally focused on building competitive advantage in our supply chain. Our investments in infrastructure and data have been central to the success of our marketplace, expanding ways we can process clothing at ever-increasing levels of scale and profit. Our investment in building a novel, dynamic, and robust data layer for secondhand clothing has enabled us to develop additional ways to compete in the evolving resale market. The first new supply growth vector we built on top of this core infrastructure was our Resale-as-a-Service business or RaaS, which now powers resale for dozens of brands. This month, we are launching RaaS programs for New York & Co. as well as Cotopaxi, a brand that is near and dear to my heart as someone who loves the outdoors. It's the first large brand to launch after our RaaS strategy shift 6 months ago, and it's just one of many expected to come over the next few months. Our Cotopaxi launch is a showcase of the suite of services we can power for brands, including take-back programs and resale shops as well as cash out programs for customer acquisition and bulk consignment for inventory management. Earlier this year, we launched our second supply growth vector, The Premium Kit. With virtually no marketing investment, this product was an instant hit with sellers and has grown to be more than 20% of the supply in our marketplace. Premium kits deliver superior monetization for sellers, access to in-demand products for buyers, and accretive margins to ThredUp compared to our regular kits. Today, I'm excited to announce the third vector of growth, which is the launch of direct selling on ThredUp, often known as peer-to-peer. While currently in a closed beta, given the way direct selling is expected to impact buying and selling on ThredUp, I thought it important to detail in advance our approach to serving this large part of the resale market. We have been working on the launch of direct selling of ThredUp for more than a year, but I personally have been working on this strategy for many years. I felt strongly there was an opportunity to serve this market as resale became more mainstream, mobile technology matured, and our operations hit a level of scale and margin where we could build a superior, differentiated customer experience. That time is now, day 1 of direct selling. But let me explain. The problem for sellers in the peer-to-peer market is the friction that still exists in listing, pricing, fulfilling, and servicing the items available for sale. Many items don't sell. Those that do don't always touch the right price and post-purchase management of returns and seller reputation becomes an ongoing headache. The result is that most casual sellers participate for a while or they mix and match across peer-to-peer platforms, but they never love the experience. While public data is hard to find, our longitudinal research has suggested that the majority of items listed on current peer-to-peer platforms never actually sell. For buyers on peer-to-peer marketplaces, it's very much buyer beware, a lack of quality merchandising and curation, low trust or buyer recourse in the event of a bad transaction keep many buyers from shopping more than periodically. For platforms, the incentives are to race to the bottom on fees to acquire sellers and to encourage as many listings as possible. This leads to rampant product pollution, limited curation, and the flea market quality that leads to short-term success, but long-term value erosion with weak network effects and limited moats, a new peer-to-peer marketplace pops up every 5 to 7 years, skinning buyers and sellers off the top with the renewed promise of that it will be better this time, join us over here. The fact is that this is a big market, and we believe it's mostly broken. Against that backdrop, here's our new approach. First, our marketplace will focus on casual sellers, the exceptionally large long tail of sellers who consistently get crowded out. The number of items the seller can list will be based on their selling success. Flooding the site with low-quality items will not be an option. Second, sellers will be independently verified so that buyers will be able to shop with total confidence. We plan to mitigate the potential for fraud at every opportunity. Third, sellers will not pay fees to list items. ThredUp will provide premium listing, merchandising, and photography tools that make the sellers' life easier. We believe if done right, that suite of tools will be worth paying for over time. Finally, and unique to ThredUp, sellers will have a seamless experience to choose between direct selling and the Clean Out Kit to meet their needs at any point in their selling journey. ThredUp is now a one-stop shop for most apparel selling needs. Turning to buyers. We are excited to solve the most important parts of buyer friction. First, returns. We believe the single biggest challenge with the peer-to-peer model is seamless returns. Leveraging our decade-long investments in our supply chain and infrastructure, we can now see this as an option to buyers given our power to resell return items in our marketplace. Second, trust. With every seller vetted and ThredUp's brand and customer service standing behind our sellers, buyers can shop with confidence. Third, we will bring standards of merchandising, listing quality, and curation to the peer-to-peer buying experience. We will bring a new wave of merchandise to buyers, but in an organized and thoughtful way backed by the Generative AI products we launched over the past year. And we will be methodical in our rollout, opting for quality and long-term defensibility over quantity. We acknowledge we're in the early days of this new vector for growth, but we are excited to bring our experience, expertise, and unique assets to solve this large customer opportunity. We believe the supply and demand we can unlock in this effort will further accelerate our flywheel for years to come and that this launch couldn't be more timely given the economic uncertainty present for many American households. Finally, before I turn it over to Sean, let me place some of the work in Q3 into the context of our longer-term strategy. On our last call, I discussed in detail the three important competitive advantages we've been building. First, our operational infrastructure and supply chain continues to prove a defensible asset. Having invested more than $400 million in infrastructure, software, and data to invent how a managed marketplace can work at scale, we are now capable of building customer-facing experiences more rapidly on top of it. Our RaaS business, our premium kit, and now the next generation of direct selling are examples of business lines built on top of this core infrastructure. Second, we believe the investments in a unique proprietary data layer have helped us build a direct listing beta product that can work better for sellers while providing endless ways for buyers to shop well-curated merchandise. Third, marketplaces are hard to build and sustain. But when you get the flywheels going, they are very hard to stop. Our marketplace has exceeded over prior years, primarily through building a quality transactional experience. By updating and elevating our brand, we have the potential to deepen customer attachment and stickiness, making ThredUp a household name for years to come. In expanding ways that customers buy and sell on ThredUp with the launch of direct listings, we believe that over time, we can increase our wallet share as well as widen the moat in our marketplace. With that, I'll turn it over to Sean to talk through the financials in more detail. Sean Sobers: Thanks, James. I'll begin with an overview of our results and follow-up with guidance for the fourth quarter and full year 2025. I will discuss non-GAAP results throughout my remarks. Our GAAP financials and a reconciliation between our GAAP and non-GAAP measures are found in our earnings release, supplemental financials, and our 10-Q filing. We are extremely proud of our Q3 results in which we accelerated revenue growth and exceeded our adjusted EBITDA expectations. For the third quarter of 2025, revenue totaled $82.2 million, an increase of 33.6% year-over-year. Our performance was driven by investments into marketing and inbound processing that drove our marketplace flywheel. As we discussed on our last call, we started spending on marketing and processing earlier in the quarter, which allowed us to generate our significant top line beat. These investments, coupled with improved buyer metrics resulting from a series of new customer-facing products we've rolled out over the past 18 months, generated our fourth consecutive quarter of accelerating growth. These drivers resulted in another record quarter for new buyer acquisition with new buyers up 54% year-over-year. We also benefited from repeat purchases by new buyers acquired earlier in the year as well as improved conversion for both new and existing buyers. We finished the quarter with 1.6 million active buyers for the trailing 12 months, up 25.6% over last year, while we had 1.6 million orders in the third quarter, up 37.2% over the same time period. For the third quarter of 2025, gross margin was 79.4%, a 10 basis point increase versus the same quarter last year. Our outperformance versus our expectations was largely a result of higher average selling prices due to the rapid growth in our premium supply offering. Adjusted EBITDA was $3.8 million or 4.6% of revenue for the third quarter of 2025. We improved adjusted EBITDA margin by 410 basis points over last year as we leveraged our multiyear investments and benefited from our revenue outperformance while still making investments into marketing and inbound processing in order to drive our top line. Turning to the balance sheet. We began the third quarter with $56.2 million in cash and securities and ended the quarter at $56.1 million, reflecting just $100,000 in cash use. We are proud to have generated $2.4 million of free cash flow for the quarter and $3.4 million year-to-date. We continue to expect to be free cash flow positive for the year. We spent $3.7 million in CapEx in Q3 as we made several opportunistic investments in order to support automation. We now expect CapEx for the year to be closer to $10 million, similar to what we expect in 2026. Now I'd like to provide a bit of context for our updated guidance. Though we remain cautious on the current consumer environment heading into a highly competitive holiday season, we are pleased to be raising our top line expectations for Q4 to align with the positive trends we are currently seeing in the business while maintaining our Q4 EBITDA margin outlook. As has been our strategy throughout this year, we see continued opportunity to invest in marketing and inbound processing to drive growth. With contribution margins in the low 40% range and healthy LTV to CACs driven by scale and recent improvements to our product experience, we plan to flow any incremental dollars above our guide back into our growth-driving opportunities. With all of this in mind, the fourth quarter, we now expect revenue in the range of $76 million to $78 million, representing 14% year-over-year growth at the midpoint and $3 million higher than our previous outlook. The sequential step down reflects the expected seasonal slowdown in resale around the holidays, combined with our planned pullback in marketing dollars as CAC spike during the highly competitive period. Gross margin in the range of 78% to 79%, adjusted EBITDA of approximately 3% of revenue in line with our previous expectations and basic weighted average shares outstanding of approximately 126 million shares. For the full year of 2025, we now expect revenue in the range of $307 million to $309 million, reflecting 18% year-over-year growth at the midpoint. This updated view is $8 million above our previous guidance, incorporating our Q3 beat and the raised outlook for the remainder of the year. We are raising our gross margin range to 79% to 79.2%. Adjusted EBITDA of approximately 4.2% of revenue, this incorporates our Q3 beat while maintaining our Q4 outlook. And basic weighted average shares outstanding of approximately 122 million shares. As we look into next year, our planning process contemplates 2026 revenue growth in the low double digits, in line with U.S. online resale industry growth expectations. On EBITDA margins, we are planning for slightly better expansion than we currently expect in 2025. Since we are planning to iterate on and roll out direct selling methodically throughout 2026, our current forecast does not include this new growth vector. We will provide a more detailed outlook on our Q4 earnings call in March. James and I are now ready for your questions. Operator, please open the line. Operator: [Operator Instructions] And your first question comes from the line of Ike Boruchow from Wells Fargo. Irwin Boruchow: Congrats. A quick clarification and then a question. Sean, on the comment you just made on next year, just to make sure I heard you right. So initially for next fiscal year, you're assuming revenue can grow low double digits with similar EBITDA margin expansion that you're putting up this year, which I assume is 4.2% relative to the U.S.' 3.3% last year. So basically 100 bps margin. Sean Sobers: Yes. So we said a 90 bps expansion we expect for '25, and we'll do slightly better than that in '26. Irwin Boruchow: And then, James, maybe just to talk about the revenue. And again, I'm not nitpicking it all. I'm actually trying to understand how you think about revenue growth because it's been a roller coaster the last 12 months and a good way for you. But just how are you thinking about the compounding effects of customer acquisition, the experience improvements, all intertwined with what is a much lower growth rate next year that you're starting to plan? And then really just longer term, I mean, this business IPO-ed doing, I think, 25% plus and then it went negative last year and now you're in the 30s. So I guess just what's a sustainable growth rate for this model as you kind of see it over a multiyear period? James Reinhart: Yes, I mean, I think we've been pretty consistent saying we want to be a Rule of 40 company, which our long-term EBITDA model is 20% to 25%, which implies growth in the high teens to 20%. And I think that's the path that we're on. I think the guide for this year is 18% coming off a flat '24. I think given it's the first week of November, as we look to '26, I think starting with kind of low double-digit industry growth rate is probably a good place to start. And look, I think the plan for '26 and then into '27 and beyond is very similar to '25, which is let's methodically expand EBITDA. As Sean mentioned, we're going to continue to expand rates similar to last year, if not more, and then flow those dollars back into the growth rate. And I think if you look at the sort of anatomy of 2025, that's exactly what we did, which is we took dollars and we flowed them back through, and that produced 4 quarters of accelerating growth. So I think that's the same playbook for '26. I just think given all the uncertainty in the economy, let's turn over some more cards, right, before we guide the full year in '26. But I think we feel very good about '25, and I think we feel very good about the multiyear path to being a Rule of 40 company. Operator: And your next question comes from the line of Bernie McTernan from Needham & Company. Bernard McTernan: Maybe just a couple on peer-to-peer to start. How will these products look on your website relative to goods coming in from the Clean Out kits? I guess, would be question one. And then maybe second on that, if you just talk to the unit economics of $1 of the expectation for what the unit economics of the peer-to-peer sales will look like versus the traditional Clean Out kits? James Reinhart: Yes. Hello, Bernie, yes, I mean, the product displays will actually look pretty sharp. I think we've done a lot of work using AI to produce high-quality imagery. So I think you're going to see best-in-class imagery for how they look on site. And in early beta, we're already seeing that come true. I think you really do see a rich set of products. So my guess is that consumers are actually going to really appreciate the diversity of the imagery and the quality product experience that we've put forward. So I actually feel very good about that. On the unit economics, I think we have built a variable unit economic model that supports peer-to-peer being a strong long-term EBITDA driver, right? And so typically speaking, you have lower top line, like revenue from peer-to-peer, but it generates superior margins because of the way that it flows through on a variable basis. You don't touch all the items in the same way. Sellers make more money, right? Buyers are happy. So I think, Bernie, if you kind of look across similar models that have been around a long time, they generally generate superior long-term profit pools. And I think we can build a superior customer offering and benefit from great economics. So I feel good about both areas, but I would caveat all that to say that we're early in the journey. And normally, we wouldn't talk about this for some time. But given how much it will impact the customer experience, it will become obvious to anybody browsing the site, the difference. And so wanted to be more detail oriented and explain it in advance. Operator: And your next question comes from the line of Bobby Brooks from Northland Capital Markets. Robert Brooks: I was hoping to get a little bit more granular on the buyer growth. So overall, up a very healthy 26% year-over-year, but with new buyers up 54% year-over-year. So I was just wondering if we could hear of that 320,000 or so buyers you added year-over-year, maybe what the mix of that was towards new buyers? And then secondly, could you discuss how your marketing approach may differ between getting prior buyers back on the platform versus new ones? James Reinhart: Yes, sure. Hello, Bobby. Yes, I mean, as you know, the active buyers is a trailing metric, right, versus new buyers is a quarterly metric. Generally speaking, about 1/3 of the total new buyers -- the total buyers that we're adding at any point, 1/3 of them are customers that we had previously who had churned that we resurrect as customers. So think about it as 1/3, 2/3 is customers we've seen before. And I think as we go forward, I think we'll continue to focus on driving new buyer growth. And with the rebrand, I think we are expecting that as we move up the marketing funnel a little bit, we'll actually capture more lapsed buyers in there. And so I think we're optimistic we'll actually recover resurrect customers who've churned maybe who don't get our e-mails or push notifications the way they do today. So that's kind of the approach to the marketing mix. Hopefully, that's helpful. Robert Brooks: Yes, that's definitely helpful. And then I was just -- I was surprised that in your opening remarks, you mentioned how you won your first new large RaaS partner since the shift in that go-to-market strategy for RaaS. Could you help me understand why there was kind of a large lag between the change in the go-to-market and the new partner that joined this quarter? And also point it seemed like your commentary, you had some pretty good visibility or confidence on new partners joining that channel over the next year or so. Could you just discuss what's driving that visibility and confidence? James Reinhart: Yes. I mean it's -- we announced the new strategy 6 months ago. Most of the contracts that you have with these brands are multiyear contracts. So it's really just a lag effect, Bobby, of how contracts come up for renewal. Think about it more like enterprise. And so I think now we're getting into renewal season for retail brands end of this year and into next year. And so the pipeline feels very good for some of these brands to either sign for the first time or switch over. But that's the way I think you should think about it. It's the lag around the contract renewal process. Sean Sobers: And 6 months isn't a long period for an enterprise transaction. James Reinhart: Yes. Yes, exactly. I'm actually delighted about the speed upon which a lot of customers are reaching out to become part of the RaaS portfolio. Robert Brooks: Yes, I agree with that. I had a -- I thought it was a little bit long, but yes, 6 months to turn around on an enterprise channel is quite quick. Just any more on -- so it just seems like general contract timing is giving you that confidence in landing some more new ones? James Reinhart: Yes. Yes. No, definitely. I think we feel like the pipeline is good, and we'll see how Q4 kind of concludes, but I think you'll continue to see momentum with us launching new brands. Robert Brooks: Fair enough. Congrats on a great quarter I'll turn in the queue. James Reinhart: Thanks. Operator: And your next question comes from the line of Dylan Carden from William Blair. Dylan Carden: James, sorry if you said this. So will the direct -- the peer-to-peer product be listed alongside the consignment? Is this sort of a separate site? And I'm just kind of curious a broader discussion of sort of the synergies that you see between these 2 businesses, I guess, beyond just simply sort of the captive audience. James Reinhart: Yes, Dylan, you'll be able to browse them together or separate, right? And so very much if you think about Amazon, right, the ability to shop 1P or 3P consistently. I mean I think this is a very well-established convention in commerce these days. So consumers will be able to flex in and out of it however they like. And what was your second question, sorry, Dylan? Dylan Carden: Kind of the synergies between the 2 platforms and well… James Reinhart: Yes. I mean the primary driver is the feedback from sellers. So we've heard consistently for some time how many sellers are sending some stuff to ThredUp but then selling high-quality stuff on other platforms, specifically peer-to-peer platforms. And so in the research that we did, we found there was really a compelling opportunity to centralize all of the sellers' needs and give them that flexibility to do both. So I see the opportunity to really consolidate selling of secondhand online through the ThredUp platform. And then I think there's huge benefits on the buyer side, buyers get greater selection. I think that can help drive customer acquisition efficiency. And then in our DCs being able to leverage our supply chain and logistics network. So I see synergies on both sides, but primarily, it's all about sellers and supply over time. And I think this just gives us another tailwind in that market. Dylan Carden: Awesome. And then for either of you, the deleverage -- or sorry, rather the leverage in the marketing line item is kind of impressive. I'm just curious if you could speak to sort of efficiencies you're seeing in marketing. And then maybe just sort of the lag effect in your customer acquisition given kind of the active customer growth versus the revenue growth. James Reinhart: Yes, Dylan, we continue to see sort of historically low CAC. I mean I think it's a combination of the product experience being better. We talked about the conversion rate last quarter. That has continued to improve. I think the ad market, we've continued to find opportunities buying ads, whether it's on Google or Meta and just really taking advantage of some soft spots as buyers now -- sorry, as other brands sort of navigate tariffs. And then from a lag effect, yes, I mean, the new buyer growth continues to be exceptionally strong, and you'll see active buyers sort of trail that. But we feel very, very good about our ability to be aggressive in market acquiring customers. And I think you should see that this year. And there's no reason, frankly, we can't continue to acquire customers next year at a similar or better rate, given that we're going to be spending more dollars in marketing next year over '25. And this year, we spent more than '24. So I think the trajectory on the acquisition side is as good as it's ever been. Operator: And your next question comes from the line of Dana Telsey from Telsey Group. Dana Telsey: Nice to see the progress. Can you expand, James, on the premium selling kits, what you're seeing there and what percent of the mix do you think it could become? And also on the AI investments that you've made, how that's leading to conversion? Is that a step-up from last quarter? What are you seeing there? And then I just have a follow-up. James Reinhart: Yes. Sure, Dana. Premium has really grown nicely this year from really 0 to north of 20%. I think there's more room to run on it, Dana. I mean, certainly, the buyers that we have are really drawn to the premium mix. And so I think we're continuing to invest in scaling that. I think it'd be premature to know what to predict like what the steady state rate is of premium, but I would say it's probably higher than it is today. And what we're seeing is the premium brands out there that customers are loving are the ones that we're seeing the fastest growth. FARM Rio, Mac Duggal, Vuori, like those are all brands that I think are hitting the sweet spot of premium, and we just want to get more of them. And then on the AI side, I would say the product conversion rates continue to trend positively. I think the rebrand launched September 22. Alongside of that, we launched a new personalization strategy that was very powerful. And then we launched this Daily Trend Report that also, I think, is capturing what's in demand and using our AI tooling to deliver that in real time for customers. So you have better personalization plus better curation and trend forecasting on top of that having superior products flowing in. I think that's a recipe for the success that we saw in Q3. And I expect that to continue not just in Q4, but into '26. Dana Telsey: And then the new buyer growth, which is very impressive, demos of the new buyers and what you're seeing? And then just after that, just marketing spend, how do you see marketing spend in '26 compared to '25? James Reinhart: Yes. I mean I think on the marketing spend side, we're going to continue to spend marketing at higher rates than we -- on a percentage basis, the same, but more dollars overall. I think Sean said a number of times, we think it's the last thing we'll probably try and leverage in the business as we pursue the growth strategy. Dana Telsey: And the demos of the new buyers? James Reinhart: Demos remain the same, remain the same. Yes, it's been a very similar story. I think it's probably the third quarter in a row that we've been talking about record buyer growth and the demo of the buyers is consistent with what we've seen previously. Operator: And your next question comes from the line of Matt Koranda from ROTH. Matt Koranda: Nice job. I guess I just wanted to hear a little bit more unpacking of what you think is enabling the large acceleration in sales in the third quarter. Would you say it's the new tools that are available? Is it sort of the new buyer growth that you've alluded to? Are you getting more repeat from existing core customers? Maybe just unpack the trends that are driving the acceleration in the third quarter? And then also just curious on the fourth quarter growth that you guided for 14%. I guess, is that what you have observed actually quarter-to-date? And what causes sort of the deceleration there relative to the 30-plus percent growth you've been on? Sean Sobers: Yes. Let me tackle the fourth quarter piece. We've baked in everything we've seen to date in the guidance. So you can do the math how you want on that. But the midpoint of the guidance is 14.5% on Q4. James Reinhart: And typically, Matt, like October remains very strong, but then the minute you switch to holiday, you start to see wallet share shift to new gifts. So I would say that October year-over-year was stronger than the 14%, but we tend to see November, December be a little softer. Sean Sobers: I would add in the difference between like Q3 and Q4 is the comps that we're comping off of last year because last year's Q3 was a minus 10% growth and the Q4 last year was plus 10%. So if you think about it on a 2-year stack, actually, Q4 is growing really nicely. Matt Koranda: Yes. Now I think I understood it. James Reinhart: And then as far as like your first question on what's driving Q3, you sort of hit the tools, the buyers and the macro. I would say that the -- generally speaking, you're seeing consumers looking for value. So at the macro level, I definitely feel like we are being sharp on price and the value proposition. And I think probably on average, drawing more customers in with that approach. And then I think the tooling that we've built is improving conversion. And so I think we're having success in the story that we're telling in the market around ThredUp has great brands at great value. And then when customers are getting to the site, they're converting at higher rates. And I think that's been driving the flywheel for a few quarters now, and I think really worked exceptionally well in Q3, and we're optimistic that will continue. Matt Koranda: Makes a lot of sense. Maybe just one on the direct listings. Exciting to see that development, and I see the betas on the site right now. I guess how will the process work for sellers to begin to be vetted? And then I noticed it looks like no fees right now for sellers. So how do you envision, I guess, layering in seller fees over time as you get the volume ramped up in that channel? James Reinhart: Yes. I think on the vetting side, we're going to do a couple of things. So one is we have more than 0.5 million sellers on ThredUp today that we have already vetted, right? So the people who are already sending us Clean Out kits are vetted for peer-to-peer in advance. So I think we have a huge head start. And then on top of that, we're going to do -- we're either going to work with some third-party vendors to do vetting ourselves or just take an extra step for customers, whether that's making us scan a picture of their driver's license, right, or scan a QR code that we send to their house. But we're going to take seriously this idea of ensuring that these are high-quality sellers. I think it's become such a problem in the broader market of fraud and low quality. So we're going to take that seriously and probably invest on average more than other peer-to-peer markets might. And as for fees, don't get me wrong, we are going to monetize the transaction, but we'll generally be charging buyers some percentage of the fees. And then for returns, which we've talked about, we're effectively launching an insurance product, which is for buyers who want to be able to return items they're going to be buying an insurance like ability to return, and we can price that based on what we're seeing in the market. And I think for sellers over time, while I don't anticipate us charging fees to sellers, I do actually think we're going to build a lot of tooling that will help make their lives easier in selling items. And I think if those tools are high quality, you can imagine sellers subscribing to a suite of tools to improve their listing, their merchandising, all the things that make the seller process robust. So I see many, many ways that we can monetize this stream of buying and selling on ThredUp. And the market is so large, I think there'll be lots of ways to do it. Operator: And your next question comes from the line of Oliver Chen from TD Cowen. Oliver Chen: Nice job. Congrats. So on the revenue beat in Q3, what was driven by repeat versus new customer acquisition? And as we look ahead to 2026, how are you thinking about how those drivers interplay into your guidance? Also on the peer-to-peer model, which is really interesting and obviously very important. How would you compare and contrast on Poshmark or Mercari? I know it's been a difficult market in terms of profitability and fees. And it sounds like you're balancing control and scalability versus curation and fraud. And third question, Generative AI is something you've been very, very good at. On the peer-to-peer model, what role will that play there? And then we're doing a lot of work around OpenAI. Your thoughts on Agentic and the evolution in terms of brands and long tail, just different characteristics of Agentic and conversational commerce continues to be an important growing traffic consideration. James Reinhart: Thanks, Oliver. You got a lot in there. So if I miss anything, you let me know. I mean, I think on the Q -- on the revenue beat, consistently, existing buyers are still the driving force. Historically, it's 80% of our revenue is coming from existing buyers, and it hasn't varied that much to date. It's still -- while we're acquiring lots of new customers, the bulk of buyers on ThredUp are existing customers. And so you're even seeing the new customers we acquired over the past couple of quarters becoming repeat customers at higher rates in Q3. On the peer-to-peer piece, you asked on the competitive set. Look, I mean, frankly, there's been very little innovation and product work done by a bunch of these other peer-to-peer platforms. I think they've lost the plot a little. And so I actually think we can build something that's far superior to what's out there today. And so I see huge opportunity to build something that sellers and buyers love. I think it's clear there's a market out there. And the question is how to serve that market really effectively, and I'm confident we can do that. On the GenAI piece for peer-to-peer, yes, a lot of the tooling that we've built over the past year is being used to deliver a superior direct selling experience. That's everything from listing photography, curation, merchandising to how we price, to how we display to buyers. So I don't think we could have done this over a year ago, right? So a lot of this has been in development based on technology shifts in the market that I think have been pretty profound. Just a nice segue to your last question, which is on OpenAI and Agentic commerce. I think it's a big part of what's coming. I'm convinced that agents is going to be a part of how people shop in the future, but I can't tell you when. So I'm quite confident that we're in the middle of the change, but I'm not sure of the timing. And because I think shopping is a little different -- shopping for fashion is a little different than buying peanut butter. And so I think the peanut butter use case is a little bit more well defined. I think in fashion, it's going to take a little bit more time. But we're staying close to all of the large players in the space. Anybody who's building sort of customer-facing chat clients, we are in conversations with. Today, if you go to OpenAI and talk and ask ChatGPT about selling used clothes, we're at the top of that list. And so we're going to keep investing to make sure that, that stays true. Oliver Chen: And what -- on the peer-to-peer angle, James, what will be your competitive advantages? It sounds like customer engagement in the existing sellers. But what would you say? Because it's been a race to price in that marketplace, but it does sound like there's new technology now and you've investigated P2P for a long time. And then, Sean, as we think about CapEx in the forward years, is there anything we should know about like in terms of how that interplays with some of these new endeavors? James Reinhart: Yes. On the selling piece, I think if you look at the market for sellers, really, it sort of has lended itself to this professional seller network, which has crowded out your casual seller. And I actually think the most interesting part of the market is the long-tail casual seller. And so right now, the incentives for some of these platforms because the product experience isn't great, is to just get flooded with stuff. And so I think our approach is a much more measured, curated experience in direct selling that I think will benefit sellers by driving liquidity and sell-through for them and also delighting buyers with a better experience. I think for buyers, in particular, returns is a huge piece of friction in this market. Trust is a big piece of friction in this market. And I think we are delivering something that, I think, a far better experience, both on the trust and safety side as well as the ability to do returns and remove that big piece of question -- that big question mark among buyers of like, can I trust what I'm going to get, who stands behind it. So I think there's actually big advantages we're bringing to the market, and I'm excited to kind of keep going. Sean Sobers: And Oliver, on the CapEx, like I said on the call, we'll do $10 million about this year, and that will be consistent for 2026. And then once we get to 2027, we're probably at the point where we're filling in the Dallas DC. So we'll give you guys more of a view there, but I'd expect it to be more than the $10 million, but we'll give you information as we go along there. Oliver Chen: And finally, James, we've talked about AI together a lot. As you think about like first-party data as well as LLMs and partnerships with different LLMs, like how do you see that evolving in terms of your competitive mode in AI and how AI has a lot of open source. However, the proprietary tools that you develop are quite necessary since a lot of this is also not very generalizable. James Reinhart: Yes. I mean I think that we are benefiting from being a technology company and an infrastructure company at heart. I think all the tooling we built I think, has allowed us to move faster and stay ahead. And at the end of the day, I think Amazon has proved this out time and again that having the right products and being able to deliver them to customers is of utmost importance. And so in secondhand, I think we've got an incredible product selection across our DCs that's improving every day. And I think then when you add in direct selling, you just are compounding that supply advantage. And in resale, supply is the name of the game. And I think we're continuing to distance ourselves from others and having the best supply out there. Operator: And there are no further questions at this time. I will now hand the call back to James Reinhart for any closing remarks. James Reinhart: Well, thank you all for joining our call today. We set out on a mission to inspire the next generation to think secondhand first. And I think this year's results so far are just beginning to show what's possible in the years ahead. It's such an incredible time for ThredUp right now. I want to thank all the teammates for being a part of this journey and look forward to sharing further progress next quarter. Thanks. Operator: And this concludes today's call. Thank you for participating. You may all disconnect.
Operator: As it is time to start, we will now begin the Conference Call for the Presentation of the Financial Results for the Fiscal Year 2025 Second Quarter. Thank you very much for your participation. Today, Mr. Sasaki, Representative Director and Senior Managing Executive Officer, will give a briefing on the financial results for fiscal year 2025 second quarter. Later, he will be joined by Mr. Yamauchi, Executive Officer and General Manager of Accounting Department to take questions. We will conclude the call at 4:50. Mr. Sasaki, over to you. Keigo Sasaki: Thank you. I'm Sasaki from Sumitomo Chemical. Thank you very much for attending our conference call today despite your busy schedule. I'd like to thank the investors and analysts for your daily understanding and support to our management. Thank you very much for that. Now let me start with the presentation of the financial results for fiscal year 2025 second quarter. Please turn to Page 4. This is a summary page. Core operating income and net income attributable to owners of parent significantly improved compared to the same period of the previous year. Core operating income of Essential & Green Materials increased significantly year-over-year. There are also profits at Sumitomo Pharma with strong sales results, leading to recording of a sales milestone of ORGOVYX and partial divestiture of the Asian business. Compared to the forecast announced in August, in addition to strong sales at Sumitomo Pharma, there was improvement in foreign exchange gain or loss from a yen weaker than anticipated, as well as a reduction in the deferred tax liability, resulting in a reduction in the corporate income tax expenses, leading to increase in both core operating income and net profit. Please turn to Page 5. Consolidated financial results of the second quarter. Sales revenue was JPY 1,954 billion, down JPY 146 billion year-on-year. Core operating income was JPY 108.7 billion, up JPY 79.2 billion year-on-year. Nonrecurring items not included in core operating income was a loss in total of JPY 5 billion. In the same period of the previous year, there was an impact of recognizing our interest in Petro Rabigh' debt forgiveness gain of JPY 86.5 billion as a nonrecurring factor, leading to a profit of JPY 91.8 billion. So compared to the same period of the previous year, this has worsened by JPY 96.8 billion. As a result, operating income was a profit of JPY 103.7 billion, down JPY 17.6 billion year-over-year. Finance income was a loss of JPY 15.8 billion. Improvement of JPY 136 billion compared to previous year when a loss on debt waiver Petro Rabigh was recognized. Gain or loss on foreign currency transactions, including finance income expenses was a loss of JPY 6.5 billion, improvement of JPY 28.4 billion year-on-year. Income tax expenses was a gain of JPY 3 billion, increase of tax burden of JPY 7.2 billion year-over-year. Net income or loss attributable to noncontrolling interests was a loss of JPY 51.2 billion, worsening by JPY 65 billion year-on-year with the improvement of Sumitomo Pharma's income. As a result, net income attributable to owners of the parent for the second quarter was a profit of JPY 39.7 billion, up JPY 46.2 billion year-over-year. Exchange rate and naphtha price, which impact our performance, average rate during the term was JPY 146.02 to $1 and naphtha price was JPY 64,900 per kiloliter. Yen appreciated and feedstock price declined compared to the same period of the previous year. Next, Page 6. Total sales revenue was down JPY 146 billion year-on-year. By segment, sales revenue decreased in all segments, except Sumitomo Pharma. As for year-on-year changes of sales revenue by factor, sales price decreased by JPY 25 billion. Volume variance decreased by JPY 88.1 billion, and foreign exchange transaction variance of foreign subsidiaries sales revenue decreased by JPY 32.9 billion. Next, Page 7. Total core operating income increased by JPY 79.2 billion year-over-year. Analyzing by factor, price was plus JPY 6.5 billion, cost, plus JPY 6.5 billion. Volume variance, including changes in equity in earnings of affiliates was plus JPY 66.2 billion, all were positive factors. Next is performance by segment. First, Agro & Life Solutions. Core operating income was a profit of JPY 11.2 billion, down JPY 2.9 billion year-over-year. Price variance. Profit margin improved for overseas crop protection products. Volume variance, in addition to decrease in shipments of overseas crop protection products, there was lower income from exports due to stronger yen and stronger yen's effect on the sales of subsidiaries outside Japan when converted into yen. Next is ICT & Mobility Solutions segment. Core operating income was a profit of JPY 33.1 billion, down JPY 10.5 billion year-over-year. Price variance, selling prices of display-related materials declined. Volume variance, though there was a gain on the sale of a large LCD polarizing film business, there was lower income from exports due to stronger yen and stronger yen's effect on the sales of subsidiaries outside Japan when converted into yen and decrease in shipments of display-related materials. Advanced Medical Solutions segment. Core operating income was a loss of JPY 1.4 billion, down JPY 1.7 billion year-over-year. Shipments decreased because of difference in the timing of shipments compared to the same quarter previous year for some pharmaceutical ingredients and intermediates. Essential & Green Materials segment. Core operating income was a loss of JPY 18.6 billion, improvement of JPY 16.1 billion year-over-year. Price variance with a drop in naphtha price, which is a feedstock, profit margins improved in synthetic resins and aluminum. Volume and other variances, there was improvement in profitability in investments accounted for using the equity method at Petro Rabigh due to factors such as improved refining margins. For Sumitomo Pharma segment, core operating income was a profit of JPY 97.3 billion, up JPY 94.3 billion year-over-year. Price variance, selling prices declined in Japan with NHI drug price revisions. Cost variance. There was a decrease in selling expenses and general and administrative expenses due to progress in rationalization. Volume and other variances in addition to expanded sales of ORGOVYX, a therapeutic agent for advanced prostate cancer and GEMTESA treatment for overactive bladder, gain posted on a partial divestiture of Asian business and ORGOVYX sales milestone are included. This is all for the results per segment. Next is consolidated statement of financial position. As of the end of September 2025, the total asset stood at JPY 3,364.5 billion year-on-year, this is dropped by JPY 75.3 billion. This is mostly due to a drop in related company's shares by sales of businesses as well as a decrease in cash and equivalents by repayment of interest-bearing liabilities. Interest-bearing liabilities stood at JPY 1,191.7 billion, which has dropped by JPY 94.5 billion compared to the end of the previous term. Equity stood at JPY 1,179.6 billion, which is up by JPY 105.2 billion compared to the end of the previous term. And now let me explain the consolidated cash flow. The operating cash flow is plus JPY 57.5 billion. However, year-on-year, this is a drop by JPY 5.9 billion. The profit level improved. We saw a deterioration of working capital due to revenue increase at Sumitomo Pharma as well as corporate tax increase. And investing cash flow was minus JPY 16.7 billion year-on-year, this is a drop by JPY 91.1 billion. This term, we had a partial sales of Asian business at Sumitomo Pharma. But in the same period last year, we had a significant income by sales of [ low bound of ] shares by Sumitomo Pharma as well as the sales of Sumitomo Bakelite shares. As a result, free cash flow stood at JPY 41 billion compared to JPY 138 billion the same period of previous year. This is a deterioration by JPY 97 billion. Cash flow from financing activity was minus JPY 114.8 billion due to repayment of borrowing compared to the same period of last year. This is an increase in outflow of JPY 39.4 billion. And now I'd like to explain the outlook for fiscal year 2025 on a full year basis. First, let me explain the business environment surrounding our company. Regarding the economic situation, the global economy continues to show signs of a slowdown. Amid heightened uncertainty, the outlook remains unclear. Below, our assessment of the business environment for our key sector is indicated using weather symbols as usual. For agrochemicals at the top, crop protection, price competition is expected to persist with regional variations in slow-moving inventories in distribution. Methionine market bottomed out at the end of last fiscal year and recovered in the first half of this year, but is expected to decline in the second half. In displays, mobile-related components remained robust. For semiconductors, although there is a variation by sector, but the demand is anticipated to show a gradual recovery trend. Regarding petrochemicals and raw materials, low margins are expected to persist. And now on Page 17, you can see the summary of our financial forecast for fiscal year 2025. We have revised the previous forecast in May to incorporate the recent performance trends and the impact of the partial sales of Petro Rabigh shares. The core operating profit forecast for fiscal year 2025 is JPY 185 billion, which is an increase of approximately JPY 45 billion year-on-year and an increase of JPY 35 billion compared to the previous forecast. On the left-hand side, the actual gain on sales of business shown in gray was projected to be approximately JPY 50 billion in the May forecast. But by incorporating partial sales of shares in Petro Rabigh, it is revised to approximately JPY 80 billion. The profit from the business activities shown in blue, representing the underlying profit and loss is projected to show a significant year-on-year increase due to sales expansion at Sumitomo Pharma and reduced stake in Petro Rabigh, we revised it upward from the May forecast, targeting over JPY 100 billion. By segment, growth areas are -- these 2 segments, Agro & Life Solutions and ICT, Mobility, we expect achieving JPY 100 billion in profit from the business activities. Regarding the profit and loss associated with the partial sales of Petro Rabigh shares, the combined impact of the valuation loss associated with subscription to new class shares and the increase in loss accounted for by the equity method is expected to be minimal on the final P&L because they are offset with each other. And now the business performance forecast. We forecast the revenue of JPY 2.29 trillion, a decrease of JPY 50 billion from the previous projection. Core operating profit of JPY 185 billion. Net profit attributable to the owners of the parent of JPY 45 billion. Assumption on the FX and naphtha prices are as stated. Regarding sales revenue, Sumitomo Pharma expects a strong sales in North America, mainly for ORGOVYX. But Essential & Green Materials except the decrease in revenue due to a decline in shipments resulting from the sales suspension of Petro Rabigh products, which is our subsidiary company. Core operating profit by segment will be explained on the following slide. Net income attributable to the owners of the parent is expected to increase by JPY 5 billion from the previous forecast. And related to Petro Rabigh company's shares. Cash contribution methodology associated with Petro Rabigh was not clearly identified and the series of profit and loss impact was accounted for and the nonrecurring items. That is how it was incorporated in the forecast. But this year, this time, the methodology for cash contribution and the accounting treatment was finalized. As a result, for 6 months, the sales timing was delayed by 6 months. As a result, the losses we bear under the equity method will increase. As a result, the gains on sales of equity will increase. As a result, core profit significantly increases. And next, we incur valuation losses of the Class B shares we newly acquired. As a result, there are additions and deductions among accounting items, but the impact on net income is limited as they had been already incorporated in the previous projections. And therefore, impact is not big. Next, regarding the full year performance or the sales revenue and core operating income by reporting segment. On to Agro & Life Solutions, though shipments shifted from the first to the second half, performance has largely progressed as previously announced with the previous forecast kept unchanged. For ICT and Mobility, EV market recovery is slow and the semiconductor market recovery is slightly moderate compared to our projection with some unevenness. As a result, we have adopted a little bit conservative outlook compared to the previous announcement. Essential & Green Materials, as I explained earlier, is expected to see a significant increase in core operating profit. At Sumitomo Pharma, mainly due to strong sales in North America, therefore, is expected to see a significant increase in profit compared to the previous forecast. The other segment sees its profit drop compared to the previous forecast. This is due to the fact that at the time of the previous forecast, a certain degree of performance improvement measures were factored in. So they were incorporated into the other categories. However, in this announcement, based on the assumption that they are likely to materialize in each segment, Essential and Sumitomo Pharma numbers are calculated. And therefore, those factors are not incorporated into others. This concludes our explanation on the financial results and earnings forecast. And now we would like to entertain your questions. Thank you. Operator: [Operator Instructions] Now the first question from Morgan Stanley MUFG Securities, Mr. Watabe. Takato Watabe: In your new forecast, Petro Rabigh's sales impact, I'd like to hear more about it. In Essential, JPY 50 billion is included this time, but the increase in profit is JPY 23 billion. What is the reason for that? Not related to Petro Rabigh, there is minus JPY 40 billion for others. You explained because there were recoveries in other segments, but it seems to be too large. And nonrecurring items, it was minus JPY 45 billion, but with the gains for sale of Rabigh that was assumed, but that is negative. So what is the reduction of JPY 25 billion in nonrecurring items? With the sales related to Petro Rabigh, maybe your forecast was too bearish. Could you explain the reason? Keigo Sasaki: Yes. Thank you for your question. For Petro Rabigh, we announced the influence recently. But for the sales, it's JPY 50 billion of sales proceeds was announced. And as you know, here, there was a time gap of 6 months, and that impact is included. So 22.5% means that the equity method is continued to be applied. So there is an increase in the burden in terms of losses based on the equity method. And that is one factor. And JPY 50 billion, because there were losses from equity method, the sales cost dropped. So in net, it is lower than that. So that included -- the increase in profit was only about JPY 23 billion. Besides, there is included under finance losses for the B shares newly acquired, there is a valuation loss included. So sales of equities, when you calculate the total loss, actually, the impact is not that large. Takato Watabe: Yes, I understand. Petro Rabigh, there is a negative in terms of sales proceeds because of equity method. Keigo Sasaki: So let me add to that explanation. How was that included in the original forecast? I think that is your question. In the original forecast, core operating income -- essentially in Green and EGM, it was not included at all. That is one point. So that makes the difference. And for nonrecurring items, we were including some impact. And by adding some items, for example, valuation loss, it is very difficult to express. So the losses were included in the nonrecurring items. But that is not a nonrecurring item. That is a financial loss. So improvement of a nonrecurring item compared to the forecast is because of this background. So we are not considering the sales gains. Well, when it's not that we are not taking into consideration at all, as I will explain. And your question, you asked about other corporate expenses compared to the forecast, this has worsened about JPY 24 billion, JPY 25 billion. And that part, in the initial forecast, we included some forecast of improved performance in EGM and Sumitomo Pharma. For both, we had conservative figures and Petro Rabigh equity sales, we were not -- we couldn't talk about it. So without including those figures, these were all added together and included under other corporate expenses, but that is now being distributed into other segments. It is now included in the figures of the relevant segments. So it looks as if the total corporate figures has worsened, but that is the reason. Takato Watabe: Is it possible to have such a big negative figure for corporate, about JPY 40 billion? Is that what you mean? Keigo Sasaki: Yes. The reason why it was good so far. Sumitomo Bakelite and other items of profit and loss are included and sales proceeds that happened last year are included. And besides Sumitomo Chemical Engineering and Nihon Medi-Physics, those losses are included under others. But these 2 are already sold. So this fiscal year, there are not so many positive factors. And under others and adjustments, expenses are high. That is how you should interpret it. Medi-Physics, I think that was Life Science, but I understand. So it's not that you are assuming a larger buffer. If you ask me if you are -- we are conservative, basically, yes, our forecast is intended to be conservative, but we are not including a large buffer. Takato Watabe: So you are conservative. I understand. Operator: Now we would like to go on to the next question. Mizuho Securities, Yamada-san, please. Mikiya Yamada: I am Yamada from Mizuho Securities. I would like to double check about the core profit. Agro & Life Solutions in the first half, there was some shortfall. From the first to the second quarter, there was a seasonality. So you said that there is some visibility, but you had some shortfalls from the first half to the second half, there was a timing difference of the shipments. Was it the reason? On a full year basis, there was no change in the forecast. Therefore, my understanding must be correct, but I'd like to double check. And ICT Mobility Solutions, downward revision, the operating profit and the revenue were revised downward. EV and the semiconductor recovery or delayed that is the reason. Marginal profit margin -- marginal profit ratio against the revenue dropped by JPY 30 billion, operating profit drop was limited to JPY 3 billion. Therefore, the balance seems to be optimistic between the 2. So could you please explain this situation? Keigo Sasaki: First of all, AGL, from the first half to the second half, there was some shift. At this point, in Latin America, business is struggling. From the second to the third quarter, there is some shift that is our awareness. As much as possible, we would like to make a recovery within the third quarter. On the other hand, in North America or in India, in these regions, so because they are Northern Hemisphere there, we expect more to come. We do not have any unfavorable factors. Well, the slow-moving inventories start to recover. And based on that, so comprehensively, when it comes to AGL, we are likely to achieve the initial projection. Furthermore, JPY 145, that is the ForEx assumption for this projection. Currently, yen is a little bit weaker than that. So I believe that this will also make a further contribution. And then on to ICT, the major factors are, as correctly pointed out by you, EV and the semiconductor. Although there is some recovery, but not much recovery than we anticipated. So that is some negative impact. They are incorporated. And the profit margin is off, that is what you pointed out. Well, the revenue in itself may be we put the numbers quite roughly and sometimes we round the numbers. So it is not precise. It is better not pay too much attention to the profit. It does not mean that you made a significant change to ForEx assumption. That is why I thought something is off. However, you more precisely calculate core operating profit. That is why you ended up this result. Am I correct? Mikiya Yamada: Yes. And Agro & Life Solutions, regarding the sales status of new products, is there any delay? Or are there any new products that are sold earlier than schedule? Keigo Sasaki: Well, there is no major delay. That is our current understanding. Operator: The next question is from SMBC Nikko Securities, Mr. Miyamoto. Go Miyamoto: I'm Miyamoto from SMBC Nikko Securities. I also have a question about Agro & Life Solutions. As a business environment, you have a cloud mark. So what's the current situation? What is the situation of the inventory? There are differences from product to product. So could you explain a little more about it? And in addition, price competition continues. And in terms of price variance, there were improvements of profit margin of foreign crop protection chemicals. So it seems that -- could you explain the price trend and by rationale in different sales situation, could you talk a little more about it? Keigo Sasaki: Yes. Thank you for your question. For AGL, in the first half, in Latin America, situation was a little worse than what we had assumed. For our distribution inventory compared to the previous year, there are improvements, but still the level is high. And generic products, competition is still expected. For Rapidicil, Argentine, still, we will continue to emphasize expansion of sales. And [ differing ] in Brazil, it is the second season. So this -- we will also continue to expand sales of this large-scale insecticide. So we want to recover from the first half towards the second half. And the other regions, in the United States, it is improving quite a lot, I believe. And of course, competition with generic products exist. But as North America in general, there's improvement in the desire of our customers to accept our product. North America is a place that is just starting. So we will keep watching. And in India, India as well, there is a question of the distribution inventory, but there are improvements seen. Not only North America, but also in India, I think we can look forward to the situation in India by watching with care, we hope we will achieve our target at the beginning of the fiscal year. Go Miyamoto: About the price variance in Latin America, there's still a drop in price and is it getting higher in other regions? Keigo Sasaki: That is a general image. Go Miyamoto: And how about the situation, the places which price is getting higher? Keigo Sasaki: Price itself, rather than higher prices in the price variance, that is a tug of war with cost. So including the cost, the improvements in some places. That is the meaning here. Go Miyamoto: I understand. And on Page 29, in Latin America, there was sales and some carried forward in Japan, but the impact in North America is bigger. Keigo Sasaki: Yes, in Japan, currently, including the price of rice, prices are getting higher in Japan. The customers, the farmers have quite a strong desire to purchase their advanced sales. In Central South America, the market is larger. So still the impact remains. Operator: Now we'd like to go on to the next question. Daiwa Securities, Umebayashi-san. Hidemitsu Umebayashi: I am Umebayashi from Daiwa Securities. I would like to ask you some questions on ICT and Mobility Solutions. From the first quarter to the second quarter, the revenue is approximately JPY 8 billion. So therefore, it is a significant increase, but the profit, JPY 4 billion drop. So there was a gain on sales of the business in the first quarter. I understand that. But excluding that, so the revenue increase is significant. However, the profit was almost flat. So what is the reason for that? And especially in the industry, smartphone in North America is strong. And in the second half, you mentioned that you might be a little bit conservative. Why is it that the situation is deteriorating to this extent? Could you elaborate on that? Keigo Sasaki: Well, let me see. ICTM, in comparison with previous year, currently, yen is stronger. That is our assumption. So this is the segment most affected by the ForEx fluctuation. Another factor is the impact of tariff. So at the beginning of the year, we told you that in total, JPY 10 billion of impact will be felt from tariff. And we start to feel that impact now. Throughout the year, this is likely to be within the scope of our projection at the beginning of the year. So the reason for drop this time is, as I explained earlier, EV as well as mobility. These are the major reasons, partially compared to our initial expectation, there are some change from the semiconductor situation. Therefore, they are separately incorporated. Separator of EV feel the impact. So please understand in that way. Hidemitsu Umebayashi: Between the first quarter and the second quarter, revenue increased. However, the profit dropped. Well, the profit dropped because in the first quarter, there was gains on sales, but it did not occur in the second quarter. However, between the first quarter and the second quarter, what was the major change in the mobile business? Keigo Sasaki: What was the major change for the polarizing film between the first quarter and the second quarter? Well, there is an impact of the gains on sales, which did occur in the first quarter. So that may have an impact on profit. The display was performing quite well last year. So there was some rebound from the previous year. So there are some irregular elements incorporated here. So please do understand in that manner. Operator: The next question is from Nomura Securities, Mr. Okazaki. Shigeki Okazaki: I'm Okazaki from Nomura Securities. For core operating income, a question for confirmation. Essential Green Materials, you made upward revision. But in terms of fundamentals, compared to 6 months ago, is it right to say that there are no major changes? What is your view about Rabigh and Singapore and other places, as was included in previous question, from the first half to second half, losses -- core operating loss tends to increase. What is the item for that? This year, I understand there's not so much difference between first half and second half in terms of sales of business. Could you explain that? Keigo Sasaki: Yes. Thank you. First, for Essential, in terms of wafer mark, I explained, basically, from the beginning of the year until now, there are no changes. So Singapore, for example, for PCS, we are studying the possibilities of optimization in TPC, MMA. In particular for MMA, restructurings and also rationalizations took place. And on top of that, high profitability items, high value-added items are areas that we plan to shift to maintain the profit. So that is a policy. As for the environment, we have not changed our view. And for other areas comparing first and the second half, in the second half, for example, this is a matter of how we spend our expenses. For R&D expenses tends to be concentrated in the second half. That is a trend that we see. So that is also included. Operator: Now we are getting closer to the ending time. So now we would like to take the final question. BofA Securities, Enomoto-san, please. Takashi Enomoto: BofA Securities, I am Enomoto. I have a question on net income. Looking at the plan for the second half, there is a significant gap from the operating profit to net income. Various items are included in the operating profit. Why is it that the net income is so compressed in the second half of the year? Keigo Sasaki: Thank you very much for your question. Throughout the year, nonrecurring items, at which timing they will be recorded that also have an impact. JPY 5 billion was the only one that was generated in the first half. However, there are several structural reform-related expenditures that will be occurring, which will be around JPY 25 billion throughout the year. So the remaining portion will incur in the second half. And regarding the financial profit, it will be skewed towards the second half of the year. That is our view. This is due to ForEx. So this is the current view. It is currently at JPY 150. But based on the assumption of the yen is stronger to JPY 155, then the ForEx loss may occur. And talking about the tax, as I mentioned earlier, Sumitomo Pharma deferred tax liability reversal gain was observed in the first half. This is extraordinary items in the first half. So this will not appear in the second half. So there are several factors. And therefore, the loss will incur in the second half of the year. So that is my explanation. Takashi Enomoto: The ForEx loss, what is your projection of that for the second half? Keigo Sasaki: Not so much. But our assumption is that, the ForEx is JPY 145. Operator: This concludes the Q&A session. Lastly, Mr. Sasaki will give the final greetings. Keigo Sasaki: Thank you very much for attending today. This fiscal year is the first year of our medium-term plan. And within the medium-term plan, we have set targets. So to achieve the target, we will do our best. So we hope we can continue to have your support. Thank you very much for your participation today. Operator: This concludes today's conference call. Thank you very much for your participation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Welcome to the Royal Philips' Third Quarter 2025 Results Conference Call on Tuesday, November 4, 2025. During the call hosted by Mr. Roy Jakobs, CEO; and Ms. Charlotte Hanneman, CFO, all participants will be in a listen-only mode. [Operator Instructions] Please note that this call will be recorded, and a replay will be available on the Investor Relations website of Royal Philips. I will now hand the conference over to Ms. Durga Doraisamy, Head of Investor Relations. Please go ahead, madam. Durga Doraisamy: Hello, everyone. Welcome to Philips' results webcast for the third quarter of 2025. I'm here with our CEO, Roy Jakobs; and our CFO, Charlotte Hanneman. The press release and investor presentation can be accessed on our Investor Relations website. The replay and full transcript of this webcast will be available on our website after this call concludes. I want to draw your attention to our safe harbor statement on the screen and in the presentation. I will now hand over to Roy. Roy Jakobs: Thanks, Durga. Good morning, everyone. Thank you for joining us today. We entered the third quarter with good momentum. We sustained it and delivered on plan for the quarter. Order intake grew 8%, marking the fourth consecutive quarter of improvement. It reflects the robust demand for our products and our disciplined execution. Comparable sales growth stepped up sequentially to 3% year-on-year. All businesses contributed to growth. Personal Health delivered particularly strong performance. Adjusted EBITDA margin expanded by 50 basis points to 12.3% in spite of the full quarter impact of currently imposed tariffs. It reflects solid gross margin delivery driven by innovation as well as the impact of our productivity and cost management. Overall, our performance in the first 9 months is tracking as expected, with momentum weighted towards the second half as orders and growth build through the year. We are delivering on our commitments, and we contain and sustain this momentum with disciplined execution into the fourth quarter to achieve our full year plan as we complete the year. We reiterate our full year comparable sales growth outlook in the range of 1% to 3%. We expect our 2025 adjusted EBITDA margin to be at the upper end of 11.3% to 11.8% range, reflecting our confidence in our execution. We continue to expect full year free cash flow to be between EUR 0.2 billion and EUR 0.4 billion. These expectations assume current tariff levels remain unchanged with mitigation fully on track. Now let's look at our third quarter performance in more detail. Starting with orders. Equipment order intake grew 8%, maintaining the momentum we have built over the last 12 months, including the typical quarter-to-quarter unevenness in large orders. Year-to-date, our order book is up 6% compared to last year. Our strong order performance in Q3 was driven by a sustained double-digit growth in North America. Strong order growth in Connected Care was partly offset by a modest decline in D&T. Within D&T, order growth in Image-Guided Therapy and Ultrasound in Q3 was offset by a small decline in Diagnostic Imaging following 3 consecutive quarters of positive order intake growth. We are pleased with 6% year-to-date order growth in D&T, driven by solid performance, and we continue to focus on strengthening commercial execution in DI and expect improvement in Q4. In Image-Guided Therapy, where we lead in minimally invasive procedures for cardio, neuro and oncology interventions, demand for high-end Azurion 7 system remained strong. Growth in Ultrasound orders reflect robust demand for our further enhanced leading EPIQ CVx systems, which highlights Philips' leadership in cardiovascular care. These AI-powered solutions enhance precision, streamline workflows and boost clinical confidence. Turning to Diagnostic Imaging. The demand for our BlueSeal MR 5300 and CT 5300 remains strong. We also advanced CT and MR innovation in radiation therapy planning, which I will touch on shortly. These systems, together with our strong imaging informatics offer are resonating with customers for their precision diagnostics and AI-driven workflow productivity, positioning us well for renewed momentum ahead. In Connected Care, demand for our hospital patient monitoring solutions continued to gain momentum. North America remains a key growth driver with strong demand, supported by major partnerships and continued hospital standardization with strong cybersecurity demands. We are especially pleased with the traction of our latest IntelliVue MX patient monitors, the AI-powered PIC iX central monitoring systems and our X3 transport monitors equipment measurement modules. With collaborations and partnerships that span the industry from Edwards Life Sciences to Medtronic, Masimo and Getinge, we have created an efficient interoperable patient monitoring and real-time data platform that addresses the key customer priorities. It's the ecosystem platform of choice for patient monitoring. Building on the strong value proposition, we expanded our enterprise partnerships as reflected in some new ones that we announced this quarter. For example, our monitoring and service agreements with leading U.S. health systems, such as Hoag Health System in Orange County and Rady Children's Hospital in San Diego. They empower our customers to focus on what matters most, improving patient outcomes while we handle system complexity. Moving to Enterprise Informatics, which also contributed to Connected Care's order growth in the quarter. Migration to the cloud remains a strategic priority to unlock further value in this business. This quarter, we signed a multiyear agreement with a major U.S. health system to move its radiology imaging to the cloud. And it's using Philips IntelliSpace Radiology on Amazon Web Services for that, improving efficiency, scalability and security while enabling future AI innovation. Turning back to Personal Health. Growth was strong and broad-based across all three businesses: Grooming and Beauty, Oral Healthcare, and Mother and Child Care. Sell-out trends remained healthy across Europe and most growth geographies. China remains subdued amid cautious consumer sentiment, and demand in the U.S. remains resilient. We saw strong demand for our premium products, including high-end shavers and IPL hair removal devices in Grooming and Beauty, but also for our Diamond Clean Series in Oral Health Care. Our continued investment in innovation fuels the momentum in orders we are delivering across the portfolio. In Q3, we expanded our pipeline with solutions designed to accelerate growth, enhance customer value and drive consumer engagement. We launched Transcend Plus in Ultrasound across our EPIC and Affiniti systems. It's featuring enhanced imaging and 26 FDA-cleared cardiovascular AI applications, the most in the industry, supporting faster, more consistent diagnostics. Similarly, in radiation therapy treatment planning, we continue to advance our innovation pipeline. At the American Society for Radiation Oncology, we introduced Rembra, Areta radiation therapy CT scanners and BlueSeal MR radiation therapy, which expanded our radiation oncology imaging portfolio and our sustainable MR leadership. Moving to consumers. We are also strongly driving our innovation pipeline in Personal Health. Last month, TIME named the Philips i9000 Prestige Ultra, one of the Best Inventions of 2025, a clear example of how our SenseIQ Pro AI technology continues to drive leadership in premium grooming. Our latest launches continue to resonate, not only with consumers, but with high-performing retailers, too. Lumea IPL debuted in the U.S. exclusively on Amazon with strong early uptake, and the next-generation Sonicare 6000 and 6400 models launched exclusively with Walmart. We continue to execute our priorities; from enhancing patient safety and quality, to improving supply chain resilience, and simplifying our operations. Our multiyear program to strengthen quality systems and embed a patient safety-first culture is delivering steady progress. In 2025, we passed six out of nine FDA inspections with no observations. Between 2024 and 2025, our 15 FDA inspections resulted in a 43 issuance rate, nearly 60% lower than in '21 to '23 despite a comparable number of inspections. Against that background, the FDA warning letter issued last week is disappointing, and we are fully committed and in full remediation since Q2 to resolve all observations to the agency satisfaction. We continue to work constructively with the regulatory agencies, also on new innovations. And we already received 27 FDA clearances through Q3, matching the total for 2024 and demonstrating an accelerating approval rate. We have also reduced global field actions by around 20% year-to-date, following a similar reduction last year, while we continue to improve complaint handling and strengthen corrective and preventive action processes. We remain fully focused on driving measurable lasting improvements in our business in collaboration with the global regulators and on reinforcing trust among patients, clinicians and investors. Moving to supply chain. We continue to make executional improvements. In Q2, we announced a multiyear nationwide agreement with Indonesian Ministry of Health to expand access to therapy using our Azurion platform. Now we are already installing the first system, a clear proof point of our speed and agility and execution strength. This collaboration exemplifies the broader progress we are making across our supply chain, where we continue to deliver tangible operational impact and greater resilience in an uncertain supply chain environment. This is also demonstrated by the continued increase in service levels across health systems modalities, reaching 87% in the quarter, a new high and another sequential step-up. Finally, we continue to simplify how we work with a more connected organization that focuses talent and resources where growth is happening. This shift is fueling continued progress in productivity and in performance. Turning to the regions. The fundamentals of the markets we serve remain sound. Dynamics vary per region. And in some areas, uncertainty is increasing. In North America, hospital demand remains strong with continued customer pull for platforms that deliver productivity to serve more patients at lower costs and to achieve better outcomes, increasingly enabled by AI. That said, demand is unevenly spread across hospitals and regions of the U.S. As hospital resource constraints in people and costs increase, they seek smarter, more productive ways to manage higher workloads with less people while serving more patients. So productivity has become a defining theme for our customers, one that sits at the heart of our innovation agenda. And this positions us well to capture growth, reflected in the sustained double-digit order intake growth over the past 12 months in the U.S. In China, tender activity has been gradually increasing throughout the year, although from a low base, fueled by stimulus measures. At the same time, centralized procurement kept expanding, which meant longer processing times and tougher competition, making it harder for bidding activity to translate into meaningful market growth. We continue to have a cautious view on the near-term outlook for China, but remain positive about the market's long-term growth potential. Capital spending remains stable in Europe and Latin America, while India and Saudi Arabia continue investing in health care and digitization, creating strong opportunities. In an uncertain environment, staying close to our customers and partners is more important than ever. We are also actively engaging with leading industry associations like AdvaMed in U.S., and MedTech Europe as well as authorities in key markets. Our objective remains clear: to advocate for patients and ensure access to care. Every dollar, euro or RMB spent on tariffs is one not spent on innovation. We must ensure tariff measures and trade barriers do not hinder innovation, access or affordability of care. We remain closely attuned to evolving customer and consumer dynamics to stay agile and responsive. We innovate to deliver better and more care. Charlotte will now discuss our third quarter performance in more detail and our outlook for 2025. Charlotte Hanneman: Thank you, Roy. The group achieved 3% comparable sales growth while our three business segments delivered 4.3%, underscoring the strength of our core operations. In Diagnosis & Treatment, comparable sales improved sequentially, in line with our expected phasing, increasing by 1% year-over-year. Image-Guided Therapy delivered solid growth, nearing the mid-single-digit range, marking consecutive multiyear expansion; a remarkable track record of consistent performance fueled by strong momentum in our flagship Azurion platform and strength in coronary intravascular ultrasound devices. Precision Diagnosis sales were broadly in line with last year. Strong growth in Ultrasound was driven by continued strength in cardiovascular, led by our EPIQ CVx systems. This was offset by a modest decline in Diagnostic Imaging, primarily due to the timing of orders. Our flagship products continue to perform well, particularly the CT 5300, which delivered a strong ramp-up in order conversions following its launch last year; the major contributor to a further improvement in gross margin within Diagnostic Imaging. Adjusted EBITDA margin decreased by 80 basis points to 11.8%, mainly due to the incremental headwinds from the currently imposed tariffs and cost inflation, partially offset by gross margin from recently launched innovations as well as productivity. Absent these headwinds, both gross and adjusted EBITDA margins improved year-on-year, highlighting the underlying strength and demonstrating robust operational execution. In Connected Care, comparable sales grew 5%, supported by strong growth in Monitoring. This was partially offset by lower Sleep & Respiratory Care sales, while Enterprise Informatics remained stable. Growth in Monitoring was driven by higher installation of latest IntelliVue MX patient monitors, X3 transport patient monitors and AI-powered PIC iX central monitoring systems across most geographies with particular strength in North America. Adjusted EBITDA margin improved by 410 basis points to 11.4%, including a 150 basis point gain from the remeasurement of a minority investment. Excluding this gain, the margin improved by 260 basis points to 9.9%, driven by operational leverage in the Hospital Patient Monitoring business, favorable mix effects and productivity, partially offset by tariffs and cost inflation. In Personal Health, comparable sales increased by 11% in the quarter with broad-based growth across all regions and strong performance across the three businesses within the segment. This sustained strong performance reflects robust demand across most geographies, including a resilient customer sentiment in North America. Growth was also supported by an easier comparison base in China following the impact of inventory destocking last year, which concluded in the second quarter of 2025. Personal Health adjusted EBITA margins improved by 60 basis points to 17.1%, driven by increased sales and productivity, partially offset by tariffs. Impacts from advertising and promotion spend remained slightly elevated year-on-year, though lower than in Q2 to support sustained demand and recent launches. These investments are delivering as intended, contributing to higher sales growth and are underscored by strong demand for our premium products across all businesses. Finally, sales in Other decreased by EUR 41 million, primarily due to lower royalty income as we expected, resulting in a EUR 21 million reduction in adjusted EBITDA for the quarter. Turning to our group results and operating highlights for the third quarter. Comparable sales growth improved sequentially, aligned with our expected phasing, increasing 3% with broad-based growth across all three segments, partially offset by lower royalty income as expected. Comparable sales in mature geographies grew 3%, led by North America with contributions from all segments. Growth geographies increased 5%, driven by strength in Personal Health and Connected Care, while Diagnosis & Treatment was broadly flat. Adjusted EBITA margin increased by 50 basis points to 12.3%, driven by higher sales, favorable mix effects and productivity measures, which more than offset the impact from incremental tariffs and lower royalty income. With tariffs evolving, we continue to actively mitigate their impacts, strengthening our ability to execute with consistency and deliver sustained performance. The impact year-to-date is tracking in line with our expectations. For full year 2025, we continue to anticipate a net impact of EUR 150 million to EUR 200 million after substantial mitigation with no revisions since the outlook we provided in July. As planned, short-term tariff mitigation initiatives in the third quarter focused on inventory management, specialty programs, exemptions and cost discipline and helped reduce the tariff impact. We also advanced medium-term initiatives meaningfully, including our supplier network and commitment to manufacturing location optimization. In August, we announced USD 150 million investment in the U.S., which will not only expand production, but also strengthen both cost efficiency and local supply continuity. We will continue progressing similar initiatives across the portfolio, carefully balancing regulatory, operational and customer considerations. In Q3, we delivered EUR 222 million in productivity savings, bringing the year-to-date total to EUR 566 million. We remain on track to achieve the EUR 800 million in productivity savings in 2025. Our disciplined approach to cost management and productivity initiatives has cumulatively delivered EUR 2.3 billion in savings since the start of our 3-year plan in 2023, exceeding our initial commitment to delivering EUR 2 billion by the end of 2025. As we build on this strong foundation, we are increasingly leveraging AI to unlock the next wave of productivity gains across the company. In Personal Health, since the second quarter, more than 80% of our marketing content has been created or enhanced using GenAI tools. This includes how we generate insights, we find creative content and even how we manage digital assets. These capabilities are already improving productivity and have delivered an increase in return on investment up to double-digit returns. In Enterprise Informatics, AI is accelerating R&D through greater use of AI-generated code, enhancing customer support with predictive AI agents and strengthening sales and marketing through AI automated content creation and real-time buyer analytics. For example, in customer support, our AI agents automatically perform remote system health checks and proactive maintenance, reducing support costs by 80%. In the quarter, adjusting items amounted to EUR 122 million, of which EUR 40 million were related to Respironics field action and consent decree remediation. This is below our Q3 2025 outlook of EUR 165 million, mainly driven by cost phasing within the year. Income tax expense increased by EUR 22 million, reflecting higher income before tax, while net income rose to EUR 187 million, mainly driven by higher earnings. Adjusted diluted EPS from continued operations was EUR 0.36 in the quarter, up 13% year-over-year, driven by positive contribution from growth. Despite significant volatility in major currencies, particularly the U.S. dollar, the impact on our adjusted EBITDA margin and EPS was broadly flat, reflecting disciplined hedging and optimized currency footprint and targeted commercial actions in markets most exposed to currency fluctuations. We delivered strong cash flow performance this quarter with free cash flow of EUR 172 million, representing EUR 150 million improvement year-over-year. Higher earnings drove this. Moving to the balance sheet. We ended the quarter with approximately EUR 1.9 billion of cash and net debt of approximately EUR 6.5 billion. We maintained our disciplined focus on working capital, delivering a solid year-over-year improvement in inventory as a percentage of sales despite ongoing tariff mitigation initiatives. Our leverage ratio remained in line with Q2 2025 and last year at 2.2x on a net debt to adjusted EBITDA basis. We remain committed to maintaining a strong investment-grade credit rating. Turning to the outlook. With 3 quarters behind us and continued strong execution, we have solid visibility for the remainder of the year. Our expectations for Q4 remain unchanged from the start of the year. We continue to expect sequential improvement in comparable sales growth, supported by sustained order conversion, sustained momentum in Personal Health sales and disciplined execution. For the full year, we continue to expect comparable sales growth in the 1% to 3% range with Connected Care growing within this range, Personal Health slightly above the mid-single-digit range and D&T delivering slight growth year-over-year. Year-to-date adjusted EBITDA margin improved to 11.2%, a 40 basis point increase despite higher tariffs, driven by strong execution and cost discipline. With continued momentum and even with the impact of tariffs, which is more pronounced in the second half of the year, we now expect full year adjusted EBITDA margin at the upper end of the 11.3% to 11.8% range. Turning to free cash flow. We continue to expect a full year range between EUR 0.2 billion and EUR 0.4 billion. As a reminder, this outlook includes the EUR 1 billion outflow related to the Respironics settlement paid in Q1. Our outlook excludes potential wider economic impact as well as ongoing Philips Respironics-related proceedings, including the Department of Justice investigation. With that, I would like to hand it back to Roy for his closing remarks. Roy Jakobs: Thank you, Charlotte. The third quarter progressed as expected, and we remain confident in delivering on our full year commitments. Looking ahead to our Capital Markets Day in February 2026, we will showcase the fundamental progress achieved under our 2023 to 2025 plan, establishing a strong foundation for the future. And we will share how we will and are evolving this into a next 3-year plan of consistent value creation and focused value acceleration. I'm incredibly proud of our passionate teams, staying close to customers, executing with discipline and keeping our momentum throughout the end of this year. Thank you, and we are now ready for your questions. Operator: [Operator Instructions] The first question comes from Mr. Julien Dormois from Jefferies. Julien Dormois: I have two. The first one would relate to a general question around price hikes going forward. You are obviously out of a period of inflation and also the tariff impact. So just curious how you think about price increase going forward. We can remember that 2 or 3 years ago, the whole industry proceeded with price hikes at the end of the inflation crisis. So just curious whether you should expect some benefit from that in the next couple of years. That would be my first general question. And the second question relates to PH. Obviously, a super strong quarter on easy comps. So just curious whether there is any restocking effect in China and maybe help us understand what was actually the contribution of China in this quarter. And that's it. Roy Jakobs: Thank you, Julien. Let me take the first one and then maybe Charlotte can take the second. So on the pricing, so as you have seen also from our bridge, kind of we are driving our margin expansion on the back of two key drivers that we see taking effect. One is expansion of gross margin. And that actually is especially the new innovations generating more traction in the total percentage of orders and then flowing through to sales. And that's where we see actually that price increases do support our margin, as well as the productivity and cost discipline actions that we are taking. We expect in the coming period that there will be some pricing given the inflationary environment that we're in. But we also know that kind of actually the inherent value increase of our innovations and how we price them in combination with kind of productivity and cost will be the bigger driver of that. So we see pricing opportunity, but not to kind of a large extent that kind of we also would impede growth because growth is still of critical importance, and we will keep driving that whilst we expand the margin at the same time as you have seen. Charlotte Hanneman: Yes. And then thank you, Julien. Your second question on Personal Health. We are very pleased with our Personal Health sales in the quarter of 11% indeed. As I said also just earlier, partially that was helped by a low comparable base in China. But even excluding China, we saw broad-based growth across all businesses and geographies. So very pleasing. And on your question on the restocking in China, we don't see any restocking. In fact, as we said, we finalized the inventory destocking at the end of Q2 and continue to be very, very cautious on making sure that those inventory levels are in line with our expectations. So no restocking now. Operator: The next question comes from Ed Ridley-Day from Rothschild & Co Redburn. Edward Ridley-Day: Really a strong improvement in productivity this year despite some of the challenges you faced. How should we think about maintaining that momentum into '26? And particularly on -- related to tariffs, you've almost fully offset the tariff headwind this quarter. Should we be perhaps assuming that you can fully offset the annualized tariff impact next year? Charlotte Hanneman: Thank you very much, Ed. Let me take that question. So first of all, we're very much focused on 2025 and delivering in line with our expectation, which is now at the higher end of the 11.3% to 11.8% range. And as you rightfully mentioned, we've been able to compensate a lot of the tariffs while we still have a net impact of EUR 150 million to EUR 200 million after substantial mitigation. And that gives us a lot of confidence. Now if I look ahead at 2026, of course, we have our Capital Markets Day on February 10, and we're looking forward to giving you a lot more details at that point in time. What I would tell you in broad strokes is we are happy with the momentum that we've seen from an order intake perspective, from a sequential sales step-up perspective, from a margin perspective. So we are very focused on continuing improving on all fronts, but more to come on February 10 from that perspective. Operator: The next question comes from Hugo Solvet from BNP Paribas Exane. Hugo Solvet: Congrats on the results. I have two, please. First, can you expand a bit on the order timing in D&T? And how would you expect Diagnostic Imaging sales to evolve going forward? And second, Roy, happy to get your thoughts on Section 232. How do you think this could impact Imaging and Connected Care business? And where do you stand exactly on reshoring of manufacturing in the U.S. in particular? Roy Jakobs: Thank you, Hugo. So on the order timing, and I think it's good indeed to -- if you look at the order buildup of D&T, as said, we are happy with the 6% year-to-date. You also say -- saw that is not yet fully evenly balanced, right? Q2 was really the quarter of D&T, Q3 is the quarter of CC, right? So we kind of -- as we have built up our order momentum, we're also getting some of these large deals. And Q2 was really a very strong D&T quarter. Q3 is a very strong CC quarter. Actually, in Q4, we expect D&T also to further step up. Also, we see that in our funnel. So actually, whilst there are certain lumpiness, the underlying improvement is visible, and you also see that coming through. The same is for the realization of sales. We also have seen the step-up in sales. Although also there, of course, it goes with the order conversion. And there, we see that some time lines are longer, but also we expect there an improvement in Q4, which also in DI is coming through. On top, I think it's also good to say that, as you know, from our strategy, we had in how we drive our businesses two different parts. One was we have growth businesses at higher margins that we explicitly drive for growth. And we have margin expansion businesses, and those are exactly doing what they should be doing. So we have been expanding DI margin, we have been expanding EI margin, we have been expanding SRC margin also in the third quarter. And we have been really driving growth strongly across the other growth businesses. Now of course, we want to have both margin and growth expansion from all segments, but actually, we're also driving them within the strategy. So in that sense, I think you have seen that we will kind of step up. And that's also what Charlotte mentioned in Q4, we also are launching, of course, new innovations like the radiation therapy suite that will support that as well, of course, we have the RSNA upcoming with some exciting news there as well. So that's kind of how we look at to continue to D&T trajectory into Q4, but also, of course, in the period to come next year. The 232, so we see that -- and I think there, we look at this in conjunction with tariffs. There's a lot of fluctuation out there. And we are focusing very strongly on the controllables to see how we can mitigate that. And I think we are happy that actually in Q3, we showed that we are able to offset in full the tariff impact. Now that's how it work because it's still substantial. We also have the same plan for Q4, where we want to deliver a strong margin quarter, that also helps us to kind of give the higher end of the range. We are, of course, following the 232 and are engaged because we're engaged in Europe and U.S. and China in advocating strongly that actually we can lower tariffs and actually forgo further impact on patient care. So in that sense, kind of, a, we are actively engaging in a dialogue; b, we are preparing ourselves to focus on the controllable so that we can deal with any consequences. On that last point also, we have further strengthened our footprint in the U.S. So we invested EUR 150 million in Reedsville, expanding our ultrasound but also wider facility there. We're also looking at our other facility to actually be even better prepared for the localization needs. And that's in line with kind of the trajectory we have been having across our supply chain. I mentioned that we've really strengthened our supply chain delivery and also the agility to kind of address challenges. And whether the challenges with tariffs or Nexperia, we are better prepared. And actually, we are upping our service levels and upping orders and sales. So we make sure that we stay resilient while we deal with uncertainties around us. Operator: The next question comes from the line of Mr. Hassan Al-Wakeel from Barclays. Hassan Al-Wakeel: A couple for me. Firstly, a follow-up on D&T, please. Last quarter, Roy, you talked about your win rate improving in China, particularly in CT on the back of spectral. How is that faring today? And do you think your softer China order commentary is a function of market growth or share losses or both? And then secondly, just if you can expand on the warning letter in ultrasound and informatics and what gives you confidence that this will not result in regulatory action, and that your more recent quality improvement measures are yielding company-wide change? Roy Jakobs: Yes. Thank you, Hassan. So on D&T, we have seen indeed, and that's also what was called out, further traction on the 5300 and CT as well as MR. And actually, that is building in the funnel. Next to that, we saw ultrasound really picking up. And actually, that in part also address maybe some concern from the warning letter. Actually, Ultrasound, we have been dialing up order intake momentum and sales momentum whilst we actually have been working in parallel the remediation since Q2 because it's not new, right? For us, we got the 43 at the end of Q1. We started to remediate in Q3 -- in Q2 and in Q3, and you have seen no impact on results. That's also why we can be quite confident on that this will not have impact on results. We are remediating the process part of it, and we are in full kind of remediation and take it very seriously, of course. But we also know that this is no product issue, not a patient safety issue, this is process remediation. And we have been working that whilst absorbing it and stepping up our products. Then on China, I think in China, you see that it's a mixed picture. Overall, the market momentum, I would still call out for health systems as subdued, right? We still don't see the market growth coming back as we all hope, and that's really a market phenomena. We see tenders increasing, but it's not turning to order growth because we see that they are not landing yet. Processing time are longer, they are being disputed, and that's something that actually we are facing as industry. On the other hand, we have seen that Ultrasound, for example, has been up in our mix, and we saw IGT also picking up. We saw some slowness in DI, where actually last quarter it was stronger. So actually, we're working also to kind of see how we can strengthen it again in Q4. So it's not that linear over the quarters. But in general, I think we are all waiting for further strengthening of China. Now we do expect it to come, but it's just not clear when. So therefore, we remain cautious. And of course, you know that the China part of D&T is just bigger than also the CC part. So you see that weighs a bit stronger on the portfolio. Maybe another data point what is important. If you look at DI in North America, we have been growing orders by 16% year-to-date. So whilst we are growing, of course, we're coming from a smaller base and that weighs upon us. But it's not we don't have momentum there, but of course, we are rebuilding from a smaller base. So those are a few, I think, data points on the D&T momentum. So we keep building it. We also have strong engagement with customers. We have been receiving many of them actually here for co-creation sessions and have been individually also part of that. So I see it coming also towards the next year, but we are sequentially building it through the quarters. Hassan Al-Wakeel: Roy, if I could just quickly follow up. In your prepared remarks, you talked about tougher competition on the ground in China as well as some of the market issues that you just talked about. Where is that manifesting itself? Roy Jakobs: Yes. I think what I mean with the tough competition is that in, of course, the centralized procurement, you have a much more regulated process around competition. And that makes that we see, and I think everybody is facing that, that you kind of much more guided in that process. There are more disputes coming out. So when you have one, people are rebottling it. So that's, I think, where you see on the ground that it's becoming tougher because it's not only clinical preference, there's also more process in the mix. I think that is a fair, I think, depiction of the China situation, and that's something that we all are dealing with, I think, all parties. And you saw it also, I think, in some commentary of others. I think we are working through that. I think on the other side, on the positive side, we also mentioned that kind of we are working to offset. And that's not only short term, but also longer term. The strong momentum of double-digit orders in North America, of course, is also a big part of mitigation for that. And there also, we could still deliver 8% total order growth despite that China is not back where it is. And of course, there, we are firing also on the strongholds that we have. And CC was particularly strong this quarter, but also we continue to build on the rest. So as we are shifting to get where the demand is coming more contribution, that's North America, but also Europe, you also see that kind of we will be building that into our sales of the various underlying segments. Operator: We will now take the next question from Mr. David Adlington from JPMorgan. David Adlington: Firstly, maybe just would be good to get your thoughts on GE's decision. Can you hear me? Roy Jakobs: Yes. David Adlington: Yes. So just on the GE's decision to sell the Chinese business. Just wondered if you thought there was potential to pick up share, but also good to get your thoughts in terms of why they might be looking to exit China? And then secondly, just wondered if -- as the hedges rolled off on the foreign exchange, just wondered what sort of headwind that will be to margin for next year? Roy Jakobs: Okay. So on GE, of course, I cannot speak on behalf of GE and what they're doing. What I do see is actually that indeed on the ground, we are dialing up our competitive positioning around innovations that we've been launching. And as I said, kind of we see that, that also is resonating. We saw the Ultrasound pickup. We see also that there is kind of more activity, but kind of we need to materialize that. And I think overall, globally, you see that we have good order momentum, and kind of that is because of the customer preference for our platforms. I think the approach of innovation that we are taking where we're really looking into the broader productivity and workflow support supported with a combination of products and AI, and Informatics is something that is resonating. So I would say that's kind of our competitive differentiation and where we have three strong platforms that we're pulling from, that customers can build upon, and they are interoperable and open so that kind of we can play with partnerships in the industry as well to strengthen the delivery towards customers. I think that's on the first part. And maybe you can take the second on FX, Charlotte. Charlotte Hanneman: Yes, absolutely. Thanks, David. So your question on FX. And of course, we're very pleased we're not seeing any impact from an FX perspective in Q3. Now if you go and also look at Q4, that's where we do expect some currency headwinds to come in, which also will impact our margin, and that's fully included in the guide of the higher end of the 11.3% to 11.8%. And where we will get that out in February, we'll also take the currency impact into account in our guide there. But what I would tell you overall that we've been doing very well in terms of offsetting any currency impacts, as you have seen also in Q3. Operator: We will now take the next question from Mr. Graham Doyle from UBS. Graham Doyle: Just two for me. Just firstly, on the tariff side of things. Just conceptually, when we think of the order book growth you've had, which probably would support, say, mid-single-digit growth next year, you think of the cost savings and the mitigation you've got in there. Just to be fair, is it reasonable to assume margins can expand next year with tariffs where they are at the moment? Just to get some clarity on that. We're not asking for a level, but just to assume that they can expand. And then just on China, we're hearing quite a bit about VBP within the CT and Ultrasound segments. And I know a couple of your peers have seen it, but mainly because they play in the sort of lower end of mid-level hospitals. Is this something that's affecting your business? Or do you just not play in those categories? Charlotte Hanneman: Thank you, Graham. Let me take the first question on tariffs. So as you know, so for this year, tariffs after substantial mitigations are impacting us to an extent of EUR 150 million to EUR 200 million. And despite that, we're expanding our margins at this point in time at the higher end of the 11.3% to 11.8% margin, so by 30 basis points. You said it, of course, the tariffs are annualizing next year, so that will be a little bit of a bigger impact. But the way we are looking at it is we know every year we need to improve, including the new reality around us. And one of the big new realities around us is tariffs. So without wanting to go into any specifics at this point in time because we'll do that on February 10, what I can tell you is that we're very much focused on improvement, improvement from a sales perspective, improvement from a margin perspective and also improvement from a cash flow perspective. Roy Jakobs: On the CT, Ultrasound question, VBP in China, I think the procurement rollout is quite broad-based. So we are also affected by that. So we see that as well in part of kind of the portfolio where we play. So that's, I think, a market phenomena. That's also where I was earlier alluding to that actually is causing some of the slowness that we see because actually that really causes longer processing times as well as a more orchestrated approach towards buying. And that has an impact -- continued impact on market growth in China. So therefore, we did see that as well for us. I think on the positive side, as I already mentioned, we saw really in Ultrasound positive growth coming in because also of some of the new launches that we have. Now we are also building the pipeline for the CT part, so we see that there is tender activity. But as I also mentioned, it's not yet kind of concluded. And therefore, kind of we remain a bit cautious on how this evolves because it's not very predictable yet when activity turns into orders and then turns into sales. Operator: The next question comes from the line of Veronika Dubajova from Citi. Veronika Dubajova: I am going to ask two, please, and a very quick third one, if you forgive me, just because that's one word, hopefully one. But I just want to circle back to the downgrade to the guidance, to the sales guidance for D&T. And obviously, Roy you've talked a lot about China, but can you sort of confirm that the downgrade is entirely just China related? Or is there anything else that you're seeing in other regions that's worrying you there? And I guess, how you feel about that kind of D&T growth momentum exiting this year underpinning this roughly 5% growth rate that consensus has for next year? If you can talk to that, that would be my first question. My second question is the low single-digit growth rate in IGT, quite a deviation from the trend that we've seen through the last couple of years. So curious if you have some thoughts on that. And again, if you can elaborate on what's driving that? And my third very, very quick, yes or no question is, do you expect the warning letter to have any impact on your ability to return to the CPAP market through the next 6 to 12 months? Roy Jakobs: Okay. Let me start with the D&T. So on the sales momentum, yes, there is some China impact in that. But the other portion that we have seen is also some longer conversion cycles of orders. There's no particular kind of other reason that we see in other regions. I said kind of especially in DI side, of course, we have a different footprint in terms of more weighted towards Europe and China and a bit less in North America, where we are building. But I also mentioned to you that we are actually building that with double-digit order growth. So actually, we are stepping that up, and we expect that also to continue. So yes, whilst the overall mix is a bit changing in the year, we remain with 1% to 3%. I haven't heard too many people talking about CC. It was quite extraordinary this quarter how they delivered in terms of the demand that there is as well as kind of supported in hospital-based monitoring and in kind of EI. So of course, we're tapping the opportunity and also growing and leveraging the strength of our portfolio in fullest. And that also holds true actually for IGT. So in IGT, the CSG has been high, especially if you look also then in terms of the compare from a 2 years comps in Q3, and that was also supply chain related. You see that kind of explains some of the LSD. But actually, we keep very much leading in IGT. The new launches are contributing to that. People are really excited about not only what we have been launching, but also the piping with Azurion and other innovations that we have. So actually, we remain very excited about the interventional opportunity that's out there and that we also keep pursuing. Then on the warning letter, no, I don't expect any impact to the CC because these are two separate topics. The CC has its own kind of SRC-related demand. As I mentioned earlier, we're fully on track in kind of working through those. This is a separate warning letter we need to address, and we are in full remediation of it. And as I said earlier, we don't expect any commercial impact of it. So in that sense, yes, it's a disappointment, and we are kind of acting it with very strong discipline follow-through, but we don't expect that to have any further operational impact. Operator: We will now take the next question from Mr. Richard Felton from Goldman Sachs. Richard Felton: Two for me, please, both on Connected Care. So first of all, I suppose just a follow-up on the strong order performance in Connected Care. Could you maybe add a little bit more color on what was driving that? And how much benefit was there from the longer-term partnerships that you signed in the quarter? And then secondly, on Enterprise Informatics specifically, I think it's roughly a year on since you extended your partnership with AWS to advance cloud services. How has that partnership impacted your Enterprise Informatics business from both a top and bottom line perspective? Roy Jakobs: Yes. Great questions, Richard. So let me start with Hospital Patient Monitoring and CC development there. I think we have been seeing strong demand on the patient monitoring side. And in combination with, I would say, really unique ecosystem that we have been building, we see us really winning. And that's not only kind of building on the momentum in the market, but also then kind of really taking positions also of competition. That is built also with partnerships. Now we mentioned two in the quarter, but it's not only of that, it's quite broad-based and also across regions. You know that we play mostly outside of China. So of course, CC doesn't have that China impact, but it's really kind of driving a very strong North America contribution. They're investing in patient monitoring, standardization, but also patient safety is important there to watch over their patients as well as the cybersecurity part. And we have been really also driving the partnership approach as you have been seeing. So we kind of offer a full open modular approach, and that's really working for the market and for our customers. So I think a winning formula there that we expect to continue to deliver results. And that not only has been driving order sales, but you saw also strong margin contribution because, as you know, the Hospital Patient Monitoring business is also a strong margin business. Then on EI, we also mentioned strong contribution from EI in the quarter. As I said, we drive, of course, EI for margin. So we saw margin improvement, but we also were very pleased with the order improvement. And that indeed is really also in combination with that offer that we have with AWS. The cloud migration is a big topic. Not only the cloud migration, we do also AI and some language model collaboration with them. So we see that really kind of supporting the engine. They're also doing some marketing and sales efforts because they, in essence, co-sell our solutions as well as that we, of course, support their cloud services when we go out to customers together. And that is a formula that also works within the market and with customers. So we see that kind of strengthening our approach, and that's indeed building the funnel and now also building the conversion since we started that collaboration with AWS. Operator: We will now take the next question from the line of Wim Gille from ABN AMRO ODDO BHF. Wim Gille: I have two questions actually. First, you reported 8% order intake growth in Q3, predominantly driven by CC this quarter. You also gave some color during this earnings call on the funnel for Q4, but I missed that answer. So can you reiterate it, basically giving a bit of granularity on how you see the sales funnel and the order intake develop into Q4 for both D&T as well as CC? The second question is related to E&I, Enterprise Informatics. As I understand it, order intake was pretty okay, but sales has been flat also in Q3 and was also quite disappointing or relatively low in the previous quarters. which reads a bit disappointing vis-a-vis market growth there. So what has been holding you back in the last couple of quarters? And when would you expect the order intake in E&I to come and convert into sales growth here? Roy Jakobs: Yes. Let me maybe take the first one in terms of the order momentum. So we said kind of when we look to the year, we expect a strong full year delivery of orders where we continue on the track that we have been building. So a positive order intake also into Q4, probably a bit more evenly based with CC and D&T. As I've said, kind of has been a bit lumpy through the quarters. But in Q4, we expect it to be more evenly based. Then depending on kind of what big orders will fall, you will see kind of this will have potentially some impact in Q4 or we see it next year back, but a strong finish in orders. Then on sales, also there, kind of we have said before, we are stepping up and also we will step up in Q4. And that will be across the different segments. So we will expect contribution from everybody in that step-up. So PH continue to be strong. We see CC continuing and also D&T stepping up. So in that sense, I think we maintain the momentum as we also signaled, and that's built up on the funnel. Now of course, still 2 months to go. So working hard to kind of get it over the finish line with our teams, but all kind of geared towards delivering upon what we also have guided for. And I think that's, of course, a reiteration of what we have been planning for and saying all year long. Charlotte Hanneman: Yes. And then maybe your question on Enterprise Informatics. Indeed, as you pointed out, our order intake has been very strong in Q3 for Enterprise Informatics, and we're very pleased with that. You probably also know that the order conversion cycle from order to sales in Enterprise Informatics is pretty long. So it will take quite a while for order intake growth to convert into sales. And Roy just spoke about AWS and our AWS partnership as well, which will also help contribute as we move customers to the cloud will also help drive sales growth there over time. Wim Gille: And in that transition where you are moving your clients to -- from on-prem to cloud, have you any indication -- can you give any indication where you are in that process? Is it like a quarter is done? Are you halfway there? Or are we now at the end of the conversion? Charlotte Hanneman: Yes. It's difficult to say, and it also depends really customer by customer. So we've done a number of successful conversions from on-prem to the cloud. But ultimately, the thing to keep in mind is that this will take time to fully execute on because it really touches also the hospitals and the hospital operations very, very deeply. So this will take time. But we've done a few that have been very successful. Operator: [Operator Instructions] We will now take the next question from Mr. Falko Friedrichs from Deutsche Bank. Falko Friedrichs: My first question is, how did the Respironics business perform in Q3? And are you seeing the momentum build as you reenter European markets? My second question is there has been a very large number of earnings adjustments again in the third quarter. Is that something you plan to significantly reduce going into 2026? Roy Jakobs: Yes. Let me take the first one, Falko. So on SRC, I think two parts. One, as I said before, of course, we have been driving very strong margin improvement. We have seen very strong margin realization in Q3 of SRC also that also contributed to the strong CC margin step-up. So that part of the strategy fully working. Also, we have seen really the OSA portfolio, so the sleep apnea portfolio stepping up. So we see actually as we're returning into the market, actually, that's something that is delivering growth to us. Where we see it being offset is with ventilation. There actually, we have improving portfolio and also been taking out. So that actually is going at the cost of the sleep momentum. So therefore, in the mix, you see that there is a slight pressure on the sales because of that ventilation reset. But we are very encouraged and excited by the fact that in sleep, both on the devices, but also the masks we see it stepping up. And that, of course, with the reentry that we have been doing across the various countries now in due course of this year. Charlotte Hanneman: Yes. And then Falko, I'll take your second question on the adjusting items. And although adjusting items came in significantly lower than we had guided for, I absolutely acknowledge that they're still high. And the moving pieces are, on the one hand, we continue to have costs related to the consent decree, Respironics consent decree, that will reduce over time. The other element is that we continue to have restructuring costs as we're continuing to simplify our operating model and to simplify Philips as a company. Now having said all of that, we are very much focused on, and it is a priority of mine to reduce adjusting items over time. So that is what we're fully focused on. There's a lot on the table there, a lot of strengthening of processes that we're doing. So over time, I see the reduction in adjusting items. And what I would also tell you is that adjusting items have already come down versus 2024 and 2025. So this is a journey and a trajectory we're on. Operator: The last question comes from the line of Mr. Oliver Reinberg from Kepler Cheuvreux. Oliver Reinberg: Two questions also from my side. Firstly, I just want to discuss the margin impact from innovation SKU reduction. I mean, I guess this is a kind of continuous effort. But can you just give us any kind of flavor in which year do you expect this kind of measures to peak? Will this probably be next year as the kind of order backlog is being worked through? Or would you expect the kind of margin contribution to be similar compared to 2025? And also, can you give us a flavor when you're pruning your kind of product portfolio, what was actually the headwind to comparable sales growth? Because my understanding is that you're not adjusting for that. And then the second question, if I may, just on Americas. I mean, you talked about different -- more uncertainty in some kind of regions. I was just wondering if this also relates to Americas where we pointed to different dynamics by region. So just try to get a kind of flavor how confident are you that this kind of growth in North America will continue into next year? Charlotte Hanneman: Yes. Thank you, Oliver. Let me take the first question on the margin impact from the SKU reduction, which we internally call Project Synchronizer. So what I would tell you, and if I take a step back on our margin improvement trajectory, we have consistently said that part of our margin improvement trajectory is related to gross margin improvement, and there are a couple of different reasons for that. On the one hand, we see improvement from gross margin driven by innovations and our innovations driving higher margins. So there's an aspect there. The other component, as you rightfully call out, is the SKU reduction where, for instance, we have pruned the number of transducers in ultrasound significantly, which leads to lower R&D costs, lower quality costs and lower supply chain costs. So all of that helps to drive improvement of margins, which is also again seen in Q3. So for instance, I'll give you one other data point there. Our gross margin in Diagnostic Imaging, where we've done also a lot of product pruning SKU reductions has improved year-over-year despite the tariffs. So that gives you a good sense of, on the one hand, we have the innovations like CT 5300, like MR BlueSeal driving gross margin expansion. On the other hand, there's also the impact from Project Synchronizer SKU reduction. Now if you then talk about how should we think about that year-over-year, this is a journey. So we've seen some impact in 2025. We'll see some impact in 2026 and the years to come. And then your last sub-question in your question was around the sales impact that we see from that. There's nothing really that I can call out there that stands out. There's not a major impact on CSG as I would see it now. It's really to focus on the great innovations that we have and doubling down on selling those with -- so that's what we're focused on. And then your second. Roy Jakobs: Yes, maybe conclude on North America. So actually, indeed, we see kind of winners and losers in the U.S. So we see some smaller hospitals really being pressured. They're also more dependent on Medicare, Medicaid patients. So some of those also in urban areas. So there, actually, we see there's a lot of pressure. We are working with them on productivity solutions more. And then we see the ones that are strong are expanding, and we're also very strongly winning with them. So therefore, actually, you have seen sustained momentum in North America, also our double-digit order intake growth. We actually expect that to continue. We have no signs yet that kind of this market from the needs that we are serving is cooling down. And that's, I think, good news. So we actually expect continued strength in North America. That's also why we have kept investing in winning in America with the further footprint, the specific customer relations and partnerships that we are concluding there, and we are excited about the opportunity there. Operator: That was the last question. Mr. Jacobs, please continue. Roy Jakobs: So thank you all for your questions. I think concluding, we delivered on our promise in Q3. Strong order intake growth, 8%. We had a positive step-up in sales growth to 3% and a margin expansion despite tariffs. Now we are fully focused on continuing to deliver in Q4 and therefore, concluding this year with in -- the reiteration of the sales range of 1% to 3%, we said that we would do upper end of our margin and strong cash delivery. And that will hopefully set us up for a good 2026, and we look forward to also kind of engage with you at the CMD. So thank you so much for your attention and your questions, and have a great further day. Operator: This concludes the Royal Philips Third Quarter 2025 Results Conference Call on Tuesday, November 4, 2025. Thank you for participating. You may now disconnect.
Operator: Hello, and welcome to the Exact Sciences Third Quarter 2025 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Derek Leckow. You may begin. Derek Leckow: Thank you for joining us for Exact Sciences' Third Quarter 2025 Conference Call today, November 3, 2025. On the call today are Kevin Conroy, the company's Chairman and CEO; and Aaron Bloomer, our Chief Financial Officer. Earlier this afternoon, Exact Sciences issued a news release detailing our third quarter financial results. This news release and today's presentation are available on our website at exactsciences.com. During today's call, we will make forward-looking statements based on current expectations. Our actual results may be materially different from such statements. Discussions of non-GAAP figures and reconciliations to GAAP figures are included in our earnings press release, and descriptions of the risks and uncertainties associated with Exact Sciences are included in our SEC filings. Both can be accessed through our website. I will now turn the call over to Kevin. Kevin Conroy: Thanks, Derek. The Exact Sciences team delivered record results in the third quarter. Thanks to the team's execution, we're raising our full year 2025 revenue and adjusted EBITDA guidance. A few highlights from the quarter include growing revenue 20% to $851 million, the highest quarterly growth rate in over 2 years. This was driven by Cologuard's strong brand awareness, inspiring commercial execution, accelerating health systems integrations and a record number of ordering providers. Screening 0.25 million more people in the third quarter versus last year, deepening our relationships with payers and health systems by helping close gaps in guideline recommended cancer screening and launching Cancerguard, our multi-cancer early detection test. Our team is focused on continued commercial effectiveness, expanding access to Cologuard Plus, and driving adoption of our new tests to close a strong year. I will now pass the call to Aaron to discuss our financial results. Aaron Bloomer: Thanks, Kevin, and good afternoon, everyone. Total revenue grew 20% year-over-year to $851 million, $43 million above the midpoint of our guidance. Growth was led by screening, which increased 22% year-over-year to $666 million. We saw broad-based Cologuard growth led by strong execution from the commercial organization, care gap programs and rescreens. Precision Oncology revenue increased 12% year-over-year on a core basis to $183 million. Growth was led by continued Oncotype DX expansion internationally, U.S. Oncotype DX volumes and partner revenues. We generated $135 million in adjusted EBITDA, an increase of $37 million or 37% year-over-year. Adjusted EBITDA margins expanded 200 basis points to 16%, driven by continued efficiency efforts across our lab, supply chain, G&A and support functions. Non-GAAP gross margins were 71%, down 100 basis points versus last year. The reduction was driven by record care gap shipments, which can cause a temporary timing difference between cost of goods and revenue. Free cash flow was $190 million during the quarter, an increase of $77 million. This was driven by increased receivables collections following the Cologuard Plus launch and continued working capital improvements. Year-to-date free cash flow is $236 million, an increase of $173 million or 270% year-over-year. We ended the quarter with cash and securities of just over $1 billion. Turning to guidance. We are raising total full year revenue to between $3.22 billion and $3.235 billion, an increase of $78 million at midpoint. This includes screening revenue between $2.51 billion and $2.52 billion or 20% growth at midpoint, and Precision Oncology revenue between $710 million and $715 million or 9% growth at midpoint. We are raising our adjusted EBITDA guidance to between $470 million and $480 million for the full year or 14.7% adjusted EBITDA margins at this point. Guidance at midpoint implies more than 47% adjusted EBITDA growth or about 300 basis points of adjusted EBITDA margin expansion. As stated on our last call, our adjusted EBITDA guidance does not reflect any potential impact from the Freenome licensing agreement. The upfront payment of $75 million will be expensed to R&D upon clearance of HSR, and it will not be an add back to adjusted EBITDA. Overall, this quarter marks an inflection point in our business. Momentum is building across the company. Operating leverage is expanding and cash generation continues to strengthen. We are well positioned to achieve our 2027 financial targets and create long-term value. Back to you, Kevin. Kevin Conroy: Thanks, Aaron. Strong Cologuard performance was driven by the trust patients, health care providers and health systems have in the Cologuard brand and our commercial organization. The iconic Cologuard brand is recognized by more than 90% of consumers. This brand awareness is driving increased adoption of Cologuard among the 55 million Americans who are not up to date with colorectal cancer screening. To have a trusted diagnostics brand, you need to have best-in-class performance. Cologuard Plus raised the bar for noninvasive CRC screening tests, demonstrating 95% sensitivity and 94% specificity. This performance leads to a 40% reduction in false positives compared to the original Cologuard. A recent modeling study published in the Journal of the National Cancer Institute showed that Cologuard Plus was the only noninvasive screening option shown to be efficient at guideline recommended intervals in age ranges. We continue to make progress expanding patient access to Cologuard Plus, including positive coverage decisions from each of the top 10 payers. In the third quarter, we also signed contracts with Aetna and Highmark to bring the added value of Cologuard Plus to their members. Backing the Cologuard brand is our patient-centered technology platform, ExactNexus. We've spent over a decade building a platform that is deeply integrated within primary care workflows. Our platform connects tens of millions of patient records and integrates access and awareness to accelerate adoption of new tests. Broad insurance coverage, deep provider engagement, health system integrations, and proven product quality allow us to deliver innovative diagnostics efficiently and at scale. The power of the Cologuard brand and our ExactNexus platform is driving triple-digit growth in a new patient demographic, customer-initiated orders or CIO. This enables individuals to easily request tests ordered online by a telehealth provider directly from their phones. ExactNexus is eliminating friction points for individuals who know they want to get screened with Cologuard. Our commercial engine continues to deliver strong results. The sales team is energized by territory realignments, AI-powered efficiency tools and new products, Cologuard Plus and Cancerguard. The changes we made are working. In the third quarter, we had over 12,000 providers order a Cologuard test for the first time, the greatest number in over 5 years. We also saw the number of active ordering providers climb to over 200,000, a new record. Our commercial team is firing on all cylinders, and they're just getting started. All these efforts will have a lasting impact and fuel momentum in Cologuard rescreens. Rescreens represent the growing base of patients that rely on Cologuard every 3 years to stay up to date on colon cancer screening. Today, these patients make up more than 1/4 of our total screening volume. In the third quarter, we launched Cancerguard, our multi-cancer early detection test. With a blood draw, Cancerguard screens for more than 50 cancer types and subtypes. This launch is a major step forward in our mission to help eradicate cancer through earlier detection. Today, only 14% of cancers are found through screening. Cancerguard will help address this problem. We are bringing Cancerguard to patients through many channels to maximize patient adoption, including primary care physicians, health systems, concierge practices and our CIO platform. We are leveraging our large sales force to educate providers about Cancerguard. In the third quarter, we trained the first group of sales reps on Cancerguard. We plan to train our entire screening and precision oncology commercial teams in the U.S. by the end of the year. On October 1, we launched our consumer-initiated ordering platform that allows people to request a Cancerguard test directly from our website and builds on the learnings of Cologuard CIO capability. Starting in the fourth quarter, we are investing in direct-to-consumer marketing, including social media campaigns to drive awareness of Cancerguard. Drawing on a decade of consumer marketing experience with Cologuard, these efforts leverage our trusted brand with the message that Cancerguard comes from the makers of Cologuard. We are excited about the launch, and we look forward to sharing more over the next few quarters. Our Precision Oncology team continues to be a global platform for growth. Oncotype DX delivered solid order growth globally in the third quarter. The strong summer was supported by effective commercial execution and the recent expansion in screening guidelines to include younger age groups. We are seeing positive momentum across our Precision Oncology portfolio, including OncoExTra, Riskguard and our recently launched MRD test Oncodetect. The Oncodetect launch is progressing well. We're seeing encouraging utilization in colorectal cancer and meaningful traction in breast cancer driven by synergies with Oncotype DX. Turning to our pipeline. One of our guiding R&D principles is to invest in areas where we can help patients the most. We have broad technological capabilities through our multi-omic platform, including our proprietary PCR and also deep next-generation sequencing capabilities. These technologies form the backbone of our novel tests. Our platform allows us to advance multiple single cancer screening tests in areas of significant needs such as liver, esophageal and endometrial cancers. Current screening methods for these cancers are outdated and lack effectiveness. Next week, at the liver meeting, the flagship International Congress hosted by the American Association for the Study of Liver Diseases, we will present ONCOGUARD liver data from the ALTUS study, A-L-T-U-S. This readout underscores the test potential to transform liver cancer surveillance for at-risk populations. During the fourth quarter, we will share data supporting Oncodetect's use in triple-negative breast cancer. In 2026, we also look forward to sharing clinical validation data in launching the next-generation version of Oncodetect that leverages our MAESTRO technology. We are investing in MRD evidence generation to support reimbursement and adoption. We have over 10 clinical validation studies planned over the next few years, including 4 key studies in breast cancer, colorectal cancer and pan-tumor indications. I'm very proud of the strong third quarter, the Exact Sciences team delivered. Our best-in-class products, trusted brands, patient-centered platform and commercial execution provide a foundation for long-term growth as we continue to make transformative new tests available to physicians and their patients who need them. We're now happy to answer your questions. Operator: [Operator Instructions] Your first question comes from Vijay Kumar with Evercore ISI. Vijay Kumar: Kevin, congrats on a nice spring here. My 1 question is on just the performance in the third quarter, quite remarkable here now for screening. Can you talk about what drove the speed, right? Was this care gap versus rescreens versus first-time rescreens? And related to that, I think the Street is looking at like 14% screening growth for 2026. You guys have done 20% year-to-date. So I'm curious on how -- any early comments on 2026. Kevin Conroy: Sure. Thank you, Vijay, and I'll let Aaron take the second part of that. But the first part, let's go back a year ago when we had a challenging quarter. The team really came together. I'm incredibly proud of the work that they did to deepen our relationships with health systems to design territories, allowing us to have total ownership of those territories, making more calls with better targeting, stronger messaging, so that you can really bring the Cologuard brand, which is known for its high -- strong test performance, sensitivity and specificity. Through our ExactNexus platform and then also bringing new products. So this is a total commitment on the part of leadership, and really more so on the part of our frontline sales force, our team members who are out there every day doing important work. And that's both on the screening side and the precision oncology side. So we could not be more proud of the work that is done, and we think that this sets us up for lasting growth and a flywheel effect so we can get those 50 million Americans who are not up-to-date with screening screened. Aaron Bloomer: And then, Vijay, specific to your comment on 2026, I think it's important to keep in mind the long-term guide that we have sitting out there, which is a 15% compounded annual growth rate from 2022 through 2027. And as you referenced, we're obviously accelerating in growth here through the back half of the year. The full year guide for screening is at 20%. The back half of the year is obviously even north of that. And so obviously, we're pacing ahead of our long-term goal, but it's important to note, our normal practice would be to provide our 2026 guidance at our next earnings call as we review the fourth quarter and look ahead to next year. Obviously, as Kevin alluded to, really pleased with the progress on the commercial side, the momentum that we have with care gaps, and then there's a lot of work we have to do in the coming months on Cologuard Plus contracting as well. Operator: The next question comes from Tycho Peterson with Jefferies. Tycho Peterson: Two hopefully quick ones. Aaron, maybe just on the care gap strength. How should we think about that continuing and then impact on margins going forward? And then for Kevin, can you just talk a little bit more about the Cancerguard strategy with payers and how you're thinking about reimbursement? Obviously, 1 of your competitors has a CRC first path on MCED reimbursement. So how do you kind of think about that as an approach versus where you're headed? Aaron Bloomer: So on the first part, Tycho, we had a record quarter in terms of our care gap business. We had our largest orders go out in the third quarter. And how we're thinking about this is we're really investing in our care gap program. Obviously, it's slightly lower gross margins, but highly accretive to the total bottom line. And this is really giving us an opportunity to partner with payers, helping them achieve their quality measures. It's also really helping us with patients, getting more and more of that 50 million to 55 million patients out there and get them up to date with screening. And so we view this as an investment that's really bringing accelerated growth here in the back half of the year, that obviously has both near-term as well as long-term patient and financial impact. As it relates to the gross margins, we would expect to see an uptick in the fourth quarter as we will have less care gap shipments go out in the fourth quarter relative to Q3. And again, as a reminder, these are typically back-half weighted. I think we've said in the past, more than 2/3 of the revenue kind of comes in the back half of the year. Kevin Conroy: Yes. As for the second question, as we talked about with Cancerguard, Cancerguard is priced at $689 distinct from other Medicare covered tests. We think the approach is being taken by others. It's an interesting approach. I think the more sustainable approach given the regulatory context and compliance context is to keep those 2 tests separate in the Medicare population in terms of the playbook to get coverage across Medicare and commercial payers, we think that, that is a long-term game, and we think that the work that is being done in this field by GRAIL, by Exact, by others, is work that will eventually captivate the payers to recognize the positive impact that screening can have. And that's the way that we look at this space. Operator: The next question comes from Patrick Donnelly with Citi. Patrick Donnelly: Kevin, maybe to stay on the screening side, can you just update us the latest on the time lines around Freenome? I know V2 is looming the FDA would love just an update on some of those time lines. And then on that same topic, just how you're thinking about your internal program? I know you kind of keep it going? Maybe just an update on how you're thinking about the 2 combined there. I appreciate it. Kevin Conroy: Really, thanks for the question. Really no changes there at all. In terms of the from Freenome V2 time lines. We expect that data to be presented in conjunction with a scientific conference sometime in the next few months. In terms of our internal program, yes, that continues. We haven't given more of an update there other than to say the Freenome test is now the exact test. We're really looking forward to making that available to physicians and patients through our deep network of providers that we have a relationship with over 200,000 ordering in the last quarter, over 250,000 total and our incredible commercial reach. So we're excited about bringing our blood test subject to regulatory approvals to clinicians and to patients. Operator: The next question comes from Brad Bowers with Mizuho. Bradley Bowers: Just wanted to hear about kind of the Cologuard to Cologuard plus Sunset plan. I would imagine, it sounds like you're more aligned with payers than ever and payers would want to have their members on the better test. So I just wanted to kind of hear about how you're thinking of pacing? Kevin Conroy: Well, thanks for the question. And yes, the Sunset plan is -- it's in the works. We -- I haven't provided public details of that at the appropriate time, we will. What's important is what you pointed out is that Cologuard Plus is a better test. There's no screening test that we're aware of that has 95% sensitivity and 94% specificity, no noninvasive test. And as a result, we are in active discussions with payers. The top 10 payers we're proud to report have all covered Cologuard. So they've issued a positive policy decision that Cologuard Plus is covered. And now we're in discussions with 6 of the remaining 10 to contract. So 4 are contracted, 6 remain and the -- there's a long list of additional smaller payers that we are focused on as well. And at some point next year, we will sunset Cologuard so that Cologuard Plus will be the test available to all patients. We think that's the right thing to do. It's incredible technology. It's differentiated, and it's good for patients. Operator: The next question comes from Catherine Schulte with Baird. Catherine Ramsey: Maybe just on your overall portfolio. You have some new products now with Oncodetect now covered by Medicare and Cancerguard launching. Are either of those material contributors in '25? And how should we think about measurements for success as those ramp in '26? Kevin Conroy: Thanks, Catherine. We do have these wonderful new products. As we've said from the beginning of the year, we don't expect them to be material in terms of the overall mix of revenues. Over time, we expect them to be very material. And those are big markets. They take time to penetrate. And we are pleased in terms of how they are progressing. Cancerguard, of course, just launched within the last couple of months. And as a result, that's nascent. But we're excited about what we're seeing and the growth that we have seen, not only week over week, but day over day. And we have big expectations there. And with Oncodetect, and I'm sure there will be more questions more in depth there. But we are doing all of the things you need to do in terms of getting the scientific evidence to secure a broad base of coverage so that we can go out there and serve patients in this large and growing opportunity. It's -- we're excited about it. Operator: The next question comes from Brandon Couillard with Wells Fargo. Brandon Couillard: Aaron, could you give us a sense of what Cologuard Plus contributed to screening growth in the quarter? And where you see that mix exiting the year? And Kevin, would be great to get an update just on care gap compliance and how that's playing out. And if you've been able to move the needle more using your compliance engine maybe relative to where you were 12 months ago? Aaron Bloomer: Brandon, thanks for the questions. On the first part, as it relates to Cologuard Plus, so when we originally did the guide for the year, we expected a couple of points in terms of contribution to growth coming from Cologuard Plus pricing and mix. What we saw in the third quarter, just given some of the progress we had made and updated everybody on the last call with Medicare and 2 of the top 10 payers, we were kind of in the 200 to 300 basis points range in terms of price impact on overall screening growth rates. With now having 4 of the top 10 plus Medicare, we would expect kind of in the 300 to 400 basis points impact on growth in terms of the fourth quarter. And you kind of package that all together, those 4 payers plus Medicare represent approximately 30% of our volume, which is where we will be exiting then as we head into 2026. And as Kevin alluded to earlier, obviously, in active discussions with the remaining top payers as well. Kevin Conroy: Thanks, Brandon. In terms of care gap compliance, let me first just remind folks what care gap is. Care gap is what we refer to payers who are approaching us to help them improve their CRC screening rates within their membership. And unfortunately, again, about half of the population in the U.S. eligible for colon cancer screening is not up today. And payers care about it. Health systems also care deeply about getting more of their members screened and capacity is limited with GIs having pretty much full capacity across the country. So what is occurring is they're approaching us to help get an order initiated, prescribed by a physician so that the patient gets a Cologuard kit. In terms of compliance, we see room for improvement there, Brandon. In terms of total volumes, we're seeing a significant year-over-year increase. As you may know, FIT programs, care gap program started about 20 years ago. That has been the predominant way to fill those care gaps. Many payers and now health systems are converting to Cologuard because they see an opportunity to secure a longer duration of somebody being screened and therefore, getting 3 years of credit versus 1 year of credit. And then also, they have fallen in love with our compliance engine, our ability to engage with patients. But the patients that we get are typically people who have refused screening over and over again. So I think it's just going to take more work for us to get the uplift we know we can with care gap compliance. We're pleased with the volume increase and the people we're getting screened that this, over time, we think can be even more impactful. Operator: The next question comes from Puneet Souda with Leerink Partners. Puneet Souda: First one, just wanted to understand the 6 commercial payers that are not in paying for Cologuard under the contracted rate, when do you think they will be contracted? If you can provide some time line on that? I'm just wondering, Kevin, on CRC blood, how are you thinking about pricing. And if the data was positive for V2, how are you thinking about pricing there? Kevin Conroy: So in terms of the contracting for Cologuard Plus with the remaining top 10, all I can say, Puneet, is that we continue to work with those payers. Eventually, we will sunset Cologuard and move all payers -- really move all patients to the newer and better tests. We have great relationships with the payers, and we have high hopes for getting that done sooner rather than later. So we won't be providing time lines there, but it's -- we're making strong progress. And then in terms of CRC blood pricing, we haven't decided that yet. Our philosophy around how we price our test is to secure the broadest access and impact. If you look at the effectiveness of a screening program, it equals the sensitivity of a test times the access that people have for the test and compliance. And those factors are the factors that impact screening. Access is so important. Commercial payers are sensitive to price, and they look at the performance of a test as part of that mix. So that's been our philosophy, how we end up pricing a blood test is probably going to be within our greater philosophy of bringing value to patients and to payers in a greater health care ecosystem. We think it's 1 of the reasons Cologuard has been such a wonderful success because of where we priced it relative to colonoscopy. Operator: The next question comes from Jack Meehan with Nephron Research. Jack Meehan: Just had a couple financial ones I wanted to ask. First is just more color on the $150 million cost savings program you've talked about in the past. Just how is that progressing and how you think that steps up into 2026? And then last quarter, you had the accounts receivable stepped up because of the timing of the Cologuard Plus payments. I was just wondering if you were fully caught up on that. It looked like yes, but I wanted confirmation. Aaron Bloomer: Jack. So on the first piece around the productivity program, really pleased with the progress that we've made. Just as a reminder, what we committed to was to deliver $150 million in savings in 2026, which would be about $100 million year-over-year impact. We're progressing very nicely against that. The actions that we need to take to deliver against that have been taken. If you think about the other component to that is the onetime expenses. And last quarter, we guided to kind of $90 million to $95 million in 2025 and then $105 million to $120 million in total. We're going to come in a little bit lighter on that, which is a good thing. So we now expect approximately $85 million in terms of onetime expenses for this year. So making good progress and the team is executing against that nicely. As it pertains to the AR, yes, all of the AR from Q2 related to Cologuard Plus has now been collected on in the third quarter. And maybe just take a step back on just the progress that the teams have made across Exact to really lean in and deliver record amounts of free cash flow for the company. On a year-to-date basis, we're at $236 million. And obviously, the strength in the third quarter obviously came from collecting on the Cologuard Plus claims, but also all of the progress that the teams have really made in terms of working capital improvements. So inventory optimization as well as renegotiation of payment terms with suppliers. So really, really pleased with the progress that the team has made across the company. Operator: The next question comes from Dan Brennan with Cowen. Daniel Brennan: Congrats on the quarter. Maybe just one. I know Aaron, in the past, you've typically updated in terms of the contribution within the screening guide between the different buckets, whether it's first-time users or care gap or rescreens, you've given some color. I wonder if you can disaggregate that, like how you're thinking about that for the year and maybe for the fourth quarter? And then just any comment on OpEx. Sales and marketing kind of was below our expectation. R&D was above. Just wondering kind of moving pieces, as we head into the fourth quarter, how we think about like the different buckets within OpEx. Aaron Bloomer: Thanks, Dan. So we saw broad growth in the third quarter, really across all lines of business. And no matter which way you cut it, 50-plus, 45 to 49 rescreens, care gaps, CIO, all elements of the business was growing north of double digits. So really pleased with the progress. All of the commercial improvements that Kevin alluded to earlier, we're really seeing that flow through, not only in the leading indicators in the sales rep productivity, but now obviously also into volumes. I think we talked at length already about care gap and the record amount of volume that we're seeing there as well. Just in terms of some of the OpEx items, yes, R&D spend did step up a little bit in Q3. We would expect similar levels of spending in Q4. A lot of that is tied to all of the clinical evidence generation and the work we're doing to continue to improve our Oncodetect test and get additional cancer indications on that into the future. In terms of sales and marketing, Kevin talked about that earlier as well, but we would expect and are investing in our Cancerguard launch, particularly as it pertains to marketing and then you'll probably start to see whether you're watching on YouTube or Netflix or any of the other social channels, you'll start to see some Cancerguard ads start to take flight here as soon as this week. Operator: The next question comes from Doug Schenkel with Wolfe Research. Douglas Schenkel: Just a couple of questions. So first on seasonality. The fourth quarter has typically been a seasonally weaker quarter due to the holiday season. Obviously, your guidance implies this is not the case this year. Some of that, I think, is just the assumption that ASP is going to increase sequentially. I think the balance of that is care gap. Do I have that right? And if so, is that probably the right way to think about your business moving forward, meaning not just this year? And then my second question is on CRC blood, it may be too early, but I'll ask anyway. I'm just wondering if you have a good handle on how to manage that launch in a way where there is no channel conflict. And as we think about the P&L, at least in terms of gross profit per test, is there a way to price that test in a way where there's -- we're going to see the same level of gross profitability, whether it's stool or blood. Again, it's early, but just curious if you guys have given any thoughts to that, that you'd be willing to share? Aaron Bloomer: I'll start maybe the first piece there, Doug, just on the seasonality. Care gaps obviously are just with the tremendous demand that we're seeing from payers are becoming a larger part of our business. And again, given the lumpy nature that those programs have, i.e., they're back-end loaded. That certainly would distort some of the more traditional seasonality trends that we had in our business. And I would just flag in particular, if you think about this Q4 guide and then what that implies for a typical Q4 to Q1 step down in terms of sequential growth as we head into 2026. And again, all driven by the strength in demand in our care gap programs. You did hit on pricing. Pricing will be up slightly sequentially from 3Q to 4Q, but that's really only about 100 basis points in terms of the overall uplift. Kevin Conroy: And for the second part of the question, Doug, around CRC blood and our launch of our CRC blood test we license from Freenome. We will take lessons from the launch of Cologuard and the launch of Cologuard Plus and our unbelievable analytics around what patients have refused Cologuard or even colonoscopy over time so that we can get the right test to the right patient at the right time. And that right test may be a blood test for a patient who has consistently refused colonoscopy or a stool test. So that's important. It's -- there are a huge number of people that are in that refuser camp and getting them tested with a test that has lower performance is better than no test at all for sure. We will price that in a way so that we can maintain margins as much as possible. But we just don't see a conflict here because we'll be out there educating physicians, clinicians, PAs, nurses about what patient population is appropriate for each test. So we think of this has expansive. The way we think about this program is expansive to where we are today with growth. And because of the fact there are 50 million people not up to date with screening, there's plenty of room for growth, significant growth with Cologuard and with our CRC blood test. Operator: The next question comes from Andrew Brackmann with William Blair. Andrew Brackmann: Kevin, I think you made a comment that you're seeing encouraging signals with the MRD launch and in particular, in the breast indication. Anything more you can share with respect to how you're sort of thinking about the halo effect that Oncotype brings to that indication in particular? Any signals or color that you can provide there? Kevin Conroy: Yes. Thanks, Andrew. It's been 21 years of Oncotype depth among oncologists, surgical oncologists, pathologists. The customer trust us with that tissue block. They trust us in the breast cancer space. So as you think about the adoption curve, in breast cancer, we think that is a natural starting point for us. Also our strength in colon cancer is also a natural starting point. The studies that we are doing in breast cancer include what we call the Exact DNA 003 test, which is -- or study. That's a study enrolling over 1,800 participants, with the -- in conjunction with NSABP. And then also, we are enrolling a pan-tumor study that has enrolled across 10 different tumor types, including lung cancer. And so we -- the evidence is going to mature. And as we get breast cancer coverage, we expect to be able to really start to more deeply penetrate that customer base. And we're excited about the ability to do that. The other thing that will unlock value is the MAESTRO technology which is whole genome approach for our next version, and we expect that to launch through 2026. It would be used to support other indications. It's important to start with breast. The ability to look broadly across these thousands of different mutations while reducing the sequencing depth and achieving this ultra-low limit of both potential below 1 part per million at an attractive cost point is a differentiator. And so that is work to be done. It's a huge market. It's growing. It's underpenetrated at the current time, and we think that our commercial organization and reputation among oncologists will be a great starting point. Operator: The next question comes from Dan Arias with Stifel. Daniel Arias: Aaron, maybe just following up on rescreening. What percentage penetration are you assuming that you'll be able to achieve there this year? I know you were thinking mid-50s as a percent back in the starting -- at the start of the year. That feels a little light just given the strength here, but would love to know just what an updated view would be and whether you think that number should move higher next year. Aaron Bloomer: So rescreens continue to kind of be in that mid-50s to high 50s. We've continued to make progress on that throughout the year, Dan. I think if you take a step back, 1 of the things that we're really trying to do is automate the rescreen process. And there's a number of different things that we have in flight to be able to do that. And what we have said is that over time, we think that we can get that up into the 70% or 75%. And the reason for that is because we know that the key to getting people rescreened is getting that prescription. And that once we get the prescription and ship the kit back to that patient, we know that the compliance rate is anywhere from 80% to 95%. And so that's what we're laser-focused on right now. No more to update on that. We'll keep you all posted as to what that means for future financial guidance. Kevin Conroy: Yes. The goal really is to automate the screening process so that people get screened and stay screened throughout the duration of the recommended screening time period. That's important. It's one of the unique things that we can do with Cologuard and the ExactNexus platform that we have invested so heavily in over the last decade. Operator: The next question comes from Bill Bonello with Craig-Hallum. William Bonello: I wanted to follow up on the telehealth comment that you made, the consumers or patients being able to order directly. Can you just talk a little bit about how that then integrates with the primary care physician, if you have that information or are able to get that information. Does that information get channeled back to the PCP? Would the PCP still get quality credit for that patient being screened? Is there any potential conflict there if the test is ordered via you rather than being prescribed by their PCP? How do we think about that? Kevin Conroy: Well, thanks, Bill. Yes, that's something that we're really sensitive to as we rolled out not only CIO, this customer-initiated ordering but also rescreen and care gap programs. And 1 of the beautiful things about the ExactNexus platform and the power, which is powered by Epic is that the MyChart account gets integrated ultimately, and we're -- that may take the next couple of years to really bring that to its maximum impact. That allows patients and physicians to see any type of test that is performed anywhere ultimately gets back into one single electronic medical record. We -- so that then enables a physician to get full credit for all of the screening regardless of whether they initiated it, and allows payers, which are on -- moving to the payer platform that allows them to see that as well. It's a powerful tool, us being on Epic, one of the nodes of Epic really creates the ability for us to do some pretty unique things in terms of managing the health at a population level. This is 1 of those really positive stories. Operator: The next question comes from Mike Ryskin with Bank of America. Michael Ryskin: I want to follow up on a couple of points you guys touched on earlier. I mean, first, the gross margin you called out, I think 100 bps headwind, I think you kind of tied to the record care gap strength. Just to make sure just relatively speaking, talking about care gap being strong again in 4Q. Is that relatively the same impact we should expect then? And then just to make sure I got it right, reverses in 1Q and 2Q just from the seasonality. So I just want to make sure I got the moving pieces right there. And then I'll throw on a follow-up at the same time. I want to bridge the revenue raise to EBITDA, really solid beat, obviously, a nice raise. But even it didn't come up quite as much. Is that the gross price impact, that difference there or maybe some of the incremental R&D investments you talked about earlier, I think when Dan Brennan was asking on OpEx. Just kind of talk about the lines between GM and EBITDA? Aaron Bloomer: There's a lot of questions there, Mike. I'm going to do my best to unpack all of those. So on the gross margin piece that we saw in the third quarter, yes, it was exclusively limited to just kind of the record demand that we saw within our care gap programs. We would actually expect 4Q gross margins to step up. And if you look at kind of where consensus gross margins are in the fourth quarter, it does imply a step up, and we certainly would expect that as well. And the reason for that is because we don't actually ship as many care gap programs out in the fourth quarter as we do in the third quarter or the second quarter. And the reason for that is because the payers, again, really want to try to get patients screened through their PCP early on in the year and then kind of turn to these larger care gap programs as you get into the middle part of the year, they want to ensure that they achieve their quality score. And so then we would expect an uplift in 4Q as well as then in 1Q of 2026. On your question as it relates to the flow-through and the EBITDA guide, I think it's an important point to, to just kind of take a step back, which is this is going to be our second consecutive year with nearly 50% adjusted EBITDA growth. Margins in the back half of the year are going to be in the 16% to 17% range and well on our way to achieving the long-term goal that we have of 20%. If you look kind of down the P&L line, where we're seeing the most amount of leverage right now continues to be from G&A. We've talked about the productivity plan, G&A as it stands already right now, it will be down about 700 basis points on an adjusted basis versus where we were 2 years ago. But we have said that this year was going to be a year of investment. Some of -- on the R&D side, Kevin just talked about some of the areas we're investing as it pertains to MRD and the clinical evidence generation that we want to generate in that very, very large underpenetrated market. And then in the back half of the year, really on sales and marketing expenses, specifically marketing for Cancerguard. Again, very, very large market. We don't have to add salespeople to be able to get after that. We really want to tap into this large market that exists, and we're putting our full back behind that and look forward to sharing updates in coming quarters and years on how that launch is progressing. Operator: The next question comes from Subbu Nambi with Guggenheim. Subhalaxmi Nambi: A couple of model cleanup questions and then 1 topic on Cancerguard. What were the Cologuard ASPs this quarter? Were they up quarter-over-quarter? And did I hear you right that Cologuard volumes grew 250,000 tests year-over-year? That's one. And on the topic of Cancerguard, you have an unparalleled PCP commercial infrastructure. That said, given this is largely a cash pay market at this point, I'm curious how impactful you expect the PCP commercial infrastructure advantage to be? Aaron Bloomer: On your first point, Subbu, the ASPs were up sequentially from Q3 versus Q2, and we would expect them to be up sequentially again in 4Q versus 3Q. And yes, we screened more than 0.25 million people more this quarter than we did a year ago at this time. Let's say that again. We screened in this quarter more than 250,000 more patients than we did a year ago. So yes, those are the modeling questions that you had. And then Kevin, maybe you want to take the Cancerguard question. Kevin Conroy: Yes, I think it's a good question. Subbu, as I've been out talking with our field reps, one of the things they're acutely aware of is which offices in their territories have patients that would be willing to pay for a Cancerguard test. And so that will become an important part of our sales forces conversations. It will get them more access. We believe we're seeing that happen already. It is -- you're bringing up a good point. It's not easy to -- in the U.S. health system to get people to pay out of pocket for a novel technology, but something that is important as a multi-cancer screening test, we believe we will see uptake here. It will take some time, just like Cologuard did. We're pleased here in the early month or 2, the early days of this launch, and we think that a significant advantage will not only be our frontline sales reps, but also the relationships that we have with health systems. We're trusted because they trust us with the quality of the tests that we develop and bring to them, the ability to electronically order and get resulted for a test, our customer service. They know that they can call us any time, day or night and get an answer that is needed. So all of this ecosystem, our human capability, our systems capabilities are important. Another part of our company that is important is you remember back when we acquired Genomic Health, one of the 3 things we said that was important that we loved about Genomic Health was their international reach. Cologuard has much broader applicability outside the U.S. than even inside the U.S., which is pretty significant in the U.S. And the team just -- we just got back from our international headquarters where the team laid out their plans for launching Cologuard around the world. They're revving up their teams to be able to deliver this, and we're excited about that aspect of the platform, the Exact Sciences platform as well. Operator: The next question comes from Mark Massaro with BTIG. Mark Massaro: Congrats on the strong 22% growth in screening this quarter. But I wanted to ask about the Oncodetect MRD test. I appreciate the commentary about the meaningful lift in breast cancer and the encouraging utilization in CRC. Kevin, I'm just curious, do you think that Oncodetect could become at least a material contributor to your Precision Oncology business in 2026. You did put up double-digit or 12% growth in PO. I'm just trying to figure out how much of that strong growth this quarter came from OncoExTra versus Oncodetect? And any thoughts about '26? Kevin Conroy: Mark, it's too early really to give much color in terms of 2026. And as we said, Oncodetect is not material to this year's revenue, but over the long call, and we really tried to -- it's been core to who we are thinking about the long term. When we developed Cologuard, we've developed -- when Genomic Health developed Oncotype, those were long-term investments that over time you're able to win because you do things the right way. And I'm proud that the team is doing things the right way in terms of gaining the evidence needed to then go to the customers, show them that evidence and convince them that our test is the best test for their patient. And so I -- we love what we're seeing so far, and we expect to be able to demonstrate that quantitatively in the future. Aaron Bloomer: And then just in terms of -- then within the third quarter, and obviously, we are really pleased with what the PO team delivered in the third quarter as well, double-digit growth in our Precision Oncology business. That didn't come from Oncodetect. As Kevin said, it's still early days, but it does speak to the strength of Oncotype DX. And so Oncotype DX continues to expand and penetrate in international markets. And we also saw a nice uptick in volume in Oncotype DX in the U.S. as well. Operator: The next question comes from Luke Sergott with Barclays. Luke Sergott: Just a quick cleanup on the Freenome simple screen with the FDA. I jumped on here at Eli Lilly. I don't know if you guys gave an update of when you expect the FDA to kind of give you any feedback there or any type of feedback you've gotten and types of updates you guys need to do? And then I guess, more longer term, as you think about the launch of that -- of simple screen within that market. I mean you guys have a massive CRC screening database. And for whatever reason or not, whether it's a failed or a Cologuard test or just shipping test out, realizing patients don't want to do that. That seems like a pretty low-hanging fruit to me as you kind of launch and think about commercializing this test? And can you use that also as you think about MCED going forward, too? Kevin Conroy: Thanks, Luke. Yes, to that last question. Yes, the -- our relationship with -- well, with over 30 million patients and more than 250,000 primary care physicians and then oncologists and beyond. You have GIs and OB/GYNs. We're a source of trust in terms of our CRC blood test that we plan to bring to clinicians and to patients. We have the ability to meet what the NCCN and who else was it? ASGE, AGA recommended in terms of the blood test are. They're not as effective as Cologuard, Cologuard Plus or colonoscopy. They're just not. But the right test for the right patient at the right time, somebody who doesn't get screened at all for colon cancer, well, we know who 10 million of those people are because we have sent them a Cologuard kit, and they haven't returned it. Now that's over 11 years. And over time, that base of customers build. So we're able to work hand in glove with health systems to identify patients would be appropriate for a blood test. If that patient comes into the office, okay, they've tried to get a colonoscopy order. They have tried to get a Cologuard test. Now how about a blood test. We are in a unique position there to help that patient get screened and nothing is more important than getting patients screened. Operator: The next question comes from Kyle Mikson with Canaccord. Kyle Mikson: Congrats on the quarter. So on the CRC blood partnership, just a couple on that. So on the data that's, I guess, due early next year. Is that the V2 data that will ultimately trigger the $100 million opt-in payment upon FDA approval? Or is that -- is the data related to that payment coming later in the year, later in '26? And secondly, something that's kind of come up in like my conversations, for example, is how do you prevent the partner from gaining access to your accounts in certain scenarios such as if the provider opts in for the FDA/CMS version and the ownership of the customer kind of switches to the partner? Kevin Conroy: So in terms of the Freenome V2 data, let's be clear about this. There is data that is kind of concept data, and then there is a pivotal study that is -- that will be underway. The initial data is the data that will be forthcoming and sometime in the next few months. The pivotal data is data that would come next year. And we don't know exactly when that data would come next year, but it's the pivotal data that is -- will be used to submit to the FDA, and that's the important thing. In terms of FDA approval, that will be on the V1 data, which was submitted in August, and it takes about a year. In terms of any confusion about who gets the credit for CRC screening. We have the exclusive right to market CRC screening test and Freenome intends to launch a lung screening test and eventually a multi-cancer screening test, but the CRC blood screening test is ours exclusively to market. Operator: This concludes the question-and-answer session. I'll turn the call to Kevin Conroy for closing remarks. Kevin Conroy: Thank you all for joining today and to the Exact Sciences dedicated team for their commitment to deliver on our mission of eradicating cancer. Thank you. Operator: This concludes today's conference call. Thank you for joining. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to ZoomInfo Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would like now to turn the conference over to Jerry Sisitsky, Vice President of Investor Relations. Please go ahead. Jeremiah Sisitsky: Thanks, Michelle. Welcome to ZoomInfo's Financial Results Conference Call for the third quarter 2025. With me on the call today are Henry Schuck, Founder and CEO of ZoomInfo; and Graham O'Brien, our Chief Financial Officer. During this call, any forward-looking statements are made pursuant to the safe harbor provisions of U.S. securities laws. Expressions of future goals, including business outlook, expectations for future financial performance and similar items, including, without limitation, expressions using the terminology may, will, expect, anticipate and believe and expressions which reflect something other than historical facts are intended to identify forward-looking statements. Forward-looking statements involve a number of risks and uncertainties, including those discussed in the Risk Factors section of our SEC filings. Actual results may differ materially from any forward-looking statements. The company undertakes no obligation to revise or update any forward-looking statements in order to reflect events that may arise after this conference call, except as required by law. For more information, please refer to the forward-looking statements and the slides posted to our Investor Relations website at ir.zoominfo.com. All metrics on this call are non-GAAP, unless otherwise noted. A reconciliation can be found in the financial results press release or in the slides posted to our IR website. With that, I'll turn the call over to Henry. Henry Schuck: Great. Thank you, Jerry, and welcome, everyone. We are executing well and capitalizing on a rapidly growing AI opportunity and go-to-market. In Q3, we continued to improve the business across every metric. GAAP revenue was a record $318 million, up 5% year-over-year, and adjusted operating income was $118 million, a margin of 37%, both were above the high end of our guidance with the highest level of AOI margin we've reported since Q4 of 2024 and the first time we exceeded the Rule of 40 since Q1 of 2024. During the quarter, we accelerated upmarket growth, improved net revenue retention for the fifth straight quarter, delivered another quarter of strong profitability and are again raising our financial guidance for the year. We are aggressively expanding the product portfolio with innovative go-to-market AI and workflow products as we continue our shift upmarket. I believe we are building and delivering the best solutions that we've ever put in front of customers, which is driving stronger daily engagement from a diverse set of go-to-market personas. Our operations suite again grew more than 20% year-over-year as our proprietary data asset continues to prove mission-critical to any AI-driven initiative that touches go-to-market. This is our fastest-growing product, and it's accelerating as it gets bigger. And with the launch of Copilot last year, its expansion into GTM Workspace this quarter and the evolution of our GTM Studio platform, we've begun to play offense again. Through the innovation we are driving, I believe it is only a matter of time before ZoomInfo will be synonymous with AI and go-to-market. We believe that our unique and proprietary data assets put us in the winners column as AI proliferates across go-to-market teams. While LLMs can reliably deliver data points available through the second or third page of search results, it is unique data not available on the public web that go-to-market teams require in order to stand out in increasingly competitive markets. If a customer is looking for every residential or commercial roofer in the United States or every company with at least three vehicles in their fleets or every non-franchised quick service restaurant in a certain ZIP code or to identify the buyers visiting their website or researching their competitors, they come to us, not just for this unique data asset, but also for our ability to tie that data asset to our contact and signal data and put them in a position to execute a sales or marketing workflow around these go-to-market attributes. By using Copilot and GTM Workspace, frontline go-to-market professionals get a single pane of glass to execute their daily workflows. GTM Studio is already generating strong interest from operations leaders and their counterparts in frontline sales leadership as they look to close the gap between idea and execution. We're also winning with our account-based marketing platform. ZoomInfo is recognized as the only vendor positioned in the Customers' Choice quadrant in the 2025 Gartner Voice of the Customer Report for ABM platforms, and we added millions of ACV in the quarter as customers like EmployBridge, Ciena, and MasterControl migrated from legacy ABM providers to our integrated ABM platform. With our Salesforce partnership, ZoomInfo Revenue Agent is now bringing the industry's most comprehensive B2B data and agents directly into Agentforce. Our data is enabling sales teams to use natural language queries to uncover hidden opportunities and engage the right contacts at the right time within their existing Salesforce workflows. Through our expanded platform, our unique and proprietary data asset and through recently released partner integrations, our pace of innovation continues to accelerate. During the quarter, we closed upmarket opportunities with insightsoftware, a fast-growing software provider to the office of the CFO, Ryder System, a $12 billion transportation and logistics company; BrightView, a multibillion-dollar commercial landscaper; and Circle K, a multinational convenience store brand. These wins highlight our focused move upmarket and the large total addressable market we have across a wide range of industries. Additionally, a global professional services firm expanded ZoomInfo enterprise-wide, adding sales seats, data and our marketing and talent solutions. Their CMO called it a no-brainer to improve sales pipeline generation, identify active buying signals, reduce wasted time on unproductive leads and connect with the right decision-makers. A large private unified data and AI company is now leveraging our sales intelligence platform to power its land-and-expand sales motion across enterprise accounts while also using us to efficiently penetrate new verticals. We demonstrated to one of the largest companies in the world how our data provided a 25% improvement in coverage rates compared to their existing data provider, including far superior coverage in the SMB and start-up space. Through company data initiatives, we have increased match rates for customers by more than 20% over the last 6 months. This data advantage is increasingly creating upmarket displacement opportunities from organizations using legacy vendors that provide stale and low-quality data. And many of the world's fastest-growing and most innovative AI native companies like Levelpath, Harvey, Pano.ai, and TiLT choose ZoomInfo as they scale their sales teams and need data signals and workflow to scale in the enterprise. To continue to win, we are providing our customers more than just another fragmented tool or another buzzy solution. We are providing the unified data foundation that connects CRM data, engagement signals, intent data, call transcripts, and market intelligence into one AI-ready system, giving sellers AI to allow them to shift their focus away from the time-consuming low-value tasks of building decks and account plans, filling out CRM fields, prioritizing prospecting lists, writing follow-ups and on to the art of sales, building relationships, adding consultative value and closing deals. For 20 years, ZoomInfo has been the trusted source of truth for company and contact data. That foundation isn't going away. It's becoming the launch pad for something much bigger. Today, our master data management capabilities unify fragmented go-to-market data across systems into a single intelligence layer, clean, connected, constantly updated. And now we turn that intelligence into action. With GTM Studio and GTM Workspace, execution becomes automatic. Sellers, operators, leaders, even their AI agents know exactly where to focus, what to do next and how to move the number. We're moving from powering decisions to powering outcomes from informing go-to-market to executing it. As we innovate for our customers, we continue to be focused capital allocators for our shareholders. In the quarter, we delivered a nearly 300 basis point sequential improvement in margins and are raising our growth expectations for the year. We remain confident in our ability to sustainably deliver revenue growth and expanding margins. And we continue to be aggressive buyers of our stock. We are increasingly confident in the trajectory of the business, which gives us even more conviction that our ongoing share repurchases will drive substantial shareholder value, and we will continue to put the majority of the cash we generate into repurchasing ZoomInfo shares for as long as that is the best and highest return use of our free cash flow. AI is giving us an opportunity to capitalize on our proprietary data assets. We are building stickier user engagement and customer relationships, and we have improved net revenue retention for the fifth straight quarter. With that, I'll turn the call over to Graham. Michael O'Brien: Thanks, Henry. Q3 GAAP revenue was $318 million, up 5% year-over-year, and adjusted operating income was $118 million, a margin of 37%, above the guidance ranges we provided. Over the last few quarters, we have highlighted the stabilization we have seen in the business. And this quarter, I'm excited to share several places where I now see signs of improvement. As you know, we have sharpened our focus on our upmarket business, which now represents 73% of our total ACV, up 10 percentage points in 2 years. This continued focus drove a 2-point acceleration upmarket with 6% upmarket ACV growth, coupled with a sequential improvement down market, which declined 10% year-over-year as compared to 11% in the prior quarter. Net revenue retention improved to 90% in the quarter, up 5 percentage points in the year and the highest level of NRR we have seen since Q2 2023. In-period net revenue retention for upmarket customers is again over 100% as we further entrench ZoomInfo as a mission-critical piece of the way scaled businesses go to market. We have always operated efficiently with disciplined investments driving high levels of profitability, and I am pleased to report a 37% adjusted operating income margin in the quarter, delivering year-over-year margin improvement, which, combined with our revenue growth, returned us to a Rule of 40 company for the first time in 6 quarters. We now have 1,887 customers with more than $100,000 in ACV, a 4% year-over-year increase in customers with ACV growth from that cohort materially outpacing customer growth. ACV growth in the quarter was particularly strong for this cohort. And next to Q4 last year, this is our best result in several years, adding 5x more ACV across our $100,000 logo cohort than we did in Q3 last year. ACV for the $1 million cohort accelerated in the quarter and was up more than 30% year-over-year. We delivered strong results this quarter, and we are again raising our expectations for the full year. Our upmarket strategy is working. Our innovation engine is accelerating, and our execution has been consistent. We are now guiding to low single-digit revenue growth for 2025 with an AOI margin of 36%, and we are confident in our opportunity to return to delivering Rule of 40 results on an annual basis as we drive a combination of revenue growth and expanding margins. And as opposed to a dynamic where equity is deployed as a substitute for cash compensation, our stock compensation relative to revenue runs well below software industry norms and continues declining with an increasing shift towards performance-based equity. And as a result, our Rule of 40 reflects a high-quality mix of strong operating performance and financial discipline. Operations growth accelerated in the quarter, continuing to grow greater than 20% year-over-year, and Copilot had another strong quarter. While still early, Copilot renewals are very promising with a mid- to high single-digit improvement to uplift on initial renewal as compared to renewals on Sales OS. As we focus on driving growth upmarket, we also remain steadfastly focused on making our downmarket business healthier as we do more to make it easier for smaller customers to buy the packages they need while reducing our cost of selling to the right customers in this segment. Our internal teams have done an excellent job leveraging ZoomInfo's proprietary data asset to engineer this shift. We built models identifying payment risk among smaller customers using our data to underpin collection risk prediction and new business risk scoring models. These integrate directly with our Salesforce instance and are fueled by ZoomInfo data to provide real-time risk assessments. Leveraging these models, we successfully reduced invoice write-offs by 45% since launching in 2024. In addition, the nature of our write-offs has changed with most write-offs now stemming from installments later in the contract of downmarket customers and the prevalence of write-offs where no payment was received is at all-time lows for the company. The quality of our customer base is improving, which is driving better conversion to revenue and improving collection trends. One item I would note is that as our business shifts upmarket, it is becoming more seasonal. And as such, year-over-year growth is becoming a more important lens through which to evaluate the business, while sequential growth is becoming less important. We expect the pattern of sequential revenue growth to fluctuate throughout the year, and you should not be surprised to see periods where the sequential trend steps up or down due to the amount of upmarket or down market activity and the linearity of ACV added in the current or prior quarter. With operations acceleration, positive Copilot renewal outcomes, a smaller downmarket business and improved upmarket NRR, overall net revenue retention continues to be on a positive trajectory, up 5 percentage points in the year. We also continue to shift customers to longer-term contracts with more than 50% of our overall book of business on a contract length greater than 1 year. This enables reps to be more consultative with customers and drives efficiency across the renewal process, which we will expect -- which we expect will continue driving better renewal outcomes and improving NRR over time. Turning to cash. Operating cash flow was $94 million in Q3. Unlevered free cash flow for the quarter was $95 million, an 81% conversion from adjusted operating income, consistent with seasonality from prior years and representing a margin of 30%. In Q3, we repurchased 8.3 million shares of common stock at an average price of $10.46 for an aggregate $87 million. Weighted average diluted shares outstanding for the quarter used in calculating non-GAAP diluted earnings per share was 334 million, and the non-GAAP share count exiting the quarter was 330 million. We have used 116% of the unlevered free cash generated since the start of 2024 to repurchase shares of stock, reducing our weighted average shares outstanding by approximately 80 million shares over the last 2 years. We expect to continue to use the cash flow we generate each quarter primarily to retire shares of ZoomInfo, and we are committed to opportunistically taking advantage of dislocations in share price as we remain resolute that share repurchases will generate the best possible long-term return for shareholders when done at a deep discount to intrinsic value like we see today. We ended the quarter with $135 million in cash, cash equivalents and investments, and we carried $1.3 billion in gross debt. As a result, our net leverage ratio is 2.6x trailing 12 months adjusted EBITDA and 2.4x trailing 12 months cash EBITDA, which is defined as consolidated EBITDA in our credit agreements. With respect to liabilities and future performance obligations, unearned revenue at the end of the quarter was $432 million and remaining performance obligations or RPO, were $1.17 billion, of which $824 million are expected to be recognized in the next 12 months. For those looking at calculated billings, the mix of our balance sheet reserve estimates and the changes in practices that we made relative to higher-risk businesses requiring prepayment in advance drove higher-than-normalized growth in calculated billings in Q3 last year. And as a result, I would caution you from extrapolating too much from the calculated billings growth trajectory in Q3 this year. In summary, we delivered strong results for the quarter with meaningful signs of improvement. Shifting to guidance. For Q4, we expect GAAP revenue in the range of $307 million to $310 million, adjusted operating income in the range of $117 million to $120 million and non-GAAP net income in the range of $0.27 to $0.29 per share. We are again raising guidance for the full year. And for 2025, we now expect GAAP revenue in the range of $1.237 billion to $1.240 billion, representing positive 2% annual revenue growth for the year at the midpoint of guidance and adjusted operating income in the range of $440 million to $443 million, representing a 36% margin at the midpoint of guidance. We expect non-GAAP net income in the range of $1.04 to $1.06 per share based on 341 million weighted average diluted shares outstanding, and we expect unlevered free cash flow in the range of $424 million to $444 million. In closing, we remain committed to properly managing expectations using a guidance framework consistent with prior quarters and are committed to delivering revenue growth, margin expansion and aggressive share repurchases in 2026, which when combined, support our expectation of accelerating free cash flow per share growth in 2026 relative to 2025. Now I will turn it over to the operator to open the call for questions. Operator: [Operator Instructions] And the first question will come from Mark Murphy with JPMorgan. Mark Murphy: Congratulations on a great performance. The magnitude of revenue upside is just noticeably larger for Q3 than it has been in the recent past. I think we're seeing the same on RPO. I'm wondering if you can drill down into what you think might have fueled that extra strength there in the quarter, for instance, should we say that it's Copilot ramping into more materiality? Could it be boomerang customers coming back onto the platform? Or could it be Google's AI overviews even maybe causing some companies to lean back into their outbound SDR hiring? Michael O'Brien: Yes. Thanks, Mark. Look, by every metric, Q3 was a really strong quarter. We executed well across the business. I'd say that the products that we're delivering are delivering better renewal outcomes. That mid-to-high single-digit uplift on initial renewal from Copilot is certainly above or above our internal expectation and that's contributing to revenue upside in the quarter. We talked about the largest TCV deal in history that we closed early in Q3. That contributed to revenue upside. Shifting the business upmarket is also contributing. So if you think about the 5 points that we've shifted away from downmarket to upmarket over the past year, the upmarket business is now 73% of total ACV. Those 5 points are effectively 5 points of revenue, whereas when that was down market, we would write off or churn through 20% to 30% of that. So when you look at the upmarket ACV growth of 6%, down market showing a sign of stabilization with the negative 10% year-over-year, you weight that and you start to get another kind of point or 2 of revenue growth just from better higher quality revenue base. The last kind of part of that bridge is if you look at usage-based and other revenue, which we generally don't include in our ACV disclosures, that was up $3 million year-over-year as well. And that's another point of growth to kind of contribute to that outsized revenue beat in Q3. Operator: And our next question comes from Elizabeth Porter with Morgan Stanley. Elizabeth Elliott: I wanted to follow up on the GTM Studio that just recently went live. Could you share some of the early customer feedback on the solution and specifically the breakdown that you're seeing between greenfield adoption versus existing customers replacing legacy tools or workflows? And what kind of leverage do you expect to see in some of those upsells with the new solution? Henry Schuck: Thank you, Elizabeth. The early feedback on GTM Studio has been really positive. We're really excited about bringing that to market. It's one of the most innovative solutions we've built at ZoomInfo and has the opportunity to be the biggest product we've ever released. At its core, GTM Studio is a data management platform that gives RevOps professionals, and frontline sales leadership the ability to organize and then architect a go-to-market strategy. First go-to-market Studio brings together and unifies all of your data, whether that be CRM data, call transcript data, e-mail data, ZoomInfo data, unique data that you have about product usage that lives in your data warehouses, brings that all together in one dynamic workspace to build a complete AI-ready view of your target market. That allows revenue operations professionals and leadership to build really unique audiences. And then with GTM Workspace and Copilot to directly execute those campaigns in those audiences with their frontline sellers. We view this as an incredibly white space opportunity that we have the opportunity to really execute against as we complete this year and into 2026 and see an incredible upside from what we're hearing from our customers and the innovative nature of the solution. Operator: And the next question will come from Siti Panigrahi with Mizuho. Sitikantha Panigrahi: Great. It's a great quarter. You talked about NRR up 1 point. Graham, could you talk about upmarket retention? How has that been trending? And especially when you're seeing this -- the NRR growth, how much of that driven by seat count versus cross-selling of your different other modules? Michael O'Brien: Yes, sure. The upmarket net retention was again above 100% in period in Q3. So we're definitely getting improving retention in that upmarket business as the mix becomes a greater part of the business. So we kind of get a compounding effect. It's coming from a lot of different places. We started building products a couple of years ago that were aimed at optimizing retention outcomes, and we're starting to benefit from that as these customers renew at much higher rates. We have upsell opportunity with Copilot now with GTM Workspace. We have upsell opportunity with go-to-market studio. Our operations business, which is our fastest-growing business, accelerated in Q3. So we have a multitude of vectors that are contributing to specifically upmarket net retention improvement. And then downmarket net retention improved sequentially in the quarter, too. So that was something that we wanted to see now that we're a year into the more rigorous qualification of new sales into that downmarket business into the pricing and packaging changes that we made at the beginning of Q3. And then you can also see this kind of as a sample in our $100,000 cohort, our $100,000 cohort had one of its best ACV quarters ever. And what you're seeing there is, historically, we were very focused on taking a customer that was spending $50,000 or $70,000 or $80,000 and getting them up into that cohort above that $100,000 threshold. We're still focused on that. We're still delivering positive logo growth there. But what's really promising is taking those customers who are already spending $150,000 or $200,000 with us and getting them up to $500,000 or up into our $1 million cohort. That's where the lion's share of growth is coming from upmarket now and in that cohort, and we are pleased to see another really strong quarter there for 100,000 logos in what is usually seasonally a little bit of a slower quarter. Henry Schuck: And Siti, also on retention and engagement with Copilot, as we release Copilot out to our customers, we anticipated because it was a better solution that our customers would engage more with it, and then that higher engagement would then turn into higher net retention rates. Obviously, we're just now sort of passing the first year of customers being on Copilot and that is coming to fruition. Our customers who are on Copilot have higher engagement and are now showing higher net retention outcome than their counterparts who are not on our copilot solution. And as we continue to release product that's more central to the workflow and more critical to go to -- mission-critical for go-to-market teams, we expect that trend to continue. Operator: And the next question will come from Brad Zelnick with Deutsche Bank. Brad Zelnick: Congrats, a lot of good signal in these results. Henry, can you expand on the agent force integration opportunity? What exactly is the use case? And how do you size that opportunity and the interest level that you're seeing? I know it's early, but whatever it is that you're seeing out there. Henry Schuck: Definitely. So at Dreamforce, Salesforce showcases a set of Agentforce agents. And we're really excited about this partnership because it's yet another proof point that AI and go-to-market should be grounded by ZoomInfo, whether that's in our products or agents running in other platforms like Agentforce, we grow when our intelligence gets consumed and Agentforce is a great partnership for that reason. You can now find the revenue agent in Salesforce's marketplace. It's featured, promoted and has co-selling incentives for the Salesforce team. And there are more products and collaboration plans, including an upcoming prospecting agent that we'll announce with extended press coverage. We feel really good about the signal that says, if you want to build AI and go-to-market, that AI needs to be grounded in ZoomInfo Intelligence. And we're seeing that across the enterprise. We're seeing that across our customer base. And with go-to-market studio, we're providing that to our customers as well. Operator: And the next question will come from Alex Zukin with Wolfe Research. Aleksandr Zukin: Maybe just again, addressing -- I think you did this in the script, but maybe putting a finer point on the delta between like really strong cRPO subscription bookings growth of 18% versus billings growth, which seemed a bit weaker. And more broadly, right, if I think about the exit rate implied by the guide for Q4 for next year, anything we should note about how to think about that with respect to what looks to be an improving demand environment as well as kind of increasing competitive product functionality that you guys are demonstrating? Michael O'Brien: Yes. I can take that. I'd say around the guidance and the exit rate, the approach there is consistent with prior quarters. We're really focused on delivering an upside Q4 here. And then we'll start talking about what that means for 2026 on the next call. On the billings growth, revenue growth, bookings growth, I think what you see in the current RPO being up 6% year-over-year, implied current calculated bookings growth of 18% is that there's some noise in that bookings just from the nature of how bookings is calculated. But I think that the RPO growth, the current RPO growth is like a good proxy for performance in the quarter. And then bridging that to billings, Q3 was largely the first clean year-over-year comparison we've had for a few quarters, except for billings. As I called out on the Q3 call last year, the mix of our balance sheet reserves and the changes that we talked about drove higher-than-normalized billings growth in Q3 last year, which makes that Q3 number this year look worse by comparison. When I think about the scale here, we're talking about an impact of about high single-digit millions year-over-year. Operator: And the next question comes from Taylor McGinnis with UBS. Taylor McGinnis: Maybe just to ask one off the last question. So -- you talked, I think, a little bit earlier about this shift with more business upmarket and causing more seasonality. Well, I guess when you look at the 4Q revs guide, it doesn't seem to imply that greater seasonality. So could you just talk through what are some of the assumptions embedded in the guide? And if there's still some headwinds that you're still working through on the revenue side as we get into 4Q? And I guess keeping in mind that seasonality, as we think about 2026, anything to keep in mind about sequential growth and how we're modeling it there? Michael O'Brien: Yes. When I think about the Q4 guide, I'd say that the guidance philosophy has not changed. We're continuing to managing expectations in a consistent manner as we have in the past several quarters. I think it's best to measure the growth on a year-over-year basis moving forward with the sequential trends continuing to fluctuate. Q3 performance was more front-end loaded than usual, and we expect Q4 to be increasingly back-end loaded which can influence that trend, but generally, that doesn't matter as much year-over-year. Henry Schuck: And I would just add, Taylor, that the momentum in our business feels better than it has in years, but we're going to continue to manage expectations to earn and keep our investors' trust. Operator: And our next question will come from Raimo Lenschow with Barclays. Raimo Lenschow: Congrats from me as well. Can you talk a little bit about like it does sound like the world is getting out better there. Can you talk a little bit about more nuance in terms of geographies, verticals, et cetera, where you see like things getting really better versus kind of stable or still weak? Henry Schuck: I mean I think that there was a lot in the better column this quarter, upmarket ACV acceleration, our upmarket retention improvements, company-wide retention improving for the fifth straight quarter, the accelerating operations growth, Copilot growth, all the product innovation and the positive feedback that we're hearing on Go-To-Market Studio. And then we've continued to operate with discipline and improving our profitability. We reached Rule of 40 again this quarter. I think when we think about what's happening in the world with AI, and the AI transformations that are happening at companies across our customer base, we're getting more and more confident that those transformations can't be successful without a valid data foundation, which we think of as context, context for the AI that's going to be deployed. And so we feel really good about the fact that as those transformations continue here, that we're going to be a necessary component to any go-to-market AI transformation across our customer base and across the universe of prospects that we sell to. So we feel really good about that. I think we saw improvement in downmarket retention sequentially as well, and we feel good about the new products driving better retention. And so I think there's just a lot in the positive column that gives us a lot of confidence in the business going forward. Michael O'Brien: [indiscernible] perspective. We saw software have improved retention sequentially for the sixth quarter in a row, and we also have really solid quarters in telecom, manufacturing and business services. Operator: And the next question will come from DJ Hynes with Canaccord. David Hynes: I'll share my congrats as well. Graham, for you, how much of the upmarket segment is on Copilot today? And then, Henry, the follow-up to that question is, do you feel like you have pricing right for Copilot now? Or are there still opportunities to potentially extract more value in the future? Michael O'Brien: Yes. We haven't disclosed what percentage of upmarket is on Copilot, but it's a significant portion where you got to think about upmarket as well. If you think about operations, which is more than 15% of our overall ACV, which is growing high 20s. That's almost exclusively an upmarket product or an upmarket user. So we've got a good kind of diverse mix of products and pricing models for that upmarket business. When we think about pricing for GTM Workspace for GTM Studio, we're designing pricing to optimize for customer simplicity and to remove barriers for customer adoption by providing a frictionless path to value. We want to balance the value we're delivering with monetization. So generally, we're thinking about these products as having a platform fee and then a prepaid AI action credit allotment. And really, what we're focused on in these next few months is driving early adoption learning as much we can about customer usage trends as we head into 2026. Henry Schuck: And we feel great about the value we're delivering for our customers. We think, with our new products, GTM Studio and GTM Workspace, there are many more opportunities for our customers to consume our data, to consume our AI within their organizations with their frontline sellers. But right now, we're focused on delighting our customers and making them feel like they're getting an enormous value from our partnership. And we're going to monetize where there are opportunities, but we want our customers to really be using our products in a mission-critical way. We'll see that benefit in net retention, and we'll see that benefit as they continue to consume our products throughout their organization. Operator: And the next question will come from Koji Ikeda with Bank of America. Koji Ikeda: I wanted to ask about the private unified data and AI company mentioned in the prepared remarks, a nice win there and clearly shows that they couldn't do it themselves. And so maybe can you talk a little bit about how that sales process went? And was it a bunch of back and forth with many proof of concepts? Or was it a pretty typically easy and smooth sale for you guys with this company? Henry Schuck: Yes. This was a customer who's actually been a customer of ZoomInfo for a number of years, and we've continued to grow that account through Merit across the organization. And as we continue -- as that company continues to move their business upmarket to target new personas and to bring on new salespeople, we're well positioned as we've already cleared security, data privacy review. We've built trust with our stakeholders there, we're uniquely positioned to continue to grow the account there, and we were and then executed against that. There's still a tremendous amount of opportunity within that account and across our enterprise clients. There are very few enterprise clients where we're wall-to-wall with an ELA of some sort. And so we see a lot of opportunity to continue to leverage our relationship with our customer base with the new products that we're releasing. Some of those products, when we're in the enterprise and we're selling large deals, those sales cycles are longer in the quarter. Our sales cycles overall were a little bit shorter than historically. But as we continue to shift the business upmarket, those sales cycles will extend a bit, but they come with a much larger price tag with them. Operator: And the next question will come from Parker Lane with Stifel. J. Lane: Henry, earlier in the call, you mentioned you've begun to play offense again. I was just wondering if you could talk about the current level of resourcing in your own go-to-market organization if that's at a level that can support you going on offense, and has it all changed the way you're thinking about inorganic contributions to the business, perhaps to accelerate the AI roadmap? Henry Schuck: Thank you for the question. Look, we feel like we're -- we have the right capacity within our sales organization to grow much faster than we've grown in the last number of years. We feel like what we've been missing are kind of 2 things, one that we've rebuilt over the last number of years, which is a really strong relationship with our customers, and we've spent the last number of years building strong consultative relationships with our customers to put us in a position to bring new products to them and new innovation to them that they are excited to receive from us. And so we've done a lot in the way that we've rebuilt the mentality of our go-to-market teams and the way that we serve our customers over the last few years to put us in a position where once we have products that we believe are best-in-class, that are innovative, that will change the way customers go to market, that we'd have an audience that was excited to receive them. And we think we're in that position now as we release GTM Workspace and GTM Studio to our customer base. We're excited about leveraging those relationships and the trust that we've built. From a capacity perspective, we feel really good. From a demand perspective, one of the things that we're seeing today, Mark mentioned it in his question is that customers are leaning back into their outbound SDR motions, where historically, they were looking for inbound opportunities, the shift in AIO and using LLMs to answer questions, has had an effect at the top of the funnel for our customers. And it's had a demand effect. And how do you fill demand when inbound is not filling that demand anymore, you have to go outbound. And so we're seeing our customers now hire more sales development reps, hire more full-cycle account executives, require self-sourcing from a prospecting perspective, and we're the partner that they trust to be able to arm those teams with the right data, and signals, and insights and now AI to be able to do that efficiently. Operator: And the next question will come from Tyler Radke with Citi. Tyler Radke: Earlier, you referenced kind of the Rule of 40, and certainly seeing good progress on that this quarter, but is that something that we should expect for next year? And how do you kind of think about the building blocks to get there? Is the 2% kind of exit rate a good proxy for next year? Michael O'Brien: Yes. I'm happy that on a quarterly basis, we achieved Rule of 40. This year, we're guiding to 2% revenue growth and 36% margin. So it's less likely that we would get there on a full year basis for 2025. And we're not guiding to 2026 today, but I will say we remain committed to properly managing expectations and then delivering revenue growth, margin expansion and aggressive share repurchases in 2026. And I kind of think of it through the prism of accelerating free cash flow per share growth in 2026 relative to 2025. Operator: And the next question will come from Brian Peterson with Raymond James. Johnathan McCary: This is Johnathan McCary on for Brian. Good to see the retention tick up, but I also wanted to ask on the net new business side, sales productivity there, and how that's performed against your expectations. And then, in some of those new Copilot wins, can you talk about any green shoots of evangelizing some of those new personas that you felt were a key unlock for ZoomInfo? Henry Schuck: I'll add a piece and then pass it to Graham. When we released Copilot, the idea behind it was to take this massive data asset and signal universe that ZoomInfo provides go-to-market professionals and then use AI to make their prospecting journey more productive. And it moved us from users having to manually sift through our data asset to using AI to tap into the full potential of our offering and then provide better go-to-market results. We are incredibly excited about the success that had for us. And particularly, it gave us this opportunity to go from what was historically top-of-the-funnel prospecting use cases, many times with SDRs to a broader base of account executives, account managers, customer success managers who got Copilot to be able to see risk in their business, to prioritize their accounts, to know their next best action. And so that gave us an opportunity to expand seats and personas from SDRs and top of the funnel prospectors to account executives, account managers, CSM, sales operations professionals. With the addition of Go-To-Market Studio and GTM Workspace, we feel like that's going to be an extension of our investment in Copilot. It will bring us even further into the use cases in account executives, account managers, SDRs, now RevOps and frontline sales leadership, who can leverage workspace and Go-To-Market Studio to drive execution in their Go-To-Market organizations. So we feel really good about not only the success we had in expanding personas with Copilot, but the opportunity in front of us to continue to expand personas with GTM Studio and GTM Workspace. Michael O'Brien: And then I can touch on the new business productivity. I'd say the trends there are what you would expect as we've deliberately shifted a lot of the resources upmarket. So down market, we've had fewer sellers where we've also rightsized packaging. We've qualified business at a more rigorous level. So on a pro rep basis, the productivity has been fairly consistent. And then if you think about the upmarket new business, that's still a $1 ACV number that's growing year-over-year. And as we've shifted kind of those reps to be more segmented and more focused on specifically upmarket customers, that was like a 9- to 12-month kind of ramp to get fully into that motion. And this quarter, Q2, Q3 really was the first time where we've gotten to the place where we feel like we're fully ramped and we're fully set up to run an upmarket versus down market new business motion. Operator: And the next question comes from Rishi Jaluria with RBC. Rishi Jaluria: Great to see some positive underlying trends in the business. I wanted to go back to Henry, you talked about how there's been a little bit of a shift in some of your customer base in doing more outbound versus inbound. Maybe I want to ask about ZoomInfo as a company, right? You talked in the past about wanting to invest in a little bit more of a PLG motion, while simultaneously going after this enterprise opportunity, which you've clearly seen some good signs of success in. Maybe, can you walk us through what are you seeing now with the changing search landscape with SEO becoming maybe a little bit less relevant, and AI search kind of coming to the forefront? And what sort of impact that's directly had on your business? Henry Schuck: Great. Thank you for the question. Look, we're seeing similar trends as others, and there's definitely an impact to the business from the AIO shifts. Now one of the positives here is that we have been in the process of shifting our focus upmarket to upmarket customers, where the impact of AIO and the changes in the SEO landscape is very mitigated. And so we feel really good about the fact that we made these shifts, that the business is less exposed to these shifts in AIO and SEO. And our PLG motion continues to perform in line with our expectations for this year, and then our focus from a sales organization perspective is on our upmarket business, and so we want significantly more of our new business mix to be in the upmarket. We're focused on growing our customers and our customer base. You saw that in our $100,000 cohort ACV growth in our $1 million cohort ACV growth and customer count growth, and you see that in our net retention numbers. We have a great customer base. They're hungry for new solutions, particularly around AI. They don't have a trusted partner there, and we feel like we have a really good opportunity now to provide them with innovative solutions and drive value for them. And then the business is much more upmarket today than it was a year ago or 2 years ago, and that's given us a lot of protection from these SEO and AIO changes. Operator: And the next question will come from Clark Wright with D.A. Davidson. Clark Wright: The Operations suite continues to be a key growth driver. And Henry, you made the point that the proprietary data assets that ZoomInfo has enhances enterprise's AI initiatives. How are you investing in leveraging AI internally to maintain and improve this data advantage? Henry Schuck: Yes. We are really proud of how we're using AI internally at ZoomInfo. We are customer-zero on all of the AI solutions that we're releasing to our customers. We have thousands of salespeople on these products before we release them to our customers. They're leaned in. It's driving efficiency and their ability to engage with customers in insightful ways. It helps them create decks, and QBR plans, and account plans and writes back to the CRM for them. It flags risk in their account base. So we feel really good about the way that we're leveraging AI across ZoomInfo. I would venture to guess that we are in the top decile of companies leveraging AI to drive efficiency and not just in our Go-To-Market organization. Graham talked about ways that we're using it in our finance organization. We're leveraging AI across our product organization. We've been able to drive efficiencies and lower headcount because we're leveraging AI to generate content for us to drive our product marketing motion. I think when we show other customers, our peer groups or our clients, the way that we use AI internally, they all walk away incredibly impressed by the way that we're leveraging it and wanting best practices, tear sheets that they can take back to their own organization. We're going to continue to invest in AI to drive meaningful efficiency in our business. Operator: The next question comes from Jackson Ader with KeyBanc. Jackson Ader: Graham, the commentary on 2026 free cash flow per share acceleration. I'm just curious if you think about splitting that between operational improvement versus, I think, the word you used was aggressive repurchases next year? Like, how should we think about the contribution from each of those sources as we head into next year? Michael O'Brien: Yes. I think about all 3 of them as contributors. And I know that hasn't necessarily been the case over the last couple of years. So I do think that we view this as we are committing to growing the top line. We are committing to improving margins, and we are committed to continuing to be aggressive with buybacks, and we're really excited about the compounding effect that hitting all 3 of those levers will meaningfully contribute to that acceleration of free cash flow per share in 2026. Operator: I show no further questions in the queue at this time. This will conclude today's question-and-answer session and also the conference call. Thank you for participating, and you may now disconnect.
Operator: Good afternoon. My name is John, and I will be your conference operator today. I would like to welcome everyone to the Insperity Third Quarter 2025 Earnings Conference Call. [Operator Instructions] At this time, I would like to introduce today's speakers. Joining us are Paul Sarvadi, Chairman of the Board and Chief Executive Officer; and Jim Allison, Executive Vice President of Finance, Chief Financial Officer and Treasurer. At this time, I'd like to turn the call over to Jim Allison. Mr. Allison, please go ahead. James Allison: Thank you. We appreciate you joining us today. Let me begin by outlining our plan for today's call. First, I'm going to discuss the details behind our third quarter 2025 financial results and provide an update on our financial guidance for the remainder of the year. Paul will then comment on our ongoing efforts to accelerate growth and improve profitability in 2026, including the rollout of our new HRScale solution. I will return to outline some initial thoughts regarding expected drivers of financial performance for 2026. We will then end the call with a question-and-answer session. Before we begin, I would like to remind you that Paul or I may make forward-looking statements during today's call, which are subject to risks, uncertainties and assumptions. In addition, some of our discussion may include non-GAAP financial measures. For a more detailed discussion of the risks and uncertainties that could cause actual results to differ materially from any such forward-looking statements and reconciliations of non-GAAP financial measures to their comparable GAAP measures, please see the company's public filings, including the Form 8-K filed today, which are available on our website. Our unit growth for Q3 2025 was within our forecasted range with the average number of paid worksite employees increasing by 1.2% over Q3 2024 to 312,842. New client sales results were encouraging. While worksite employees paid from new clients in Q3 fell just short of the Q3 2024 level, our Q3 booked sales efficiency and the resulting number of accounts that are in the queue for first payroll over the next few months have increased significantly from a year ago. Client retention remains strong, averaging 99% per month and in line with prior year results. Similar to last year, the departure of seasonal summer employees caused net hiring within the client base to be negative in the third quarter. The overall hiring environment continues to be challenging, and Q3 2025 activity was slightly weaker than Q3 2024. Adjusted EPS for the quarter was minus $0.20, and adjusted EBITDA was $10 million. These results fell below our forecasted ranges, primarily due to a further continuation of higher-than-expected benefits costs. Gross profit per worksite employee in Q3 2025 was $208 per month, down from $247 in Q3 of 2024, driven primarily by higher-than-expected benefits costs of $20 million. As you may recall from last quarter's call, we had expected our benefits cost trend to taper down over the second half of 2025 due to favorable demographic changes within our plan, combined with the relative benefits cost patterns in the comparison period, which had been more favorable in the first half of 2024 and resulted in higher year-over-year cost trend in the first half of 2025 that we did not view as reflective of the underlying trend for the year. Unfortunately, while we benefited from those favorable impacts, Q3 claims data revealed that they were outpaced by higher-than-expected outpatient and inpatient utilization and pharmacy costs, including a significant increase in large claims frequency, both sequentially over Q2 and also year-over-year. These factors resulted in a benefits cost trend of 9.1% for Q3 2025 over Q3 2024. The issues that we have experienced with increased health care claims costs are not unique to Insperity. At a macro level, the health insurance industry has reported an unexpected rise in health care costs and loss ratios. From our discussions with our carriers and outside advisers, there are a number of factors driving a higher level of health care utilization, including the increased use of prescription drugs and outpatient procedures, the prevalence of high-cost conditions and the introduction of new higher-cost treatments and drugs. Additionally, we have recently been made aware that the use of AI tools by health care providers has emerged as an additional contributor to the higher cost trends, impacting everything from condition diagnosis and treatment plans to clinical documentation and coding for insurance billings to preauthorization and appeals processing. Many insurance carriers have alluded to such issues in their comments on higher cost trends and loss ratios, and our understanding is that they are responding in a variety of ways to reduce issues around upcoding or unnecessary spending. From what we are hearing, it is the accumulation of all of these things happening at the same time that has created the unexpected increase in trend. At this point, the prevailing view in the industry is that the higher claims trend experienced in 2025 will persist in 2026. We responded quickly to the emergence of higher-than-expected benefits costs earlier in the year by increasing our pricing targets. Over the course of the year, these costs have continued to outpace our projections, and we have revised our pricing plan accordingly. We believe that the plan we are executing remains competitive in the broader marketplace and will continue throughout 2026. This plan is focused on attracting and retaining the right clients at the right price to produce sustainable profitability at normal historical levels. To date, we believe those plans are on track, and I will provide an update later in the call. Moving on to operating expenses. We continue to actively manage these costs below budgeted levels while continuing to invest in our strategic priorities. On a year-over-year basis, operating expenses in Q3 2025 decreased by 4%. Operating expenses declined sequentially from the second quarter of 2025 by $10 million with the most significant reductions in salaries and G&A costs. During the third quarter, we achieved significant software development success on the HRScale scale platform, which met the threshold to capitalize a portion of our Workday strategic partnership costs for the first time. For Q3, we invested a total of $17 million, of which $11 million is included in operating expenses. This compares with $19 million in Q3 of 2024, all of which was expensed. During the third quarter, we continued to return capital to our shareholders through our regular dividend program, paying $22 million in cash dividends. On a year-to-date basis, we have paid cash dividends of $68 million and repurchased 225,000 shares of stock at a cost of $19 million. We ended the quarter with $120 million of adjusted cash, and we had $280 million available under our credit facility. Now let me provide an update to our Q4 and full year 2025 outlook. Given our recent sales, client retention and client net hiring results, we expect average paid worksite employees to be in a range of $313,000 to $315,000 for the fourth quarter, an increase of 1.3% to 1.9% over Q4 of 2024. As a result, average paid worksite employee growth for the full year is expected to be 1%. We are forecasting full year adjusted EPS in a range of $0.84 to $1.47 and adjusted EBITDA in a range of $119 million to $153 million. As I mentioned earlier, our benefits cost trend over the first 3 quarters of the year has hovered around 9% as favorable changes in our planned demographics and planned migration have been outpaced by increased care utilization, pharmacy costs and large claim activity. We expect our full year benefits cost trend to remain at this elevated level. Q4 operating expenses are expected to decline sequentially once again. As a result, full year 2025 operating expenses are expected to be below 2024 levels by approximately 3%. For the full year, we expect the investment in our Workday strategic partnership to total approximately $58 million, of which $48 million would be included in operating expenses. This compares to $57 million in 2024, all of which was expensed. As for Q4, we are forecasting adjusted EBITDA in a range of negative $25 million to $9 million and adjusted EPS in a range of minus $0.79 to minus $0.16. For purposes of adjusted EPS, we are forecasting an effective tax rate of 28% for Q4 of 2025. The effective tax rate on GAAP EPS could fluctuate from that based on the level of nondeductible expenses as a proportion of pretax income. Looking at the big picture of 2025 at this point, we have a significant earnings shortfall from our initial budget. Nearly all of this shortfall is related to the benefits area, driven by the unexpected increase in health care cost claims costs. Other impacts, including a lower level of growth than initially forecasted, mix changes in the business and the impact of lower interest rates have been largely offset by the management of operating expenses below budgeted levels. Now at this time, I'd like to turn the call over to Paul. Paul Sarvadi: Thank you, Jim, and thank you all for joining our call. Today, my comments will focus on 4 important topics to frame the financial performance rebound and growth acceleration we expect in 2026 and beyond. First, I'll discuss the decisive and assertive actions we are taking to navigate the significant and unexpected step-up in health care claims we have experienced this year. Second, I'll present an update and perspective regarding the official rollout of HRScale this quarter, our joint solution with Workday that's designed to effectively enhance our PEO solution set for mid-market companies ranging from 150 to 5,000 employees. We believe the addition of this offering will position Insperity uniquely within the marketplace and serve as a new driver for large client sales and retention, advancing our growth model. Third, I'll provide an overview of our recent strong book sales performance and the momentum driving our flagship PEO solution, HR360, which is a key contributor to our growth and integral to our upcoming year-end transition. I'll conclude my remarks with some thoughts about the next 3 years and the plan we are working through that we believe will allow us to return to historical key metrics in our business model. The most urgent issue that we continue to address is the health insurance claim cost escalation. This issue has occurred across the marketplace and industry and has impacted Insperity in a severe manner over the last 3 quarters. We have seen 2 significant negative developments in the health insurance marketplace. First, the claim trend for the industry at large for 2025 is now expected to be 200 to 400 basis points higher than industry estimates at the beginning of the year. This unexpected increase that emerged during the year is significantly higher than a typical year. Analysis of our Q3 claims data revealed our benefits cost trend has increased from our initial estimate at the beginning of the year, in line with the higher trends now reported in the health insurance industry. Secondly, the increasing adoption of AI tools by health care providers appears to be a recent additional factor driving higher costs across a wide range of claim categories. As Jim mentioned, we have seen many providers cite utilization and revenue increases, while insurance carriers are reporting higher loss ratios and passing this higher level of claim trend on to employers. Jim has specifically addressed this claim cost escalation we've experienced in his remarks, including the expected effect on adjusted EBITDA in 2025. This factor accounts for nearly all the underperformance from our target for this key financial measure at the beginning of the year. So this is certainly the most significant challenge we are confronting. Now even though the full effect of this higher-than-expected trend has made a larger impact on our estimates for the full year than we thought last quarter, we believe the actions we have taken in response have been progressing on track to achieve a rebound in 2026. When we saw signs of a step-up in claim cost in Q1, we quickly initiated action plans to address this trend. We also adjusted these plans during the year as the trend continued to increase. To date, we've had measurable success in increasing pricing appropriately with client retention remaining solid in Q3. We believe our pricing remains competitive with the industry and with the broader health benefits marketplace for our clients, and we provide plan design options and other ways for clients to mitigate these increases. These pricing measures take time to fully take effect as we price new and renewing accounts each month in line with market trends. The initial effect of these measures began in Q3, and we expect the positive impact will continue to grow over the coming months as we complete our fall sales and renewal season. These pricing initiatives are strategically designed to support our profitability recovery as we move into 2026. Now in addition, we expect a significant new agreement with UnitedHealthcare announced today will add additional support and contribute substantially to our margin recovery. Since the first quarter, we have focused on negotiating a revised contract with UHC to go into effect at the start of this year. We've now signed the contract extension through 2028, which addresses our key short- and long-term objectives. The contract incorporates financial terms, plan design modifications and risk transfer alternatives that are projected to significantly reduce Insperity claim cost and mitigate expected trends and large claim risk for the upcoming year. Additionally, the agreement strengthens our partnership alignment to long-term favorable administrative and risk charges and credits as well as growth incentives. This structure and alignment of this agreement are paramount as we expect them to enhance the financial impact in subsequent years as the business expands. The project -- the projected immediate offset to the benefits cost trend combined with the lower large claim pooling level in 2026 presents a timely and important opportunity to reduce cost and lower risk. When you combine the effects of these significant cost management and pricing initiatives, we believe we have the foundation for a substantial rebound of gross profit and margins in 2026 beginning in January. The second hot topic I'd like to discuss is the rollout of our HRScale solution underway with active co-marketing and co-selling target prospects, including demonstrations of the platform. We are also working on deployment and enablement of beta clients and our software development success has proven the viability of the product, a milestone which impacts accounting treatment for our investment in the platform. This is a pivotal moment for Insperity due to the potential for HRScale to be a catalyst for growth into the future. It's important to recognize the tremendous accomplishment to reach this point in this length of time. We signed a strategic partnership agreement with Workday at the end of January 2024, just 21 months ago. This partnership was established to bring a unique comprehensive HR solution to a large underserved market of more than 40,000 companies employing more than 25 million employees by combining Insperity's HR service and Workday HR technology. We identified 4 pillars of work to create this joint solution with the potential to be a category of one and a competitive disruptor in the marketplace. The 4 defined pillars included our Insperity corporate tenant, our exclusive PEO client tenant, our deployment and enablement services and our joint go-to-market plan. This effort represented a significant financial investment and a commitment of time, effort and resources by both partners. In our case, we estimated $150 million investment, including $60 million in each of the first 2 years to build and take this joint solution to the marketplace. Following the signing of the agreement, we commenced the significant effort for this major development project, which involves integrating the client-facing Workday HR platform with our advanced Insperity HR compliance platform. Additionally, I set aggressive internal time line goals to achieve key milestones across the other 3 pillars with the emphasis on speed to market of the new product. We did not share these at the time due to too many unknowns, but we believe it's important to note now so we can look at the big picture and assess how we have performed up to this point. It's not uncommon for a significant project of this magnitude to take substantially more time and investment than initially projected to create a new product and prepare to take it to market. The internal goal for launching the first pillar, our corporate instance of Workday was January 1, 2025, and implementation was completed by April 1, 2025. We set the goal for the client tenant for completion to initiate deployment and enablement for beta clients on July 1, 2025. The client tenant uses functionality in the Workday solution that did not exist when we entered the agreement, and both of our companies had to work diligently together to create a solution that had not been built before. This milestone was achieved by October 1, 2025. Our deployment and enablement capability is in place now to allow us to bring on beta clients for a go-live date in March 2026 for first payroll in April 2026. In August, our go-to-market plan was launched with our product page on the website going live, our demand generation campaign implemented and prospect outreach underway. Co-selling, co-marketing and co-branding is in full swing and a pod or product-oriented delivery team of sales professionals from both partners are working together every day on a team that's wholly dedicated to this solution. They are rapidly advancing the sales motion and identifying and meeting with prospects to fill the HRScale sales pipeline. Based on our forecasted investment for the rest of the year, we expect to achieve all these milestones while staying within our original $120 million estimated investment for the first 2 years. The achievement of these initiatives within this time period and within the budget reflects the professionalism, dedication and proficiency of both the Insperity and Workday teams. It also demonstrates the strong cultural alignment of the strategic partnership, which we expect will support the successful rollout of HRScale and positively affect our return on investment for years to come. We expect the launch of HRScale as a significant growth catalyst for Insperity is particularly timely given the broader macro trends impacting our industry. For the past 2 years, the labor market has posed considerable challenges for small and medium-sized businesses, which has contributed to restrained growth across the business services sector. There's also uncertainty regarding the future impact of AI on employment, prompting companies in the HR service sector to seek a new catalyst for sustained growth. Had we not established our strategic partnership with Workday, we believe we would also be searching for such an opportunity. Instead, we believe we have our new growth driver already in place. Now on to my third topic, our confidence in this new growth driver is growing due to recent booked sales success. In Q3, our booked HR360 sales were substantially over budget and 45% greater than the same period last year. These strong results were driven primarily by outperformance in our mid-market and enterprise space, which is the target market for HRScale. We sold our largest account in history during this quarter, which is scheduled to come on HR360 in January and is planned to upgrade to HRScale by the end of the second contract year. The opportunity to have a discovery call with this large potential client resulted from the client becoming aware of the HRScale as an Insperity Workday joint solution. Over the last quarter, we've been encouraged by prospective clients' receptivity to Insperity Workday strategic partnership in a number of ways, including the ability to set appointments and the nature and level of the conversation. The system and service demos to beta and prospective clients have resonated well, and we are very pleased with the receptivity of the proposed value proposition. We believe the early feedback is validating our strong competitive positioning in the marketplace. It's also compelling to see prospective clients considering 2 product options with the opportunity to start on HR360 with a plan to upgrade to HRScale in the future. We also believe that the availability of HRScale and HR360 at different price points will positively impact the level of sales for both solutions. We believe our success and momentum in book sales through the third quarter puts us in a favorable position going into our year-end transition with more client worksite employees in the pipeline scheduled to become paid in January. This is also important in a year where we have higher pricing for new and renewing business, which could have some impact on client retention when our priority is to see margin improvement into the new year. The last topic I'd like to address today is our 3-year plan we expect to finalize this quarter with the objective of returning to the targeted growth and profitability metrics of our business model. Our historical key metrics in good times include double-digit unit revenue and gross profit growth, combined with operating leverage to achieve adjusted EBITDA annual growth rates north of 20%. Our work on this 3-year plan includes specific initiatives designed to return our key drivers to these metrics and generate corresponding shareholder returns. We are confident that a return to double-digit growth is possible with the implementation of our new growth driver, HRScale, even if future small- and medium-sized business employment gains remain modest. We anticipate improvements in gross profit margin as we align price allocations and direct costs moving forward and expect that the value proposition and pricing of HRScale will further support these outcomes. We expect operating expense efficiencies and improved margins from both internal and client-facing AI initiatives. As we grow, our AI strategy is already generating efficiency gains and should help us achieve greater operating leverage. Earlier this year, we launched a proprietary Insperity HI tool called Compass, which is already being used by our service providers. We are continuing to develop AI capabilities across our operations, including targeted and proprietary tools for things like predictive analytics and prospect scoring. We are also working to combine the speed and information reach of AI with the validation of our HR expertise to more efficiently deliver complete and accurate information to our clients. This improves response time and enables us to focus even more on the high-touch nature of our customer relationships which continues to be a strong competitive differentiator and retention driver. So in summary, we believe the elevated health care trend and malaise in the small- and medium-sized business labor market is masking significant progress we are making across the company in these areas to return to historical growth and profitability metrics. We take full responsibility for continuing to take appropriate action steps to address these issues, and we believe we will see significant progress ahead. At this point, I'll pass the call back to Jim to provide some further perspective on 2026 expectations. James Allison: Thanks, Paul. As this year has progressed, we have worked diligently to create and execute plans aimed at generating a significant profitability rebound in 2026. In the benefits area, we expect the elevated benefits cost trend to persist in 2026 based on input from our carriers, outside advisers and industry benchmarks. As a result, our response must remain swift and steadfast, and our focus is both on right pricing our book of business and reducing planned costs. On the pricing side, we continue to strategically implement higher pricing targets for both new and renewing business using AI tools and revised methodologies. Our focus is to attract and retain the right clients at the right price that can produce sustainable forward-looking profitability at our normal historical levels. This process began earlier this year, is progressing according to plan and will continue throughout 2026, consistent with what we're hearing in the broader market. Through a combination of higher pricing and the exit of lower profitability clients, we believe that we are on pace to exceed the projected benefits cost trends. Regarding our plan costs, I'm happy to report that we have successfully completed our contract negotiation with UHC and have extended our contract through 2028. The combination of cost savings from this contract and other plan design changes, both of which will be effective in January, are expected to have a favorable impact of about 2% of our gross benefits costs. In addition, we plan to reduce our health care claims risk in 2026 by lowering our pooling level from $1 million per member per year down to $500,000. For clarification, the pooling level represents the maximum annual amount of claims exposure we have for any individual plan participant, which provides a measure of protection against the severity of large claims. Taken altogether, these contractual changes reflect the strategic alignment of Insperity and UHC to provide exceptional value for our clients and plan participants, and they are foundational to both our 2026 financial performance and our long-term success. Regarding the rollout of HRScale, we expect to add clients into this solution during 2026, which is expected to incrementally impact worksite employee growth and revenue as we move through the year. As the rollout plan continues, we should be in a better position to comment on client traction and revenue potential in future calls. Once we achieve go-live and a stabilization period, the level of our investment is expected to decline and certain product development costs will be capitalizable, which we expect to positively impact operating expenses. A portion of those savings will be offset by new costs to build service capacity and for the implementation and ongoing service of HRScale clients as well as Workday platform maintenance and support. Taken altogether, operating expenses associated with HRScale in 2026 are expected to be about $15 million lower than the $48 million estimate for 2025. Even though we expect each of these positive contributors to be significant, we also recognize that there are likely to be a variety of other puts and takes in our financial performance. In addition, there are risks and uncertainties that could impact 2026 results, including changes in prevailing health care cost trends or planned utilization, the successful completion of our fall sales and renewal season and more broadly, changes in the macroeconomic environment and labor market. We will not be providing our financial outlook for 2026 until our earnings call in early February. But given the significant positive contributors that we have outlined, we believe that 2026 represents an opportunity to recover a majority of the earnings shortfall we have experienced this year. At this time, I'd like to open up the call for questions. Operator: [Operator Instructions] Our first question comes from Andrew Nicholas with William Blair. Andrew Nicholas: I wanted to first ask for some clarification, Jim, on that last comment you made about an opportunity to recover the majority of earnings shortfall. Is that related to 2024 as the base? Is that specific to the shortfall relative to your initial guidance? Just trying to think -- I think you're trying to guide us a little bit in terms of what next year looks like. I know there are a lot of moving pieces. Just trying to make sure I understand what you're specifically referencing in terms of the shortfall. James Allison: Yes. Thanks for the question, Andrew. Our initial guidance for 2025 and our actual results for 2024 were relatively similar. So what I'm referencing is pretty well aligned with both of those. Paul Sarvadi: I think the best way to look at it... James Allison: Go ahead, Paul. Paul Sarvadi: I'm sorry, yes. So I think what we're describing there is relatively straightforward in that we had an expectation at the beginning of the year, and you can see from our guidance today what -- where this year is forecasted to end up. And nearly all of the shortfall that occurred this year is from this one issue. And we expect, as Jim commented, to see a rebound from these 3 major elements of at least the majority of that shortfall in 2026. Andrew Nicholas: Understood. And then for my second question, in terms of 2026 kind of worksite employee growth, I understand that the macro hasn't been super supportive in terms of change in existing or net client hiring. But do you have -- to what extent should we be concerned with kind of these cost trends and the repricing on attrition? Do you expect it to have any impact? Or to what extent do you expect it to impact new sales heading into next year? Just want to understand if we should expect a decent kind of sequential step down in the first quarter tied to some of this repricing activity. Paul Sarvadi: Yes. Thanks for that question. No, we actually, again, are -- we have strong sales effort continuing. And we don't see the pricing changes that we're making to be far out of sorts with what's happening in the marketplace at large. So even I mentioned in my remarks that the most recent results in the third quarter, not only were sales 45% ahead of last year, but also the renewing business that came on, our renewal rates were still at the 99% level for the quarter. So we have not seen that dynamic causing a reduction. We are also going into this stage of the year with a significantly higher number of worksite employees scheduled to be paid in January. And I think in my remarks, I was kind of putting that out there just to make sure we understood that even though we may -- because of the priority to have some margin recovery, we probably will have some more go away, but I don't expect that to be -- I expect that to be offset by the degree to which we're ahead in new sales. Operator: Our next question comes from Jeff Martin with ROTH Capital Partners. Jeff Martin: I wanted to dive into kind of some initial anecdotal responses from your -- from this new pod that's jointly marketing the joint solution. What are you hearing from them? Are they finding this as a relatively smooth process? Anything they've learned along the way? And how encouraged are you by the initial results? Paul Sarvadi: Yes. It's hard to hold it all back because it's been very exciting. We even had a 3-day retreat meeting with the full pod just a week or 2 ago. And what's really exciting is that they are now seeing the full picture of this unique solution that we have developed that is the full HRScale. It is the full scalable solution of both service and technology in one comprehensive solution. And they've worked through how to help customers understand even a cost comparison to other options they have. They started to understand better how we have gone through the research to understand how to price this for the client. And the energy level is really impressive, and we are already beginning to fill the pipeline. And we're ahead of where I thought we'd be. Remember, we put this in place on July 1, gone through a lot of effort just to make all that work at this point. But now we're already out there calling on customers. We've got the messaging down, and we're getting great reaction from the prospects. Jeff Martin: Great. And then my other question is on the benefits repricing. Have you had to make adjustments from the initial repricing that you did in the first quarter? If so, could you provide some details around that? And -- is that a dynamic thing on a quarterly basis? Or how are you looking at that going forward as we are very close to starting 2026 here? Paul Sarvadi: Yes, that's always been a part of our whole operation where we are literally month-to-month on a rolling basis, we're looking at what pricing is necessary for the trend rate. In this case, of course, we've seen the trend escalate. And so where we were at the end of the first quarter, we started processing some pricing changes. But as the year progressed, we were continuing to raise the level of price increase up to and through and including everything we sent out for January 1. So we believe we're in good shape on that front. As Jim mentioned in his remarks, we expect our pricing going into next year to actually be exceeding this continuing higher rate that we've seen. So we're on a good track to balance that out in the appropriate timetable. Operator: Our next question comes from Mark Marcon with Baird. Mark Marcon: Just on the health care pricing, Paul and Jim, is it your expectation that on an apples-for-apples basis, same plan design, we're basically looking at a benefit cost trend that would be somewhere in the 9% range for next year? Or would it be higher or lower? James Allison: So apples-to-apples, same client, same people, same plan design. We would expect the average increase to be in the low double digits range. Paul Sarvadi: And what typically happens there, of course, is you quote the increase. And then we have tools and ways we can help the client mitigate the increase, other plans to choose from and other aspects of what we can do to help them manage that increase. And that's what's happening all over. When we look at the quotes that are coming in and the competitive situations, our increased level and our ability to help them manage that puts us in a very competitive position. And that's what I think we've demonstrated even up to this point in the process. Mark Marcon: I appreciate that. And then the second question is basically along the lines of you mentioned potentially managing out some of the lower profitability clients. I was wondering if you could give us a sense for the magnitude of that level of the client base. And one other thing, Paul, if I can squeeze one in. You and I, along with a lot of investors, we used to talk about the risk mitigation and whether it makes sense to be at $1 million versus $500,000. We had lots of discussions even back in 2019. Now that you're going down to $500,000, how would you -- it's obvious what the benefits are. What are the costs or what are the things that we should take into account in terms of thinking about that? Paul Sarvadi: Well, just to put it in historical perspective, we have looked at that for a long time. And of course, there was a time when we didn't have the $1 million limit. in our world. But what's happened over the years is the number of ways that someone can have a claim of a significant size like that, the number of ways has increased. But also, I think it's important to note that this contract that we have just signed with UHC is -- this is what we mean by better alignment in how we're looking at the entire game plan for our program. And in this particular case, the agreement to be able to look at the various levels every year and have them, I'm going to say, priced in a way that makes it fit our program. and for the whole program to be designed to have growth incentives and things of that nature. So I'm just telling you the elements, the terms of the agreement really line up to have the best program we can have for our people and have a higher level of consistency and predictability in the model. So being able to have a significant immediate cost reduction right now where we get a majority of even the shortfall we had this year back as we go into next year and be able to put a lower cooling level that's the $500,000 level, that's really good timing, obviously, against the backdrop of a sudden elevated claim level. James Allison: Mark and on your question, I was going to answer the question about pricing and a little bit more focus on unprofitable clients. I think generally speaking, as we're increasing our pricing, the curve is a little bit higher than it was. So you're not just raising the pricing equally across the board. We're taking actions to make sure that we're doing everything we can to retain our profitable clients. And so we think that the ones that do terminate are likely to be lower profitability than the ones that stay. Operator: Our next question comes from Tobey Sommer with Truist. Tobey Sommer: I was hoping if you could provide a little bit more detail on the pricing. On the prior earnings call, you said you've done some work and we're really encouraged by the opportunity being more significant than you had mentioned. And I just want to understand that to also provide color in a better grasp on how you can offset the incremental operating and service expenses associated with the new platform. James Allison: Thanks for the question, Tobey. Clarifying for anybody who's listening, you're referring to HRScale pricing. And yes. So if you think about what we are offering, obviously, we've got a lot of services that are similar to what we offer today. There are some new services that get unlocked or made more advanced because of new functionality available in the Workday platform and the opportunity for strategic services around those things as well as keeping the platform up to date and current. So we've taken all those things into consideration in our pricing. There's a significant uplift in what I would call the base price, if you will, or the list price of the product. And what we expect to be happening over this first 6 to 12 months, we're thinking about the pricing in terms of kind of 3 stages, if you will. So there's -- from a new client perspective, there's a beta stage and then there's an early adopter stage and then we'll be into the pure growth stage. And so we do plan to give some fairly significant discounts to the first customers that are willing to sign a contract and come on to the platform. And then we will reduce those discounts as we go through time and get to a growth stage. We still anticipate that even at those significant discounts, it's higher than what we historically have charged in HR360 for similar-sized clients. But I think one thing that's important to point out that I think Paul was alluding to in his script, having the 2 price points for these 2 products is really beneficial and actually supports the pricing of HR360 from what we're seeing over the course of our discussions and sales in 2025. So we see these as being complementary and supportive of each other at the different price points. Tobey Sommer: You mentioned being able to hit your target growth and profit metrics even if the SMB labor market is kind of sluggish. Like do you think you can hit the historical double-digit worksite employee growth even if SME job growth is flat versus, I think the long trend within your -- long-term trend within your customer base is around 5% per annum. Paul Sarvadi: Yes, Tobey, that is exactly what I said in my script. And I'm just reflecting what I see going on when you have a new offering where you've got over 40,000 businesses that have over 25 million employees. And when you sell them, the average size is 400 to 700 employees instead of your average size client being 25 to 30 or 30 employees. This is a significant catalyst for growth. And I think the timing of it is particularly exciting because of what we've seen in the small business -- small- to medium-sized business labor market. And we've seen now this is third year in a row with very low single-digit net gain within the client base. I would have never dreamt that. And we're on the front end of AI. So I see us being in a unique position in our space by having such a rifle-shot target, perfect-fit solution for this highly underserved and highly desirable client, being able to walk in the door with 2 of the leading companies in the HR space coming to the table, having made an incredible commitment and investment to make a hand-in-glove fit solution for these target accounts. And when you look at the whole pricing picture, where you're bringing so many different elements together and able for them to do this at a price that's never been able to do before, both upfront cost and ongoing cost, it is an engine for growth, and we're very excited about it. It's not time yet to convert that into the sales per salesperson per month and how the size, all that kind of stuff. But we're on that way now. We're on the way of keeping track of everything we're doing on every call and how it goes and what -- over this next year or so, I think we're going to see some exciting things where we can give you some better picture of the future. Operator: Our next question comes from Andrew Polkowitz with JPMorgan. Andrew Polkowitz: Congrats again on the launch of HRScale. I appreciate the color that you guys gave on the investment over year 1 and year 2. You also mentioned that you expect something to be effective, call it, low $30 million in investment in 2026. So that gets us pretty close to the aggregate $150 million you called out at the start of the process. I was just curious now that we're kind of in the early days of go-live, is that $150 million aggregate investment still the right framework? Or is there a different way we should be thinking about the cost of the go-live? James Allison: Andrew, thanks for the question. I would like to clarify one thing. When we talk about the operating expense impact of HRScale for next year, we're including ongoing operating expenses that have revenue offsetting them a little bit of probably some inefficiencies in the first year. But obviously, I would consider those to be operating expenses and not necessarily investment. The level of investment is down significantly lower than that. And I think you have to think about, as Paul alluded to -- we still have some months to go before we get to the first go-live and the stabilization period. So our investment kind of continues through that period, and then it's going to fall off relatively significantly and just have kind of a normal product road map associated with it. Now is that number -- we don't have a better number right now than $10 million a year going forward. Obviously, what we're looking at when we think about the product road map is the available resources across a lot of different projects and ideas, things that people want to do with HR360, things that people want to do with AI and other potential projects that are out there. And so this is a resource allocation decision that gets made there. So as we're thinking about the 3-year plan, as we're thinking about the budget for 2026, we'll be making some decisions in that regard. But obviously, a little bit fluid when we're trying to capture the opportunity, but also balance the level of investment with needs in other parts of the company. Andrew Polkowitz: Got it. That clarification is super helpful. Just for my quick follow-up, Paul, you mentioned that you guys consider for your midterm framework uncertainty about AI and employment. And just understanding that at this stage, no one really knows the full impact, I'm curious how you just think about that over the midterm relative to your kind of prior 3-year plan that you called out in the past. Paul Sarvadi: Sure. It's interesting because we haven't seen any of it yet where the malaise, so to speak, in the hiring front is rooted in specific AI job replacement. We haven't seen that yet. So everything we've seen so far is really more about the big picture of where things have been and some of the uncertainty and -- et cetera, that has caused a delay in decision-making, that type of thing. But I believe as we go forward, we want to be at least prepared for that. And that's why I think it makes sense that everybody should be looking at other growth engines. I just think the timing of ours being in place right now is really sweet. James Allison: If I can add to that a little bit, I would say -- when you think about what's going on in the small business environment today, to the extent that they're using AI tools, it's more likely to make them more effective right now as compared to more efficient. Efficiency could come certainly at some point in the future. But the other thing -- other point is as larger companies have potential efficiency gains and potentially reduce headcount, historically, that has led to a lot of entrepreneurship, people that are really smart. And I think about whether it's the dot-com boom or other times in the past that people leaving large companies decide to start small companies. And so I do think there's a possibility as we go through time that new business creation could provide some level of buffer against the employment efficiency. Operator: We have reached the end of the question-and-answer session. And I will now turn the call over to Mr. Sarvadi for closing remarks. Paul Sarvadi: Well, once again, I want to thank everyone for participating today, and we are really excited about both the UnitedHealthcare contract and the rebound that we're expecting in 2026 and also the exciting news about HRScale and how we're off to the races on that front. So thanks for participating today, and we look forward to further discussion with each of you. Thank you. Operator: Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Hello and welcome to the Uber third quarter 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, please press star one on your telephone keypad. I would now like to turn the conference over to Balaji Krishnamurthy, Vice President, Strategic Finance, Investor Relations. You may begin. Balaji Krishnamurthy: Thank you, Sarah. Thank you, everyone, for joining us today, and welcome to Uber's third quarter 2025 earnings presentation. On the call today, we have Uber CEO Dara Khosrowshahi and CFO Prashanth Mahendra-Rajah. During today's call, we will present both GAAP and non-GAAP financial measures, and additional disclosures regarding these non-GAAP measures, including a reconciliation of GAAP to non-GAAP measures, are included in the press release, supplemental slides, and our filings with the SEC, each of which is posted to investor. Certain statements in this presentation and on this call are forward-looking statements. You should not place undue reliance on forward-looking statements. Actual results may vary, may differ materially from these forward-looking statements, and we do not undertake any obligation to update any forward-looking statements we make today, except as required by law. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the press release we issued today, as well as risks and uncertainties described in our most recent form 10-K and in other filings made with the SEC. We published our quarterly earnings press release, prepared remarks, and supplemental slides to our Investor Relations website earlier today, and we ask you to review those documents if you have not already. We will open the call to questions following brief opening remarks from Dara. With that, let me hand it over to Dara. Dara Khosrowshahi: Thanks. Q3 was an outstanding quarter for Uber, driven by a powerful combination of innovation and execution. Trips grew 22%, marking the fastest growth since 2023. Both lines of business accelerated, with mobility trips growing 21%, significantly exceeding our expectations. This top-line strength was fueled by record audience and engagement, up 17% and 4%, respectively. Gross bookings grew 21%, while average pricing remained relatively flat. This translated into record adjusted EBITDA and free cash flow, reinforcing our ability to deliver affordability for consumers while generating strong operating leverage. We are expecting more of the same strong performance in Q4, with another quarter of high teens gross bookings growth and low to mid-30s EBITDA growth. In fact, we hit a new record over Halloween weekend, this most recent Halloween, with more than 130 million trips across mobility and delivery and more than $2 billion in gross bookings. While we are proud of what we built, we are even more focused on what comes next. As I often remind the team, great technology companies deliver today while building for tomorrow. To that end, we have defined six strategic areas of focus to guide our next phase. First, from trip experience to lifetime experience, we are deepening engagement across our platform, with cross-platform consumers spending three times more and retaining 35% better than single product users. Second is building a hybrid future, seamlessly integrating human drivers and autonomous vehicles into a single marketplace, giving us unmatched flexibility and efficiency. Third, investing in local commerce, expanding rapidly into grocery and retail, now at approximately $12 billion gross bookings run rate and growing significantly faster than restaurant delivery. Fourth is multiple gigs, broadening earning opportunities for our 9.4 million drivers and couriers, including new digital tasks powered by Uber AI solutions. Fifth is becoming a growth engine for merchants, helping our over 1.2 million merchant partners drive significant incremental sales through ads, offers, and new demand channels like Uber Direct, as well as new partnerships. And then finally, generative AI, embedding intelligence across Uber to enhance productivity, optimize our operations, and deliver more personalized consumer experiences. You will see us invest in these areas with our product, our people, and our capital in the years ahead. They are designed to deepen customer relationships, our technology advantage, and to extend the profitability flywheel that we built. The strong execution, a unified global platform, and unmatched scale. We are building the next generation of Uber, one that is positioned to create lasting value for many, many years ahead. With that, Operator, why do not we start questions? Operator: Thank you. Your first question comes from the line of Doug Anmuth, JP Morgan. Your line is open. Douglas Till Anmuth: Thanks for taking the questions. Can you just talk about the path to increase the 20% of map in markets where you have mobility and delivery? They use Uber One, and you talk about those drivers of cross-platform usage. And then could you expand on the recently announced Nvidia partnership? Both of you have invested in several AV tech providers. You have also talked about deploying 100,000 vehicles. Can you talk about the timeline and then who will own the fleets in that scenario? Thanks. Dara Khosrowshahi: Sure, absolutely. So in terms of cross-platform and the penetration there, you know, as we talked about, about 20% of consumers where we operate both mobility and delivery, because we do not operate on mobility delivery in every single country that we operate in, only 20% of consumers are active across both businesses. And for example, 30% of our mobility riders have never tried any Uber Eats offering, and 75% have never tried grocery and retail. And typically where we see a higher penetration of that 20% is in markets where mobility and delivery are particularly strong in terms of their penetration. Australia would be an example of that. And so just mathematically, the cross-platform crossover is higher. What we have now done, what we are doing now is to set specific programs to drive cross-platform behavior. So you will see kind of top tabs and rides and Uber Eats app to make it easier to transact across the various businesses. We are creating personalized experiences to upsell based on context. Let us say Rise Eats. If you are going to work, we will offer you a Starbucks on the way to work. That is great incremental business for Starbucks, and it is kind of a delightful experience for you as well. And then, of course, membership is a huge factor in deepening our own relationship with consumers. But then also introducing cross-platform as well. So all of those are various ways to drive cross-platform. The average cross-platform consumer spending three times more than kind of model line consumers. So it is just a mathematical and unique advantage that we have. And I think we are very, very early in terms of the innings, in terms of driving cross-platform activity. It is happening naturally and again, a lot of innovation going on from the teams to make sure that when we target cross-platform usage, we are doing it with the right context and not getting in the way of your just ordering pizza on a Friday night. In terms of Nvidia, we are very, very excited about the partnership. There, you know, Nvidia is creating with Hyperion, like a reference architecture for L4 ready autonomous that they are going to make available to any OEM out there. And if you kind of step back and you think about the strategy, a future, you know, ten years from now where every single new car sold is not only L3 ready, if it is a personal car, but it is also L4 ready if you want to contribute that car to a ridesharing platform like ours, or fleets might buy those cars as well. That is a very bright future for the world because it will make the world safer. In terms of these autonomous vehicles being super safe, not getting distracted in terms of driving. But it is also very good for the ecosystem in that we will have a ready kind of supply of cars on our platform as well. And we are very early, but I think that we are quite confident in demonstrating that cars, L4 cars that are on our platform can drive higher revenue per car per day than cars that are not on our platform. So we think that the Nvidia strategy and our strategy is very much aligned. We announced the relationship also with Stellantis, with an initial 5,000 vehicles that are going to be powered by Nvidia as well. But we expect that to scale significantly more going forward. We will use our, you know, again, Nvidia is building the software as well. So it is a hardware platform. But Nvidia is also investing in building out L4 software stack that will be then essentially distributable on any car using the Hyperion platform, which is a great reference architecture. And then in terms of who is going to own the fleets, you know, we will we can lean in with our balance sheet early on to kind of establish the economics of these fleets, but eventually we think that you are going to have just like you have got these rights owning hotels that are yield vehicles. I think that you will see yield vehicles show up for fleets. In terms of whether they are owned by private equity or public fleets out there. So we can lean in with our balance sheet. But we think that all of these assets are going to be financialized over a period of time. So very excited about the partnership. Obviously, if there is one ally you want in the world in terms of AI or autonomous, it is Nvidia and super excited to innovate with them. Operator: The next question comes from Eric Sheridan with Goldman Sachs. Your line is open. Eric James Sheridan: Thanks so much for taking the questions. On the delivery side of the business, as you continue to widen out the array of what you are offering users, can you talk a little bit about how much of that is a stimulant to new user growth for Uber Eats or a driver of increased frequency across the broader platform? Just to better understand where the output of the yield is showing up in the business. And then on the AV side, maybe building on Doug's question where you have rolled out AVs today, what have you learned so far with respect to the impact of more supply on the road and how it helps either stimulate demand or impact on the pricing side? Thanks so much. Prashanth Mahendra-Rajah: Yeah. Hi, Eric, it is Prashanth. I will take the first part of that on delivery and then let Dara address the AV side. We are really thrilled with how the delivery business has accelerated for the third quarter. It is the fastest growth we have seen in four years. Four points of acceleration. And it is really you are seeing that growth pretty broad across multiple markets. And it is coming from investments that we are making in a number of areas. On improving the product on the grocery and retail side, specifically. We are very excited on how grocery and retail is leading to an introduction of folks into the online food delivery as well. And we are seeing great growth. And I think we have some data in our supplemental charts that show some of the statistics around that, which is grocery, retail being a source of creating consumers for the online food delivery, grocery and retail. It is a great TAM for us. I think in the prepared remarks, we may have mentioned that we are now at a $12 billion run rate, which is growing at a meaningfully faster rate than our online food delivery. And we will continue to lean into that grocery retail business, which is now variable contribution positive. So it is helping us carry its own weight with high growth. And really is working quite complementary with delivery. And then as Dara just answered in Doug's question, it is a cross-platform strategy that we are working on to help folks move across all three of our LOBs. Dara Khosrowshahi: And then, Eric, in terms of how AVs are affecting the overall business, listen, it is very, very early. The biggest scale operations that we have got are with Waymo in Austin and Atlanta. And what we are seeing is that those markets are growing faster than other US markets. And this is in a Q3 where the US actually accelerated nicely Q3 over Q2. So the overall US market is strong, but we are finding that, for example, growth in Phoenix, Austin, Atlanta was more than twice the rest of the US. So that is certainly a good signal. What that has also led to is that driver earnings in those markets are super, super healthy as well. So in Austin, for example, where we have the most AVs on the ground, driver earnings per hour actually outpaced the rest of the US. So, you know, whether or not the growth in those markets is correlation or causal, it is too soon to tell. But the market certainly looks healthy. Our partnership with Waymo continues to be excellent from an operational standpoint. Waymo utilization is still very, very high. And what we are seeing is an overall market that is healthy as well, which is really good signal as we transition to this hybrid network of AVs and human drivers. All right. Next question. Operator: Okay. Next question comes from Brian Nowak with Morgan Stanley. Your line is open. Brian Thomas Nowak: Thanks for taking my questions. I have one on mobility and one on delivery. The first one on mobility. The US business seems to be doing very well. Again, just curious for any further color on progress you are making in the urban versus suburban strategy or the sparse strategy? I think you talked about call it 6 or 9 months ago, sort of drivers of that growth and that nice, that trip growth you are seeing in the US, urban versus suburban. And then on food delivery. Any color you can give us about the European food delivery business, one of your competitors is going to be entering a couple of those markets, potentially a little more aggressively to come. How do you sort of think about the key investment areas into 26 you are focused on? In the European food delivery business? Thanks. Prashanth Mahendra-Rajah: Okay, thanks. Thanks, Brian. I am going to handle the first question on mobility and then Dara will talk about competitors in the food delivery space. So the sparse geography strategy, which we had talked about this originally, if you recall, this originally was an output of the work that we had led on focusing on how to increase our delivery business. And in that analysis, and as we began to look at how we can make better progress on delivery, we identified that there was more opportunity for us to continue to push on sparse geographies and the mobility area and the benefit that we are seeing there really is it is first, it is a very large footprint. So as we look across the globe here and the similar for the US, our sparse geographies are actually growing at about one and a half times the rate of our denser markets. And the penetration opportunity in these sparser markets continues to be quite high. Our rough take is that we are maybe 20% into what the opportunity is on the sparse market. So still lots of upside there. And again, that is global numbers. But you sort of seeing similar demographics for the US, which I think is where your question was. So in focusing on the sparse geographies, we are really focused on three areas. It is on expanding the availability of the product, increasing the reliability of the product, and then ensuring that we have the right product fit. For example, the weight and save product has been an excellent match for the sparse geographies because typically when you are in a more suburban environment, you are in a situation where you do not mind waiting a little bit for your ride, which gives us the ability to find the right match and to compensate for the lower density of cars which may be in that market. So all of that is continuing to feed the flywheel. And we feel very excited about how sparse geographies are going to continue to provide growth for our US market for many, many quarters to come. I will hand here now to Dara to talk about the delivery competition environment. Dara Khosrowshahi: Yeah, absolutely. So we are very happy about our position in Europe. We have got the leading position in Europe. We have become the number one player in the UK. We have been the number one player in France for some period of time. We are gaining category position very solidly in both Spain and Germany. I was visiting there last week to visit with the teams and understand a bit more about the market. So the momentum in Europe and the profitability in Europe is excellent. And listen, food is a huge category. It is no surprise this is a $2 trillion TAM in food and $10 trillion TAM in grocery. So competition is going to be a fact. We have built a position in Europe organically. And some of our competitors have had to buy their way into European position. And that is always more difficult because it comes with a bunch of integration, mess, etc., that we do not have to deal with. And I think from our standpoint, we are going to do more of the same, which is it is all about expanding merchant selection and improving service, improving reliability in terms of delivering the food to you exactly as expected at the right time. We are going to use the power of the platform to drive cross-sell and membership as well. And then we are going to continue to deepen our partnership with the ecosystem. You have seen announcements with OpenTable, Instacart, Ifood, as well in Brazil, not in Europe, obviously, but in Brazil. And I think that the last thing that I will say is, you know, we have competed with a number of these players outside of the US. We compete with DoorDash in many markets. You know, Australia, Japan, Canada. And we have been gaining category position in those markets for some period of time. So competition against these players is nothing new. And certainly in the US, in Europe, and the rest of the world, we have been a category gainer for some period of time while improving profitability. And I expect that to continue. Great. All right. Let us take another question. Operator: The next question comes from Justin Post with Bank of America. Your line is open. Justin Post: Great. Thanks for taking my question. I just would love to hear you talk about the margin flow through in the quarter. If you made any extra investments and then second, how you are thinking about the investments you are going to need over the next 12, 18 months to really scale your business. And could that impact mobility margins? Thank you. Prashanth Mahendra-Rajah: Justin, I will take the first one. And I will let Dara sort of comment on that second one there. So maybe let us take a step back to reflect on the third quarter. Our EBITDA was up 33% year over year. And as a result, we hit an all-time high for margins at 4.5% of GBS, which is up roughly 40 bips year over year. The outlook for Q4 is pretty consistent. Another rinse and repeat, and we are tracking exactly where we want to be against the three-year framework we gave you in February of 24. And that is mid to high teens gross bookings growth and a high 30 to 40% EBITDA CAGR. We really are proud of how we have been able to drive profitable growth at scale here. Both mobility and delivery are accelerating. And that is accelerating off of a pretty enormous base. So it is tough to really defy the law of large numbers. And with that growth, we are converting that into strong profitability. And generating a ton of cash, almost $9 billion on a trailing 12-month, which we are using to reduce share count. So we are very deliberately, as we have said for several quarters now, we are very deliberately moderating the pace of our margin expansion. Over the last couple of years, we demonstrated that this enterprise and this business model can be profitable. We have taken our, for example, we have taken our delivery business from when I joined in late 23, from like a low 2% EBITDA margin to now, almost four. And that has been through to demonstrate that this is a great business. These are both great businesses. With that, we are now asking investors to measure us on total profitability. Understand that we are committed to annual profit expansion year over year, profit expansion for as far into the future as we can see. But we will sort of run the balance between the two product lines and on a sequential basis to make investments. And that is because we, as we have said many times, we have so many exciting opportunities to invest in. I will not go through a big laundry list here, but, you know, Dara has already mentioned the exciting things we see on cross-platform. The investments we are making in affordability and low-cost product offerings is partly what is responsible for the acceleration in mobility that we are talking about. We, in some earlier questions, we talked about grocery and retail, which are being a great source of adding new consumers. So I could go on and on, but that is the model. And we are excited about the future. And I would just continue to remind investors to focus on our overall profit, dollar expansion, and know that we are committed to grow that on an annual basis for as far into the future as we can see. Let me now relate that among the many exciting investment opportunities to hand off to Dara to talk about investment opportunities in AV. Dara Khosrowshahi: Justin, so just putting some perspective in terms of AV, AV is not profitable today. And any new product that we introduce into the marketplace starts off in a position where we are losing money and we are unprofitable. And the pattern is the same every single time. Introduce a new product. Invest in building out supply of that product. Once we invest in building out that supply of that product, we build up liquidity in the ecosystem. And as we build up liquidity, we build more consumer demand as liquidity and reliability improves, consumer demand improves, as does willingness to pay to improve like that. We have done it ten times, 15 times over and over again. And if you look at our strategy on the mobility business, it is a bit of a barbell strategy. So we have got kind of Uber X, which is kind of the baseline business. And then we have some premium products like Uber for Business that has premium margins like Black and Reserve, that also come with premium margins as well. And we use those premium margins to invest into some of the categories that we are trying to build. Our growth bets. For example. So this was taxi. It was two-wheelers. Three-wheelers, auto rickshaws in India, it is Uber X share. For example, all of those products have been unprofitable when we launch. And as we build out liquidity, kind of the profitability of those products improves. And frankly, you know, we can turn those products profitable if we want it tomorrow. But it is about the balance of investing and profitability and growth. The same is true of AV here, which is as we are building out our supply base, we will lose money in AV. I expect that AV will not be profitable for a few years going forward. And as we build liquidity, we can take margins up. Right now, it looks exactly like a number of our early products. And kind of we can balance the overall margins of our mobility business with this barbell strategy of premium products, feeding some of our investment products and feeding some of the new growth bets as it relates to AV. We will also use our balance sheet. We will kind of invest in AV ecosystem. Various players. We will. We have established a global kind of fleet network to make sure that they can claim the cars, recharge the cars, etc. And we are also investing in AV data collection and partnership with Nvidia so that we are collecting kind of rideshare specific data that we can provide to our partners as well. So this is something we have done multiple times and we expect to run the play again in AV, in terms of the barbell strategy that we have got. Great. Operator: Thank you. Next question comes from Ron Josey with Citi. Your line is open. Ron Josey: Thank you for taking the question. Maybe sticking with the investment theme. But to your point on lifetime investments, you know, I think in the letter you talked about suggested some short-term investments for loyalty gains. Can you help us understand a little bit more on these loyalty gains on the Uber One benefits? Clearly, we have talked about cross-platform and then back on US trip growth, which accelerated affordability. The barbell approach totally get it. Talk to us about insurance rates. And then the benefits from newer driver or newer riders like seniors and teens. Thank you. Dara Khosrowshahi: Yeah, absolutely. So we are very, very happy about our progress in Uber One. I think the last time that we talked to you, we talked about 36 million members growing at healthy rates. That continues. So penetration of Uber Ones in terms of gross bookings, it is about two-thirds of gross bookings for our delivery business and continues to increase. It is gross bookings penetration in mobility as well. And the benefits are there. Frankly, they are just the best benefits in the industry. You know, you get 6% cash back on rides. No delivery fee, up to 10% off of orders, plus exclusive selection and upgrade to priority delivery. And then kind of surprise and delight, other moments as well that we give to our members. The other good news for us is that when we look at membership cohorts and membership retention, even though the number of members is growing very, very fast. The cohorts actually, in terms of retention, continue to improve, especially as we move a higher percentage of the users from monthly passes to annual passes, as well. And then at the same time, we continue to roll out the program geographically. We are now in 42 countries versus 28 a year ago. Now, I would tell you that early on in the initial months, when someone becomes a member, typically that is profit negative for us because the discounts that we offer the member exceed the increment in terms of how much they use the product. And or how well we retain them. Both of those go up as the members mature, you know, six plus months. Then the members actually become profitable as well. So in the first six months, actually moving someone over to membership, especially moving someone who is already a high-frequency user is a net negative. We still make money on those members, but it is a net negative in terms of margins. And then it becomes a net positive as the power of the platform comes in, cross-platform comes in, and retention kicks in as well. So it is just an example of kind of a near-term investment that we make to drive long-term engagement and long-term growth. And the math behind those investments in terms of the lifetime value versus the cost of a member acquisition continues to improve as a result. We are also kind of investing in more partnerships to align our membership program with other membership programs. Obviously, we have a best-in-breed program with Amex. The Consumer Platinum spend, but you are also seeing like exclusive premium table reservations via OpenTable, discounted or sometimes free Clear Plus memberships as well. So the power of the membership is actually getting stronger as we align with others in the industry as well. Prashanth Mahendra-Rajah: Ron, I will take the second part of that question on insurance and 2025 really has been a very good year for us in terms of the progress that we have made. And maybe before I get into the elements, just a shout out to the cross-functional team across Uber us who really has helped us in a number of different areas, make great progress in 25. So we have always talked about sort of three elements to our insurance strategy. And over the course of this year, all three have really contributed to what I think will be beneficial for us in 26. And as we go forward on the legislation side, we have had a number of great wins in a variety of different areas. Georgia, Nevada, and then most recently, I think there has been a bit of press on the wins in California, which will help specifically reduce the uninsured and underinsured motorist coverage limits that are applicable to us from $1 million down to $60,000 on an individual basis. And $300,000 per accident. That is very beneficial for us in California, and it adds to the momentum that we have seen in a number of other states. On the tech side, we have talked about the driving insights dashboard, and this is a product that the tech team has developed that allows our drivers to get some intelligence and some performance feedback on what their driving behavior is doing. It helps alert them to, you know, jackrabbit starts and hard braking, sharp turns and so forth. And by giving them this feedback, we are actually seeing drivers on their own sort of improve their driving behavior. And it is actually we have seen after we have introduced that visibility to drivers, we have seen more miles driven by those in the highest scoring bucket, which is an indicator that folks are adopting, adjusting their behavior to be safer drivers. And then the sort of the cherry on top of that is we have now introduced advantage mode into select cities and will continue to roll that out and advantage mode actually provides some rewards to those drivers who are improving their driving score. And then lastly, on the commercial side, by having a captive and having a top-class team that is working on the commercial negotiations, we have the ability to continue to keep our partnerships really at a stable level and also, you know, where need be. Apply some tension on who holds the risk and who holds the, you know, how much profitability our partners can share from that. And that allows us to keep tension on the cost side. So the result of all these efforts is we expect that we are going to see hundreds of millions of dollars of savings. And we look to pass those savings on to customers through lower fares, really across the US for next year. Okay. Next question. Operator: The next question comes from Ross Sandler with Barclays. Your line is open. Ross Adam Sandler: Hey guys. Just wanted to ask about the new multiple gigs initiative. So what are some of the areas that you are looking into for new work, new earning potential and, you know, stepping back, how might this initiative impact things like driver retention or overall profitability? For Uber compared to just kind of operating only the two areas of earnings that were in today? Thank you. Dara Khosrowshahi: Yeah, absolutely. So, you know, just similar to the consumer where we see consumers using multiple platforms, they retain better. They use our they get embedded with our platform more. The same is true for earners, which is to the extent that they use us for delivering and shopping etc., or delivering and, and or mobility. They are embedded with the platform or retain them for longer, etcetera. What kind of one way of looking at Uber? Obviously, we are a logistics transformation platform in terms of moving people, places or getting anything to your home or, you know, getting a truck to ship your goods. Another way of looking at our platform is that we are a platform for work. And the first kind of work that we have gone after is transportation. But we can empower other kinds of work as well, which is what Uber AI solutions is all about. The work that we are doing encompasses, you know, training AI models. To rating both kind of voice bot audio responses to annotating videos from multiple sources. For various players, like security cameras and robots, for examples, or creating, you know, kind of judging query response pairs across various answers. AI answers. And this kind of work is available to both earners who are on the platform all around the world. You know, we need this work done in English and we will need it done in Spanish. We might need it done in many other languages as well. And it is another earnings opportunity for both our earners who are in place now. But also new earners who can come to the platforms. Some of the rules require, for example, in physics in order to get the gig done, so to speak. And the pay for that kind of work is obviously higher. So this is we think, you know, one is it is an opportunity to provide more work as the nature of work changes going forward. We do think that it will provide more earnings opportunities for earners and kind of which is terrific. And we think this can ultimately be another profitable line of business for us. Uber AI solutions is we are landing a ton of customers. And it is kind of nascent in its operations right now. But the potential that we see is enormous. Next question please. Operator: Okay. Next question comes from John Colantoni with Jefferies. Your line is open. John Colantoni: Great. Thanks for taking my questions. First. Can you talk about any key capabilities provided by the Toast Partnership? And how it fits into your broader framework for leveraging partnerships to help drive growth and profitability? And second, Prashanth, maybe you can talk about the rationale for shifting some of the non-GAAP metrics and for the move from adjusted EBITDA to adjusted operating income. Specifically, does this have any reflection on your ramp and capital investments in the autonomous vehicle space? Thanks. Dara Khosrowshahi: Yeah, absolutely. So in terms of toast, we are very, very happy about that partnership. They are a strategic partner. And obviously toast is kind of one of the leading point of sale offerings in the industry. What you will see in terms of toast is that, you know, a restaurant that is toast enabled essentially will be automatically enabled for eats as well. So the integration between toast and eats is going to be seamless. Menu uploads will be seamless. Picture uploads will be seamless. So we are actually using the data. The restaurant data that toast is empowering. And then moving that data directly across to Uber Eats. It is going to simplify kind of setting up your operation on eats. It is going to simplify how you market on eats. And it is going to kind of save a bunch of time for those entrepreneurs who are building out our restaurant ecosystem. So I think it is just going to be a more seamless, integrated experience that gives restaurants a lot more control, a lot more flexibility, and allows them to launch on eats immediately. We are also hoping to help toast grow its international presence outside of the US. Obviously, they are very, very strong in the US. Our footprint outside of the US, as you know, is much more mature. So we think this is kind of a win-win for us. It gives us more footprint across toast ecosystem. And then for toast, it helps them grow outside of the US as well. Do you want to take a second? Prashanth Mahendra-Rajah: Yeah. Thanks. So yeah, thanks for the question John. So the rationale really is a reflection. Just as we as a company grow in size, scale and maturity. We want to provide investors with metrics that allow for better comparability across the alternative options they have on where to put their client's capital and moving to an adjusted EPS model. Really allows for that ease of compare and it reflects that we as a management team understand that there are real costs that come from depreciation, from some of the software amortization, the stock-based comp, etc., that need to be reflected in the cost of running the business as well as including really the benefits that come with reducing share count from returning the cash that enterprise is generating to shareholders by repurchasing our shares. So nothing more to it than really I think it is a journey that all companies go through as they scale. And become more meaningful in an investor's portfolio. And then personally, I think as CFO, I like having the LOB leaders held to an adjusted operating income because, you know, there are choices that they make on, for example, talent decisions and location decisions, which can impact costs such as stock-based compensation or depreciation. And those are real costs to the business. And it helps to have that also in their consideration as they think about where they want to make their investments to continue to drive top-line growth. But being mindful of our commitments to continue to grow profitability. So it is really just I think the appropriate evolution for the company, given where we are. All right. We will take the last question, please. Operator: The last question comes from Nikhil Devnani with Bernstein. Your line is open. Nikhil Devnani: Hi there. Thank you for taking my question. I had a couple. Please. So first I wanted to follow up on the strong results in mobility. And I am just wondering, did the upside primarily come from the moderation in insurance pressure or were there other network improvements that unlocked the growth in the quarter as well? I think the letter talks about driver supply and product uptake. So just trying to understand the relative contribution from those additional factors and how they might continue to stack in your favor into 26. And then my second question is on AVs, there are can you speak a little bit about the scale and quality of real-world data that you are able to contribute? It seems like that is a core constraint for a lot of AV companies. And you can help chip away at that problem. So I am curious to hear how you are going about tackling that. Thank you. Prashanth Mahendra-Rajah: Yeah. Thanks, Nikhil. I will take the first one. Really. And it is very specific to mobility. Growth I believe is where you were asking. So the business is doing really well. Look, the investments we have made are starting to come through at a great rate. The marketplace trends are strong. The product innovation is giving us conviction. I think what we would like investors to really focus on is this growth is trips led and that is the healthiest way to grow the business because it comes from expanding our audience and mobility. Audience hit almost 150 million users. That is an all-time high for us. Our frequency growth was also very strong. So together you are seeing the right drivers behind it, and it is coming from great growth on the core. As well as the new product portfolio. So we still feel very confident as we look to 2026 and beyond. I mean, the metric that keeps us excited is, for example, looking at our top ten markets, only 10% of the adult population uses Uber on a monthly basis. So we continue to see great opportunity to continue to penetrate the TAM. And I think Dara has made reference to our barbell strategy. And maybe just to help put that in perspective, Uber X, which is really the core engine of our growth, represents about two-thirds of our trips. So when you look at the wings, you see the investments we have made in product innovation on the low cost, such as the Moto product. Weight and save the shuttle that we are running in New York, shared rides. All of those are making Uber more accessible to a broader population. And helping us onboard new users, which is behind some of that audience growth. And then the investments that we are making in premium, which include the comfort, the black, I think we have made mention that we are working to launch an Uber Elite product in the next quarter or two. All of those help us to balance that overall profitability, to allow us to continue to drive the margin expansion. So overall, we feel great about the growth. And then sort of more specifically, if we think about what happened in the third quarter, I would tell you that it was up on the trip side. We had good growth internationally, Latam and APAC, and we also had a great European summer travel that really helped out on trips. And then just in terms of helping you bridge from the high trip growth of 21% to the 19% of GB growth, as I mentioned, that growth internationally, that puts a little bit of pressure down because obviously trips outside the US and Canada are at a lower price point. So that puts a little bit of pressure as well. So I would not really characterize what we saw in Q3 as one-off, we are now entering our busiest quarter. Dara already made opening comments on what a spectacular weekend we had for Halloween. So, you know, we feel good that 2026 is going to be another great year for Uber. And we will continue to be a business that has the ability to generate high mid to high teens growth. Convert that into great profitability, convert that into great cash and then use that to reduce share count. And that is the model we want people to get behind. Great. Dara Khosrowshahi: And then in terms of AVs and collection of real-world data, we are collecting real-world data as we speak. The advantage that we have is we already run a rideshare network, and it is essentially putting a vehicle in place that is appropriate for collection of this real-world data. And as you can expect, the rideshare use case is particular in terms of pickups and drop-offs or the commonality of pickups and drop-offs. You know, stadiums, airports, etc. We have obviously, we are working very closely with our partners and the feedback that we are getting from them in terms of the value of the data and training their models is very, very positive. And then the Nvidia announcement for us is a marker to really scale the operations. Here. We are looking into building out a more robust sensor stack. For example, to get higher definition data quality across both camera and lidar. For some of our partners. And we are not really restricted by scale because it is either a vehicle or it is a sensor suite that we can put on top of these vehicles. We have got, for example, you know, we will probably work with some of our fleet partners as well as some IC drivers as well. So this is something that we can scale up essentially as much as we desire, in partnership with Nvidia and our other AV partners. As well. And again. We think that between the Hyperion hardware platform, Nvidia working on L4 themselves, the multiple partnerships that we have, both in terms of mobility and delivery on AV and now our ability to collect data. And then the SIM capabilities for many of these partners are much stronger in terms of collecting one piece of data. And then running thousands of scenarios from that core piece of data. We think that is a terrific combination to bring AV to market as quickly as possible. And obviously on the Uber platform. So very excited about the possibilities here. All right. Thank you very much. Operator: Thank you for your questions. And thanks everyone for joining us. And to the Uber teams. Great quarter. In terms of growth, both top line and bottom line. And hopefully more to come. Thanks everyone. Talk to you soon. This concludes today's conference call. Thank you for joining. You may now disconnect.
Operator: Good morning, and welcome to the Third Quarter 2025 Results Presentation for Hillman Solutions Corp. My name is Tanya, and I'll be your conference call operator today. Before we begin, I would like to remind our listeners that today's presentation is being recorded and simultaneously webcast. The company's earnings release, presentation and 10-Q were issued this morning. These documents and a replay of today's presentation can be accessed on Hillman's Investor Relations website at ir.hillmangroup.com. I would now like to turn the call over to Michael Koehler with Hillman. Michael Koehler: Thank you, Tanya. Good morning, everyone, and thank you for joining us for Hillman's Third Quarter 2025 Results Presentation. I'm Michael Koehler, Vice President of Investor Relations and Treasury. Joining me on today's call are Hillman's President and Chief Executive Officer, Jon Michael Adinolfi, or JMA as we call him; and our Chief Financial Officer, Rocky Kraft. I would like to remind our audience that certain statements made today may be considered forward-looking and are subject to the safe harbor provisions of applicable securities laws. These forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties, assumptions and other factors, many of which are beyond the company's control and may cause actual results to differ materially from those projected in such statements. Some of the factors that could influence our results are contained in our periodic and annual reports filed with the SEC. For more information regarding these risks and uncertainties, please see Slide 2 in our earnings call slide presentation, which is available on our website. In addition, on today's call, we will refer to certain non-GAAP financial measures. Information regarding our use of and reconciliations of these measures to our GAAP results are available in our earnings call slide presentation. JMA will begin today's call by providing some commentary on our record third quarter results, briefly hit on our guidance and discuss our performance by business segment. Rocky will then give a more detailed walk through our financial results and guidance before turning the call back over to JMA for some closing comments. Then we will open up the call for your questions. It's now my pleasure to turn the call over to our President and CEO, Jon Michael Adinolfi. JMA? Jon Adinolfi: Thanks, Michael. Good morning, everyone, and thank you for joining us. The third quarter of 2025 was a record quarter for Hillman. We recognized the highest net sales and adjusted EBITDA of any quarter in our company's 61-year history. Net sales for the quarter increased 8%. Adjusted EBITDA increased 36% and our leverage improved to 2.5x versus 2.7x a quarter ago. These outstanding results were driven by our team's commitment to taking great care of our customers, successfully navigating the current tariff environment and operating efficiently across our global supply chain. I'm especially proud of this team because we accomplished these great results despite market volume headwinds and tariff volatility. Our results for the year-to-date period have been strong. We are positioned well to build off this strength and expect to see continued growth for the remainder of 2025 and for 2026. For the first time in a long time, we are encouraged with some of the leading macro indicators. For example, 30-year mortgages are down 50 basis points lower since last quarter. We are hopeful that lower rates, coupled with the elevated level of existing homes currently for sale will help drive existing home sales in the near future. Based on our performance so far this year and our expectations for the rest of the year, we are reiterating our full year 2025 net sales guidance and increasing the midpoint of our full year 2025 adjusted EBITDA guidance. We maintain our expectation that our full year 2025 net sales will be between $1.535 billion to $1.575 billion, with a midpoint of $1.555 billion. The low end of our net sales guidance represents 4% growth over 2024 and the high end of our guidance represents 7% growth over 2024. As for our bottom line, we are increasing the low end of our guidance and now expect full year 2025 adjusted EBITDA to be between $270 million to $275 million with a midpoint of $272.5 million. The low end of our 2025 adjusted EBITDA guidance represents 12.7% growth over 2024 and the high end of our guidance represents 14% growth over last year. These numbers are very consistent with our long-term algorithm and as we have said many times, we get there many different ways, but this business delivers in just about any environment. Since our founding in 1964, Hillman has built a long and consistent track record. Over the decades, we have proven our ability to perform through every kind of economic cycle from periods of expansion to times of uncertainty. The durability of our business model comes from the essential nature of our products. Our 112,000 SKUs are generally tied to everyday repair, maintenance and home improvement projects. These projects need to be done during good times and difficult times. As a result, we have delivered steady, resilient performance for more than 60 years. Many would argue that the last 3 years have been a difficult market in our space with existing home sales hovering around $4 million annually. This is about 20% below the 10-year average of over 5 million single-family existing homes sold in the U.S. How has Hillman performed during this time? Compared to where we were just 3 years ago, we have increased our trailing 12-month adjusted EBITDA at a 10% CAGR, totaling over $70 million, paid down over $240 million of debt while reducing our leverage over 2 full turns and successfully executed and integrated 2 acquisitions. These outstanding results demonstrate the resilience of Hillman's model and the ability of this team to execute well in any environment. You've heard us say that we are a good business when things are good and a surprisingly good business when things have been challenging. The last 3 years have proved this. Hillman is a great company with a long track record of success. We have an experienced team that has been battle tested, great relations with our customers who are the best in the business at what they do and a world-class distribution network. We believe when the market turns, we will be positioned for outsized growth at both the top and bottom line. Our growth and performance have been powered by our competitive moat and the long-term customer relationships that are unmatched in our space. The Hillman moat includes our secret sauce of 1,200 dedicated sales and service reps working directly in our customer stores, our best-in-class direct-to-store delivery capabilities, category management expertise and retail partnerships that are embedded and strategic. These make Hillman an indispensable partner to our customers. To date, we have successfully managed the current tariff environment, which continues to evolve. Thanks to our team's hard work, we have fully covered the increased costs associated with higher tariffs. We continue to execute our dual faucet strategy where we buy products from multiple suppliers in multiple countries. At the end of the quarter, we held our annual supplier conference in Vietnam. Our sourcing team and I met with many of our top suppliers. This annual event serves as an important in-person touch point to strengthen relationships with our supplier partners, which is especially important given the environment. Meeting face-to-face offers our long-term and new supplier partners a fresh view of Hillman's near-term objectives and how we can work together to achieve our long-term goals. As we have seen throughout this year, changes in tariff policy can shift the market rapidly. The flexible supply chain we have built allows us to react to these changes so that we can always deliver high-quality products to our customers at the best value. Managing tariffs has been a big effort for our team, but we have not lost focus on taking great care of our customers, winning new business and consistently striving to make our operations more efficient. We continue to deliver orders on time and in full to our customers, which have been demonstrated by excellent fill rates, which have been above 95% this year. Now let's turn to results for our quarter. Net sales in the third quarter of 2025 totaled $424.9 million, which increased 8% versus the third quarter of last year. Driving our robust top line was a 10-point increase from price, 2 points from Intex, which we acquired during August of 2024 and 2 points from new business wins. These were partially offset by a 6-point headwind from market volumes, which was consistent with our expectations. For the quarter, adjusted EBITDA increased 36% to $88 million compared to $64.8 million last year. Adjusted EBITDA margins improved by 420 basis points to 20.7%. Adjusted gross margin for the quarter totaled 51.7%. This marks a 350 basis point improvement from 48.2% during the third -- the year ago quarter and a 340 basis point improvement from 48.3% last quarter. Driving our year-over-year sequential margin performance were both improved contributions from RDS and benefit from price cost timing. Our biggest segment, Hardware and Protective Solutions or HPS, had a great quarter with 10% growth versus the comparable period. Adjusted EBITDA increased by 57.3% to $65.8 million. Our results were driven by contributions from Intex, new business wins and price cost, partially offset by a 5.5% decline in HPS market volume. Net sales in Robotics and Digital Solutions, or RDS, were up 3.3% versus the year ago quarter. This is our third consecutive growth quarter for RDS and again illustrated the successful rollout of our Mini Key 3.5 strategy. Adjusted gross margins and adjusted EBITDA margins were both near their historic norms, totaling 74.2% and 31.4%, respectively. As of today, we have over 3,000 Mini Key 3.5 machines in the field, an increase of over 800 during the last 3 months. We remain on track to finalize the rollout of these kiosks to our 2 largest customers by the end of 2026. Turning to Canada. Net sales in our Canadian business were nearly flat, down just 0.2% compared to the prior year quarter. New business wins were partially offset by another quarter of soft market volumes and FX remained a headwind. We continue to expect that adjusted EBITDA margins will remain above 10% in Canada. Overall, this was a great quarter. Hillman's disciplined operations, strong execution and healthy customer relationships position us to continue delivering consistent results in this or just about any environment. With that, let me turn it over to Rocky to talk financials and guidance. Rocky? Robert Kraft: Thanks, JMA. Let's get right to our results, then we'll review our guidance. Net sales in the third quarter of 2025 totaled $424.9 million, an increase of 8% versus the prior year quarter. Our top line results were a record for Hillman, marking the highest net sales of any quarter in our 61-year history. Third quarter adjusted gross margin increased by 350 basis points to 51.7% versus the prior year quarter and improved 340 basis points sequentially. Adjusted SG&A as a percentage of sales decreased to 31% during the quarter from 32% in the year ago quarter. Adjusted EBITDA in the third quarter totaled $88 million, improving 36% versus the year ago quarter. This also marked the highest adjusted EBITDA of any quarter in our 61-year history. Recall that last year, we revised our presentation of adjusted EBITDA to include a $7.8 million write-off of receivables from True Value during Q3. Even excluding the revision, adjusted EBITDA still increased over 21%. Adjusted EBITDA to net sales margin during the quarter improved by 420 basis points to 20.7%. We saw price increases read through our income statement throughout the quarter, while tariffs began to burden our cost of goods sold toward the end of the quarter. This price cost dynamic -- timing dynamic drove record results for Hillman and should begin to normalize next quarter. Now let me spend a minute on cash flows. For the quarter, net cash provided by operating activities was $26.2 million and we generated $9.1 million of free cash flow. Impacting our free cash flow for the quarter was about $30 million of tariff-related costs. At the end of the third quarter, we had about $60 million of new tariffs in our inventory. Turning to leverage and liquidity. We ended the third quarter of 2025 with $672 million of total net debt outstanding, which was [Technical Difficulty] by $3 million from the end of the second quarter. Liquidity available totaled $277 million, consisting of $239 million of availability on our credit facility and $38 million of cash and cash equivalents. At the quarter end, our net debt to trailing 12-month adjusted EBITDA ratio improved to 2.5x versus 2.7x a quarter ago and 2.8x at the end of 2024. We have now reached our long-term adjusted EBITDA to net leverage ratio target, which is at or below 2.5x. We will continue to pay down debt while we evaluate M&A opportunities and use our improved financial strength to play offense. As we announced last quarter, our Board approved a $100 million share repurchase program. This marks the first time Hillman has an active SRP in place since coming public in 2021. During the third quarter of 2025, we deployed $3.2 million to buy back 326,000 shares at an average price of $9.72 per share. We continue to be in the market buying stock. Our SRP activity during Q3 and since falls in line with our anticipated $20 million to $25 million annual spend buying back stock. Our objective here is to offset any dilution caused by employee equity grants and opportunistically buy stock should we feel there is a meaningful discount between the value of Hillman and where our stock is trading. We believe these repurchases will be accretive to earnings per share, drive shareholder value and are an attractive place to deploy capital. Now to our guidance. We are reiterating our top line guidance of $1.535 billion to $1.575 billion, with a midpoint of $1.555 billion, reflecting 5.6% growth over last year. For the full year, the growth at the midpoint of our guide is driven by about 6 points of price, 3 points from Intex and 2 points from new business wins, which are partially offset by a 6-point headwind from market volumes. For the second half of the year, we anticipate about 11 points of price, 1 point from Intex and 2 points from new business wins, which are partially offset by a 7-point headwind from market volumes. For the bottom line, we are increasing the low end of our adjusted EBITDA guidance by $5 million. This raises the midpoint as the top end remains unchanged. Our increased adjusted EBITDA guidance is now between $270 million and $275 million, with the midpoint of $272.5 million, reflecting 12.7% growth over last year and a $2.5 million increase from our previous guide. Our expectation remains that we will end the year around 2.4x leverage. As we discussed, the price cost timing dynamic drove record results for Hillman during the third quarter. Now during the fourth quarter, we will see price increases fully reflected while tariffs burden our cost of goods sold. The result of this will be a step down in adjusted gross margin rate, which will look similar to our gross margins during the second quarter of this year. Before I turn it back to JMA, I want to thank the whole team for delivering such a strong quarter with solid growth on both the top and bottom line. We are confident we can keep this momentum going through 2026 by staying disciplined and focused on our key priorities. That said, with flat market volumes, we expect full year 2026 net sales to grow in the high single to low double digits. The increase will be driven by rollover price and new business wins. However, the price cost timing dynamic we are benefiting from now presents a difficult margin comp next year. Further, we expect adjusted EBITDA to grow next year in the low to mid-single digit range, assuming no change to the current tariff environment. We will give our detailed full year 2026 guidance during our Q4 earnings call next February. The numbers I just provided are directional as we are not predicting what market volumes will be next year at this time. Hillman is in a great position to build on this success, continue growing with our customers and drive long-term value for our shareholders through the rest of this year and beyond. JMA, back to you. Jon Adinolfi: Thanks, Rocky. We are pleased with our results so far this year and are very excited about the future. We continue to work on ways to grow our business within our 4 walls of our existing customers and beyond. Before we wrap up, I want to once again thank the entire Hillman team for an outstanding quarter. Your hard work and commitment continue to drive great results, strong growth, solid execution and momentum. As we look ahead, we're confident in our ability to keep the momentum going. We're focused, disciplined and aligned around the correct priorities, growing with our customers, strengthening our partnerships and creating long-lasting value for our shareholders. Hillman is in a great position and the opportunities in front of us are exciting. I'm incredibly proud of what this team has accomplished so far this year and even more excited about what's ahead. With that, I'll turn it back to the operator for the Q&A portion of the call. Tanya, please open the call for questions. Operator: [Operator Instructions] And our first question will come from Lee Jagoda of CJS Securities. Peter Lucas: It's Pete Lucas for Lee. I guess starting out, have you seen any competitive opportunities or pressures as a result of other suppliers to your customers and their actions around willingness or ability to import product that could be changing the competitive landscape out there? Jon Adinolfi: I mean, from what we're seeing right now, we actually have quite a few different business opportunities that we're quoting on. We're excited about our new business opportunities that will cascade into 2026. So yes, we do see opportunities in the market where we've seen some competitors that have seen some challenges operating in this environment. So yes, we're excited about 2026 and what's ahead of us. Peter Lucas: That's great. And in terms of -- what have you seen in terms of order patterns from your largest retail customers in the last month or 2 compared to sell-through? Jon Adinolfi: They've been very consistent. We've got great relationship with our retail partners. They're running solid businesses right now. And I think all of us are excited about the next run that will be in front of us. So we haven't seen anything out of the ordinary. Peter Lucas: Great. And then just last one for me. On the -- I know you touched on it and we'll hear more about '26 later, but on the last call, you did give us a preview in terms of what kind of growth you might expect to see in '26. Given today's results and the guidance, what, if anything, has changed for your '26 view? Robert Kraft: This is Rocky. Pete, absolutely nothing. I mean, we reiterated the same view that we had before. If you assume -- and again, we're not yet predicting what we think the markets will do in 2026. But if you assume those markets are flat, we believe the top line will be up high single to low double digits and that's primarily driven by rollover price and new business wins and that gives us a lot of confidence in that number. And then when you think about how that reflects down the P&L into EBITDA, that read should be kind of low single to mid-single digits on the EBITDA line. And the reason that we don't leverage in '26 like we normally do in the business is because of the kind of windfall we have for a short period of time in 2025 around tariffs. Operator: And our next question will be coming from Andrew Carter of Stifel. W. Andrew Carter: I want to focus on the Hardware Solutions segment. Price was up 12.5%, volume down 33. Is that kind of a real-time elasticity number? Or were there any helpers to the volume? I think the new business wins were isolated to Protective Solutions. It's -- I think hardware is about as real time as you get with your retailers in terms of sales. But are there any pockets where retailers can take a little extra inventory or whatever? So I'll stop there. Robert Kraft: Yes, I would say, Andrew, the short answer is yes. I mean -- but it depends. I mean, listen, we sell to a lot of different customers, we sell a lot of different products. And so every product and every customer behaves a little differently. If you think about the retail channel that we sell into, clearly, in a period of rising prices, a local hardware store is probably going to buy less inventory in the first turn of that until they see their price read through. When you think about folks, the big guys, we don't send a lot of product through their distribution centers, we go store direct. And so because of that, the ability to take inventory out of the channel is muted, but that doesn't mean there is not an ability to say that our big customers couldn't at times take some inventory out of the channel in a period of increasing prices would be naive. They can. That said, again, compared to someone who's living through a customer's distribution channel or through their DCs, obviously, there's a lot less impact on a business like ours because we're going store direct. So that was a long-winded way for me to say, yes, as prices are rising, there's clearly an impact with our customers around price. As we look at POS, JMA, I mean, October felt okay and the third quarter felt okay. I would say better than it's felt for a while and there's some green shoots, but we're still cautiously optimistic. When -- the one thing we would continue to believe, Andrew, is that we have positioned this business really well for when the market turns and we see housing return. I think when housing returns because of how well we're operating the business, we're positioned to take advantage of that. Jon Adinolfi: Rocky framed it up well. I mean, you think about the repair and maintenance side of our business, very consistent. We see some good trends. And so we see some good things setting up for 2026 and beyond. We're not changing our outlook. But Andrew, we were pleased with how the business performed in Q3. W. Andrew Carter: A second question I would ask about kind of the tariff number. If you said in the script, I apologize, the $150 million. Is that still a good number even with some favorable changes? And from here, if we get favorability here and there, how is that going to work in kind of the pricing with retailers as well as kind of the potential implications to your P&L? Are there -- will you see favorability immediately? Will you have to wait, et cetera? Robert Kraft: Yes, I think we've not come off that -- it's approximately $150 million of total tariff in the business, Andrew. It's interesting because even last week, we saw a 10% reduction in reciprocal as an example, out of China. That said, there were a lot of things that moved in the quarter. And so we're still around that same number. To your second question around timing, to the extent there is a benefit or there are costs, it does take time to run through our inventory. And so we are delayed in whether we see the benefit or the, call it, the bad guy from the timing of tariffs. Jon Adinolfi: Rocky, that's exactly right. So for us, we're running the business, we're always going to put the right products in front of our customers from the country of origin where it makes the most sense. We're going to have the highest quality and make sure that our supply chain stays robust. So Andrew, no macro change with what you just mentioned. And candidly, there were a number of other changes, plus and minuses in tariffs over the past quarter. We don't spike those out separately. Operator: And our next question will be coming from Reuben Garner of Benchmark. Reuben Garner: So Rocky, those second half volume numbers, I think you said market down 7%. Are you -- do you think that the elevated price from the tariffs is driving that? Is it just broadly consumer activity? Like I don't know if you can tell, but I know you didn't raise price necessarily on every product the same, but can you tell how much the price is having an impact on the actual demand in your space? Robert Kraft: Yes. It is virtually impossible to figure out what's driving consumer impact, whether it's price increase or whether it's whatever other thing that's happening in the external environment. We do look at POS, we look at customer trends, but figuring out what is directly related is very difficult. The 7% is the implied number at the midpoint of our guide. I think everyone will remember the implied number in our guide in the third quarter was down about 9% in volumes. We did a little better than that. And our commentary around that was what we told people. It is really hard to predict what's going to happen to market volumes. We were confident that the amount of price that was going into the market that they wouldn't be down 2, it will be bigger than that. And we're relatively confident it would be less than 9% and we ended the third quarter kind of right in the middle of those numbers. I think as we go into the fourth quarter, we're cautiously optimistic that market volumes may be a little better than the guide, but we were down 6% in the third quarter and you think about going into the fourth quarter, could be other macro factors like even think about Christmas spending and things like that, it's probably a good number and will be in the ballpark. Reuben Garner: Got it. And then the sequential improvement in gross margin, you mentioned RDS. Can you talk to us about how much of that improvement was from RDS versus the price cost? And then I guess, what exactly is driving the pickup in the RDS profitability? Robert Kraft: Yes, I mean, the largest percentage of the increase was driven by what happened with price cost. When you think about RDS, that number was up, it was up about, call it, 100 basis points in the quarter. The RDS pickup is really driven by the 3.5 rollout and what's happening there and the profitability of that business. So we feel really good about RDS, the fact that we've grown it 3 quarters in a row and we continue to execute on our 3.5 strategy. But again, the biggest driver of margin improvement in the quarter was the price cost dynamic. And as we said in the prepared remarks, we expect that to come back in the fourth quarter and we would expect the fourth quarter gross margins to look a lot like what we saw in the second quarter of this year. Operator: And our next question will be coming from Matthew Bouley of Barclays. Elaine Ku: You have Elaine Ku on for Matt. I wanted to touch on pricing a little bit. So you've kind of pointed to expectations of price cost neutrality in the face of tariffs. But sort of this quarter, we've seen a sense of price fatigue where some of your peers have kind of not seen that full anticipated price realization. So just wondering, like are you experiencing any similar signs of a bit more elasticity or pushback on price than expected? Or is that price kind of coming through largely according to your expectations? And just what has feedback been on just receptiveness of increases or negotiations, just anything around that? Robert Kraft: Yes. It's Rocky. I'll answer the beginning of the conversation, then I'll let JMA comment on relationship with customers. I think -- it's interesting because I would tell you, it kind of went as expected with lots of twists and turns because as you can imagine, the tariff regime has changed so many times. That said, we had always told everyone that we expected price even before tariffs to be flat during the current year, but a bit of a headwind in the front half. That implied that we would take some price for inflation and we did take some price for inflation in certain channels on certain products where it was necessary. So I think as you think about that, price, in my opinion and in the company's opinion, has played out about as expected. It hasn't been easy, but our customers have -- understand. They live in the same world we live in and so have been fair, I would say, relative to how price has rolled out. And JMA, do you want... Jon Adinolfi: Yes, Rocky. I mean, that's exactly right. I mean the customer conversations have been challenging, but they've been balanced, right? They want the same thing that we want. We want to make sure they continue to flow the supply chain right. They will need high levels of service. They want to make sure their customers are taken care of. And that's why we're doing things with our customers now. We're resetting more in this year and 2025 than we really have in record, if you will. So we're going to continue to make investments in our business. We're going to continue to keep the product flowing because we really are still excited. I won't call when it's going to happen, but when it does, we believe the home improvement market is set up for a great run. So we're excited about where we are. The conversations around price are certainly challenging, but our customers and we are aligned that we want to take care of the end user. Elaine Ku: Great. And second to that, I guess, you had mentioned October felt okay and you're seeing some green shoots. So could you kind of elaborate more on what those green shoots are? And similar to Pete's question earlier, are you seeing any incremental new business wins just given today's market backdrop or opportunity there? Jon Adinolfi: Yes. So I mean, on the market, October was slightly better than what we saw in Q3. I'm not going to go into any specifics on each retailer, if you will. But Elaine, we've seen some certain categories that are what we deem to be non-elastic, if you will, actually doing decently. So just given the complexity of this call, you can understand I won't go any deeper there. We really think the setup as we move forward and kind of where Pete was going, we really feel like the new business wins that we have, we talked about [ ACE ], we talked about our chain win that we had there that's rolled out nicely in 2025 is just an example of things that we're doing. Our teams have a number of big projects in motion right now. We're going to report them out as we realize them versus getting ahead and talking about what we want to win. But we have some exciting opportunities in the hopper and we'll have more to come in future quarters. Operator: [Operator instructions] Our next question will come from David Manthey of Baird. David Manthey: First off, thanks for the 2026 outlook. I guess, did you say that that revenue outlook of high single, low double on the top line is in a flattish market? Is that correct? Robert Kraft: Yes. That is, Dave. What we keep trying to say and we're going to keep trying to say it is that assumes a flat market. At this point, sitting on November 4 to predict next year's market is tough. And so we'll let people make their own estimates. But in a flat market, that's the expectation we have. David Manthey: Got it. And then, yes, it looks like EBITDA, it probably builds more cleanly from '24 than '25, but seems to be right based on what you told us. So thank you for giving us that framework at least. In the quarter itself, could you just talk about -- I mean, there's a lot of variability relative to us, relative to the Street in the third quarter, the fourth quarter, but netting it all out, it looks like it pretty well hit the mark. The high gross margin was expected in the third quarter. Could you talk about why SG&A was also so elevated in the third quarter? Robert Kraft: Yes, Dave, the biggest impact, quite frankly, on the SG&A in the third quarter is the way our bonus accrual works. And so there was a pretty significant bonus accrual relative to the rest of the quarter. And so I think if you took that out, you would see that number be pretty consistent with what we've seen in the other quarters of the year. David Manthey: And so was that some sort of catch-up that you had to smooth it out relative to the first 3 quarters and then it will be normal in the fourth? Is that right? Robert Kraft: That's correct. David Manthey: Yes. Okay. And then when you think about the third quarter and the fourth quarter, again, given the wild variability relative to our own estimates to the Street, what for you came in differently than how you were thinking about things, if at all? When you look at the third quarter and then sort of what you're guiding for the fourth, is there anything in there that you say, well, this is a little bit more, a little bit less than we were originally anticipating midyear? Robert Kraft: Yes. I would say, Dave, as we look back on what we said last quarter, I think it was pretty consistent with our expectations in both the third and what we're seeing in the fourth quarter. So I don't think there was anything really that surprised us. We expected the profitability. We expected the margin rate to increase about 300 basis points. It might have been a little bit better than that, but pretty much in line with our own expectations. I think the team did a really good job of performing again in really tough -- a really tough environment when you think about what's happening macro with tariffs and those conversations with our customers. I think the other thing that I think we're really proud of is we had 2% new business wins in the quarter in spite of all of the noise around tariffs. Again, great job when you think about what our sales team is doing and it really speaks volumes about how much our customers value and trust us when we're able to go out and win new business when we're asking for price at the same time. Jon Adinolfi: Yes. And I think in addition to the sales team doing a great job, our operations team is world-class. We're very proud of what they've done. They've really run the business well. Q3 was an excellent quarter, very efficient. We had a lot of moving pieces and the team was able to execute. So yes, there's a little bit higher cost, as Rocky mentioned. We did do things like labeling on the field. There was a lot of activity in Q3. So we feel like Q3 is set up and we also feel like, Dave, Q4 is on target with what we expected. Operator: And our last question will be coming from Brian McNamara of Canaccord Genuity. Brian McNamara: So Rocky, I just want to clarify the cadence. In May, I think your projection for market volumes and pricing was plus 17, minus 17. Then in August, it was plus 12, minus 9 for H2. And then now it's plus 11, minus 7. Is that correct? Robert Kraft: I think that's -- I think those were quick the way you said that, Brian. But yes, I think it's correct. The only thing I would say when you say those numbers, again, back to the minus 17, that was when there was a $250 million tariff regime. And in that environment, we weren't changing any of our guidance. Brian McNamara: Understood. Understood. I'm curious on the timing of when these price increases hit the shelves, understanding, obviously, it probably varies by retailers. As our work suggests it's kind of late August, early September? Robert Kraft: Yes. I mean, you're spot on. I mean, if you think about traditional hardware, labels are put on throughout the back half of the year. So yes, you didn't see all that price really reading in till Q3, into Q4. And then each of the other retailers, they maintain their own pricing and they drive the retail strategies that they see fit. So you've seen it cascade in throughout the quarter and we expected it to cascade in the fourth quarter as well. Brian McNamara: Got it. And then has there been any pushback on these significant price increases either on the retailer level or the customers within the stores? And I'm curious your thoughts on -- I mean, lumber has been a pretty volatile commodity this year. There's a lot been written in the quarter, obviously, about it was dropping in price. It was up year-to-date. I'm just curious, like how is the price of lumber and maybe other construction materials either directly or indirectly impacted your business? Robert Kraft: Yes. I mean, just go back to here. I mean, customers have been balanced and reasonable. They understand this is a tax and we have to run a business. So I won't say they've been easy, but they've also been fair. We have -- we do business with some of the best retailers in the world as you know and I think that's been reasonable. As far as the impact of lumber, I think from my perspective, this is one man's opinion. I think what you see is we're still seeing the smaller projects are still going forward. People do the repair and the maintenance type activities because they have to take care of that good times are bad. Brian, what we are seeing though is -- and I think this is consistent, I'm not going to quote the retailers, but the larger projects is where you're seeing some pushback. So where we would have had some drywall screws or some structural screws go along with the project and where lumber might be impacting that, that is where I would say that there has been less of the demand than we'd like to see. And that's where we believe the interest rates as well as getting things settled down from a tariff perspective will help in '26 and again, why we're excited about the future. So yes, I think the input prices on bigger ticket items is a pressure point in my opinion. Brian McNamara: Great. And then just if I could squeeze one last one on M&A. Obviously, a big part of your story historically, I'm assuming there's been a pause given tariffs and the like. When do you see that maybe starting to open up a little bit, just given we probably have a little more clarity on tariffs today than we have in acknowledging it changes daily with tweets? Robert Kraft: Yes. Well, I won't comment on that aspect. But back to the M&A piece of it, Brian, we are seeing -- our team is actually getting more inbound now than we saw last quarter or the quarter before that. So actually, we're starting to see some interesting activity. So I'd say the activity and the interest level is ticking up a bit. We're excited about continuing our strategy, which is to drive tuck-ins whether it's we focus on our core business or what we're doing to grow DIY and specifically also we're interested in the Pro. As you know, it's 25% of our business. We're going to look at deals that make sense in all those 3 areas. So we're excited about what M&A will present for opportunities as we move forward. Operator: And this concludes the Q&A portion of today's call. I would now like to turn the call back to Mr. Adinolfi for closing remarks. Jon Adinolfi: Thanks again, everyone, for joining us this morning. We look forward to updating you on our progress soon. Thanks, and have a great day. Take care. Operator: You may now disconnect.
William Lundin: Welcome to IPC's Third Quarter Results Update Presentation. I'm William Lundin, the President and CEO; and alongside with me today is Christophe Nerguararian, our CFO; as well as Rebecca Gordon, our SVP of Corporate Planning and Investor Relations. I'll begin with the quarterly highlights and provide an operational update, then Christophe will expand on the financial details for the quarter. Following the presentation, we'll take questions via the web online or through conference call. It was another strong quarter for IPC with average production rates of 45,900 barrels of oil equivalent per day for the quarter, which was above guidance for the quarter specifically, and our full year production guidance of 43,000 to 45,000 barrels of oil equivalent per day is maintained. Operating costs were slightly below guidance at $17.90, marginally lower unit per production figure than expected, partially due to the production outperformance achieved in the quarter. Full year operating costs are maintained at USD 18 to USD 19 a barrel, likely to end the year around the lower end of this range. We're very pleased today to announce the transformational Blackrod Phase 1 development project is expected to be delivered a quarter ahead of the original scheduled guidance with first steam expected by year-end and first oil in Q3 2026. So great progress on the project has been made to date, which I'll go into more detail later in the presentation. Super proud of the team's efforts to be positioned for an earlier start-up compared to that of our original sanction guidance in early 2023. As a result, we've accelerated some activity from 2026 into 2025, mainly being drilling the final well pad at the Blackrod asset. So IPC full year CapEx is therefore revised to USD 340 million for 2025 compared to the original CMD guidance of USD 320 million. In the quarter, $82 million was spent with about $56 million of that allocated to the Blackrod Phase 1 development. So Dated Brent averaged around $69 a barrel in the quarter. Our operating cash flow was USD 66 million, and our full year operating cash flow is forecast to be between $245 million to $255 million between $55 to $65 Brent for the remainder of the year. Free cash flow for the third quarter after all CapEx was minus USD 23 million or positive USD 36 million pre-Blackrod expenditure. Full year free cash flow forecast inclusive of our final major growth spend year at Blackrod is forecast between minus USD 160 million and minus USD 170 million between USD 55 and USD 65 Brent for the remainder of the year. We successfully refinanced our Nordic bonds subsequent to Q3, took place in October, and that has a coupon rate now of 7.5% maturing in October 2030. Net debt at the end of September stands at USD 435 million with gross cash available to the business of USD 45 million plus additional headroom exists under our RCF in Canada. So for the oil hedges in 2025, we have a mix of swaps and zero cost collars for flat price and differential hedges for around 50% of our exposure for the remainder of 2025. We also have taken advantage of the tight WTI to WCS differential and added around 5,000 barrels per day and a differential hedge for 2026 at $12.50 per barrel. No material incidents recorded during the quarter. We also completed our normal course issuer bid program, the 2024-2025 program in Q3, marking in excess of 6% reduction in our shares outstanding over the course of that buyback program. We have the intention to renew the next NCIB program in December. Production for the quarter, again, was just shy of 46,000 barrels of oil equivalent per day for Q3, and we're averaging around 44,600 BOEs per day year-to-date. So implying we're very well positioned to deliver within our original CMD production guidance of 43,000 to 45,000 barrels of oil equivalent per day. IPC production mix is weighted to 2/3 oil and 1/3 natural gas. Year-to-date operating cash flow is USD 196 million and $4 and $11 per barrel differentials for the Brent to WTI and WTI to WCS, respectively, for the first 9 months of 2025. $66 million out of that $196 million was generated in Q3. There's a slightly tighter differential on the WTI to WCS dip for that quarter. Full year OCF guidance is expected to be between USD 245 million to USD 255 million between $55 and $65 per barrel Brent for the remainder of the year. Really pleased with the base business cash flow generation given we're expected to land in the middle of our original CMD, OCF guidance, as can be seen on the slide, which was based on a $75 per barrel Brent price and the year-to-date settled oil price plus the strip for the remainder of the year is well below that $75 per barrel Brent. Capital expenditure, inclusive of decommissioning spend is forecast at USD 340 million for 2025. So again, slightly increased compared to our CMD guidance, largely due to the acceleration of the drilling activity in 2025 from 2026 for the last well pad at Blackrod given the earlier start-up expectation. And the majority of our non-Blackrod related capital investments have taken place already, mainly relating to the sustaining activities at Onion Lake Thermal and Malaysia. Free cash flow year-to-date, excluding Blackrod CapEx is just shy of USD 80 million, inclusive of Blackrod CapEx, it's minus USD 125 million. With the updated pricing outlook for the remainder of 2025 between $55 and $65 per barrel Brent, we're expecting $80 million to $90 million in free cash flow, excluding the Blackrod CapEx and minus USD 160 million to minus USD 170 million in free cash flow, including the Blackrod CapEx. So this full year outlook has been updated to include the bond refinancing cost, which was opportunistically executed in October this year, and Christophe will touch on that in his section, as well as the additional costs associated with the Blackrod given the acceleration of the activity. At the end of Q3, we completed our seventh buyback program since the company was formed. We do intend to renew the next NCIB in early December. So a total of 77 million shares have been repurchased through all of these programs at an average price of SEK 79 per share or CAD 11 per share, which is well below our current share price level. There's less shares outstanding compared to that when the company was formed and the size of the portfolio has materially grown with current comparatives to 2017 in production being 4.5x higher. We've seen a 17x increase in our 2P reserves, added in excess of 23 years to our 2P reserves life index and added greater than 1 billion barrels of contingent resources and enhanced our NAV by USD 2.5 billion. So the per share metrics are a key focus for the company and driver for maximizing shareholder value. IPC's 2P NAV as at year-end 2024 is in excess of USD 3 billion, representing a fair share price of SEK 287 per share or CAD 37 per share. No value is assigned to our large contingent resource base in this net asset value calculation. Current share price levels suggest we're trading at an approximate 40% discount to our 2P net asset value. So the Blackrod Phase 1 development, this is on budget and progressing ahead of schedule. The original sanction guidance in 2023 suggested a growth capital expenditure for the Phase 1 development of USD 850 million for the total installed cost of the central processing facility and the well stock needed to fill the plant and first oil was guided for late 2026. With the significant progress achieved to date, we now expect first oil in Q3 2026, around a quarter ahead of the original sanctioned time line. So the Phase 1 cumulative capital that's been incurred from 2023 to the end of Q3 2025 is USD 785 million or approximately 92% of the total growth CapEx. So all the surface kit is in place at the central processing facility. Construction and progressive commissioning is ongoing, supported by a lot of manpower at site. Some key milestones have been achieved and derisking the path to startup. Notably, we have commercial gas usage in place now and islanded power generation has been successfully commissioned. So with the detailed sequencing of events planned out and a closer line of sight to start-up, we feel confident pulling the schedule forward, as mentioned. And with that, we have brought forward the drilling of the final well pad into 2025 from 2026. It's a very exciting time at Blackrod for the company as a whole. I'm especially proud of the strong safety record achieved to date with no material incidents since development activities started in 2023. So key items to highlight here on the schedule really is emphasized here with the first team and first oil activity moving to the left, given the great progress that's been made on the project. Moving on to our producing assets. It was a fantastic quarter at Onion Lake Thermal with incremental production benefits coming in from our short-cycle sustaining investments, 4 infills and final well pair tied in from L Pad. So in September, as you can see in the production plot, we saw nearly 14,000 barrels of oil equivalent per day at the asset, which is one of the best monthly production figures achieved at the asset to date. The Suffield area assets is very steady, predictable low decline production from the Suffield area assets and solid low-cost optimization work on the oil side and solid inventory of drill-ready candidates are actionable discretion of the company. So the other assets, this is Canada, as you can see on the map on the right, is yielding around [ 4,000 ] barrels of oil equivalent per day. So seeing great response from our Phase 2 polymer flood at the Mooney asset. In Malaysia, we successfully completed a 2-week turnaround at the end of September and early October. Our investment program in Malaysia was also successfully executed, which can be seen on the production chart. We saw solid production boost come in July and in August, which will come back following the start-up from the shutdown. And France continues to provide stable low decline production. Now over to Christophe for the financial highlights. Christophe Nerguararian: Thank you very much, Will, and good morning to everyone. So again, very pleased to be reporting a solid quarter with very strong operational performance with a production this quarter just shy of 46,000 barrels of oil equivalent per day. And so the average year-to-date production is 44,600 barrels of oil equivalent per day. So we feel really comfortable about our ability to deliver within that 43,000, 45,000 guidance range for the full year. Coupled with operating costs, which on dollar per barrel of oil equivalent remained this quarter below USD 18, partially driven by low gas and electricity prices. So with relatively low costs, it's driven a very strong financial performance as well with operating cash flows and EBITDA this quarter of USD 66 million and USD 62 million, respectively. With $81 million -- $82 million of CapEx this quarter and USD 280 million year-to-date, it's -- this quarter we generated a negative free cash flow of $23 million, $36 million positive before Blackrod CapEx. And our net debt now stands at USD 435 million. As you can see, realized prices were reasonably stable when you compare the second and the third quarter. On average, Brent was at $69 per barrel during this quarter, WTI $65 and WCS was very tight, so that's the good news. I would say, now we have the proof is in the pudding, and we've been able to see over the last few quarters how tight the WTI/WCS differential has been, and that's really a reflection of the expansion of the TransMountain pipeline, which came on stream more than a year ago. Now we can finally benefit in Western Canada from excess egress capacity, which is -- which really bodes well for our production from our base assets today. But also when we bring Blackrod on stream and ramp it up, we should continue to benefit from reasonably strong WCS prices in the future. We're continuing to enjoy a premium of Dated Brent. In Malaysia we're selling our oil on parity with Brent in France and on party with WCS in Canada. You have the examples here of Suffield and Onion Lake. Gas prices, it's not entirely clear yet, but while Q3 was a very weak quarter when we realized that below CAD 1 per Mcf during that quarter. We might be seeing some light at the end of the tunnel. Clearly, 2026 forward curve is showing some good sign with even the summer months in between CAD 2.5 and CAD 3 per Mcf next year, next summer. So it's very encouraging. We hope that the storage are going to continue to reduce. And we're expecting as well the LNG Canada project on the West Coast of Canada to continue to ramp up in Q1. So those elements together should help alleviate the weakness we've seen in the third quarter and which also partially explains why our OpEx per barrel were reasonably low again this quarter. You can see here that on a cumulative basis for the first 9 months, our operating cash flow was just shy of USD 200 million and EBITDA around USD 185 million for the first 3 quarters. And you can see that this third quarter was in terms of contribution to the year-to-date performance was in between the first and the second quarter, driven by very high production at Onion Lake Thermal. In terms of looking ahead at our operating cost per barrel, we still anticipate higher operating cost per barrel driven by some specific project and maintenance or some workovers in the normal course of business in France or Canada. But overall, year-to-date, our operating cost per barrel remained below $18 per barrel. And so we feel very good about our ability to deliver within the guidance range of $18 to $19, which we provided for the whole year and which we keep unchanged. The netbacks have been around $16 per barrel when you look at the gross cash revenues minus production costs or whether you're looking at operating cash flow or EBITDA per barrel of oil equivalent for the first 9 months were at $16 and $15 per barrel, respectively, which is slightly better than our base case guidance netback from our Capital Markets Day. Reconciling the opening to the closing net debt of the last 9 months. You can see here that this is the last year where we are spending so much CapEx because obviously, with 92% of the budget spent on Blackrod, we're getting much closer to first steam and then first oil in Q3 next year. So you can see here with $196 million of operating cash flow during those first 9 months that fully covered the CapEx of the Blackrod Phase 1 CapEx. But then with the CapEx from the rest of the assets, some cash G&A at $12 million, so less than $1 per barrel. Over $30 million of cash financial items and $100 million of share buyback, the closing net debt was $435 million at the end of September. Our net financial items are very stable. You can see a very small increase in net interest expense quarter-on-quarter, driven by the limited drawdown under our revolving credit facility. Otherwise, the costs are very stable. The exception is this FX loss, which is a non-cash item, really driven by some accounting reassessment revaluation of intra-group loans. It doesn't bear any weight on the cash flows of the business. The G&A remain in cash terms around USD 4 million per quarter or less than $1 per barrel. The financial results now. So in the -- during the first 9 months, our business generated close to USD 510 million of revenues, generating a cash margin of around USD 200 million, gross profit of close to USD 100 million and net profit for the whole first 9 months of $34 million. When you look at our balance sheet, it's very obvious what's happening, and it's an interesting way to look at the way we've been funding the investment in Blackrod. You can see our oil and gas assets increasing by close to USD 250 million, which is the net effect between the CapEx invested and some depletion. And you can see our cash, which has decreased from $247 million down to $45 million over that same period. Looking at our capital structure, Will touched upon it. We were lucky or very smart. We marketed the refinancing of our bonds at the end of September, which was one of the -- really one of the best weeks to go to market. The oil price was still in between $65 and $70. More importantly, the credit spreads were as low as they've ever been over the last 5 years. So as you know, the coupon is a result of the U.S. 5-year swap rate and the credit spread. And bringing those 2 elements together, even if the credit spread was much tighter than at our inaugural bonds, the overall coupon was slightly higher. And so the previous coupon was at 7.25% and now the current coupon is 7.5%. The good thing is that the maturity was extended as a consequence to October 2030. And we've introduced a new feature. We've introduced a $25 million semi-annual amortization starting in April 2028 once we have reached essentially the plateau production at Blackrod. The rest of the capital structure has not changed. And on this last slide of my presentation part, you can see a recap of all of our hedging positions. We're continuing to make money to generate money under our oil WTI swaps or oil WTI collars between $65 and $75, losing money on our WTI/WCS differential swaps at minus $14.2. But we've seen, as we mentioned, the tightness in that differential, which led us a couple of weeks ago to hedge 5,000 barrels a day of our 2026 exposure at minus $12.5, which is one of the best levels we've ever seen in the market for the year ahead. We continued to have 2,000 barrels a day of Brent hedged at close to $76 per barrel. We've recently layered in just shy of 10,000 -- 10 million standard cubic feet a day of hedges. I mentioned that we can really see the forward curve for gas prices improving going into next year. And so we hedged at CAD 2.8 per Mcf, the summer months, the summer strip from April to October, which is typically based on the seasonality, the lower gas prices months. In terms of FX, we've hedged in the past our FX exposure for most or 80% of our exposure to the Blackrod Canadian spending. CapEx, we have nothing in -- as for 2026 yet. We may layer in some FX protection swaps next year given the reasonable weakness in Canadian dollar, but that will be the decision will be made between now and year-end. So again, as a recap, a very strong operational performance, which has driven a very strong financial performance in this third quarter, good performance in the first 9 months, where we're going to deliver essentially within the guidance range we provided at our Capital Markets Day in all our material key performances. Thank you for that. And I will let Will conclude this presentation. Thank you very much. William Lundin: Thank you, Christophe. And so with the final slide and the summary slide, investment year-to-date through the first 9 months of the year in 2025 has been USD 281 million, USD 194 million of that has gone towards the Blackrod Phase 1 development. Production, again, for Q3, was very strong at 45,900 barrels of oil equivalent per day. Annual production guidance maintained at 43,000 to 45,000 BOEs PD. Very stable operating cost base of $17.90 for Q3 and maintaining the full year guidance of USD 18 to USD 19 per BOE. Good prices and healthy production, good cost discipline translated into strong cash flow generation for the quarter with $66 million in operating cash flow generated and $36 million in free cash flow for the quarter, excluding Blackrod CapEx there. Balance sheet, again, net debt, we have $435 million as at the end of Q3 and gross cash of $45 million. No material incidents took place in the quarter. And we completed our share repurchase program in the quarter as well. So with that, that concludes the presentation overview and happy to turn it over to the operator for questions. Operator: [Operator Instructions] We'll now take our first question from Teodor Nilsen of SB1 Markets. Teodor Nilsen: Congrats on good Blackrod progress. First question then is on the Blackrod production profile. Can you just give us a reminder of what kind of ramp-up profile you expect there now, assuming first oil in Q3 next year? Second question that is on your leverage. When do you expect the net debt to EBITDA to peak? I assume that will be around or maybe slightly later than first oil at Blackrod. And my third and final question, that is on the LNG Canada project. Could you just discuss the potential price impact on your realized gas prices of that project and time line for the project? William Lundin: I'll take the Blackrod question, and then I'll hand it over to Christophe for the net debt-to-EBITDA and LNG Canada, second and third parts of your question. So as it relates to the Blackrod schedule advancement, what we had originally guided for Blackrod was first oil in late 2026 and 30,000 barrels of oil per day to be achieved in 2028 with the great progress that's been made and the scheduled advancement of around a quarter, and we expect that profile to move a little bit to the left as a result of that. And so more details around the exact profile will be refreshed coming into our CMD presentation in 2026. Christophe Nerguararian: Yes. Thank you very much. On the leverage, you're absolutely right, Teodor. You should expect the leverage to progressively and then a bit faster reduce once we reach the first oil on Blackrod. As for gas prices, I mean, the reality is that the weather forecast is quite cold right now in Alberta, so that's clearly helped. Over the last few days increased the spot AECO price and the whole forward curve moves with it. So that's -- this is more the tactical review, if you wish, where AECO gas price is right now and the impact on the forward curve. Well, the forward curve tends to move altogether with the spot price. But now on the fundamentals, we understand that the ramp-up of the LNG Canada project is progressively increasing the local gas demand and is going to continue to help, hopefully, increase gas prices. Certainly, this is what the market anticipates when you look at the gas forward curve, which is in excess of CAD 3 for the whole year next year. Operator: And we'll now move on to our next question from Rob Mann of RBC Capital. Robert Mann: I'm just curious if you could dig into some of the factors that have allowed you to pull forward the schedule of Blackrod. I imagine it's a combination of things, but just curious if you can provide any further details there. William Lundin: Yes. Thanks Rob. And so further to the explanations provided in the development section in the Blackrod part of the presentation, exceptional progress is made to date here. And with certain milestones achieved such as acceptance of first gas into the plant and commercial gas, firing up our power generation. We have 2 turbines that provide 15 megawatts of power each, so a total of 30. Those have been successfully commissioned and with the overall progressive commissioning and turnover strategy and some of the other milestones that have been achieved, it's given us further confidence to be able to pull forward that schedule. We have water inventoried in tanks now as well. And so everything is being lined out to have a higher degree of certainty around that first steam and then corresponding first oil date. So we feel good at this point in time with not being too far away to provide that update to the market overall. Robert Mann: Yes, that's great. Maybe just shifting gears to one other question, if I could. You've added some hedges on in 2026. So maybe just curious how you're thinking about that program moving forward, just given the commodity price outlook here and as you move toward completion of Blackrod? William Lundin: Yes, that's correct. So we've added some differential hedges in place as well as some gas hedges for the summer period at this point in time. We will monitor forward curves on the flat price as well as further differentials and gas prices and it's potential for us to add on more hedges, provided they're at prices that we deem attractive overall. We do have a significant amount of our CapEx rolling off as a result of Blackrod getting to its final stages before starting up here. And as well with getting the refinancing done, which would have matured in early 2027 previously, that also is a significant factor that's been executed and taken care of by the company. So for next year, I mean, the strip that's pretty flat in the curve as we look at flat price right now as maybe a tiny bit of contango. Still feel prices are relatively low as it relates to Brent and WTI looking forward into 2026. But if there were to be a bit of a spike or a bump, we may look opportunistically to lock in some hedges. Operator: And we'll now take our next question from Christoffer Bachke of Clarksons Securities. Christoffer Bachke: Christoffer from Clarksons is here. First of all, congrats on a strong quarter. So only one question today, and that relates to Blackrod. So given that the Blackrod Phase 1 is now progressing ahead of schedule and also now close to the first steam, could you please elaborate on what specific efficiencies or lessons learned that have driven that outperformance? And also whether any of those gains could translate into cost or timing benefits for potential future Blackrod phases? William Lundin: Given we're still in the midst of the project execution, I mean, it all comes down to the overall planning that the team has put forth before sanctioning this project and putting allowances in place on schedule and cost is always a prudent thing to do. So we set ourselves up for success on the onslaught of sanctioning this project. And with the steady execution that's taken place across all key disciplines, whether it be mechanical, electrical and the construction, on operational hires, and the drilling front, everything has been going very, very well. That's put us into this position to update the overall schedule advancement for Blackrod. As it relates to the overall budget, we are maintaining that overall budget of USD 850 million to first oil at this point in time. And I think once we get this asset fully fired up and producing at plateau production rates, there's undoubtedly going to be positive lessons learned from undergoing this development where, of course, we have 100% working interest and have been the controlling developer in this process. So definitely something that we will add into our toolbox that will be beneficial for unlocking future phase expansions of the asset. Operator: [Operator Instructions] And we'll now move on to our next question from Mark Wilson of Jefferies. Mark Wilson: Excellent progress. You've clearly got a hell of a team up there at Blackrod. We've seen it in-person and on the ground and now you've accelerated that start-up. Now Will, you said you'd update on the ramp-up at the CMD. I'd like to ask about that and then the bigger picture because you've just mentioned on the last question, unlocking future phase expansions. And with Blackrod Phase 1 having a ramp-up potentially towards 2028 and combining that with the improved WTI/WCS situation that you've spoken about with TransCanada, you're in a completely new situation in terms of your outlook. I just want to know how much you want to derisk the production from Phase 1 before you may start thinking about committing to Phase 2? William Lundin: Thanks, Mark. Appreciate the color and the commentary that you provided. That's right, we had a great field visit earlier in Q2 with yourself and many others included there. So no, hats off to the team at site. They've done a tremendous job pushing this project forward. So very pleased with where we're at overall. It is a great situation when you look at the WTI to WCS outlook right now as well with it being very tight and there being excess takeaway capacity relative to the supply for the future years ahead, which matches the ramp-up profile quite nicely with respect to Blackrod, which should also hopefully translate into higher flat prices as well at that point in time to give us good cash flow generation. So I think as we look forward, we remain opportunistic in our capital allocation approach at all times. And so it's going to be a balance of always targeting to maximize shareholder value. So looking at stakeholder returns, organic growth, M&A, it's going to be a balance of all 3 of those. We have to monitor our liquidity position, balance sheet and take into account all the learnings as well from Blackrod. We are very confident, of course, in terms of what to expect for that production ramp-up, given that we have direct analogs at the asset with well -- pilot well pairs that have been successfully producing for many years, specifically -- well pair 3. So it's a bit difficult to give an exact time line in terms of when we would look to do a sanction of the future phase expansion at Blackrod. It's really going to be dependent on oil prices, liquidity, leverage position, and of course, taking into account some of the learnings from Blackrod over the course of the start-up. But what we've said previously is we'd expect sometime, likely end of the decade provided oil prices were healthy. And so this is something that sits within our contingent resources. And until we really go forward and mature that into reserves, it will be something that will keep us upside in the back pocket. Operator: And we'll now take our next question from Jonas Shum of Clarksons. Jonas Shum: Congratulations on the progress on Blackrod. So given that you have kind of progressed very well, can you elaborate a bit on kind of what are the key remaining milestones, and the risks for that. You mentioned that the weather forecast for Alberta was indicating relatively cold weather. Could that have any ramifications on kind of the progress during the winter time here? William Lundin: Yes. Thanks Jon. So as we look forward going into the start-up for Blackrod, weather is for sure a variable that exists for start-up overall, and we have seen some snow take place a little bit earlier than expected. And so things like heat trace are very important at site, which the team is all over and heat trace is largely installed in the key areas and the rest of it will be implemented as well in due course here. As we look to the overall start-up, as I'd mentioned, we have some water inventoried in some tanks. And so it's really getting the downstream equipment of that ready to be fired up with respect to the associated pumps in the boiler feed water system leading up into the steam generation and then going downhole. So -- of which we expect that to be completed and fired up by year-end to give us first steam by year-end and then correspondingly first oil in Q3 of 2026. Operator: We have no further questions in the queue. I'll now hand it over to the company. Rebecca Gordon: Okay. Thank you, operator. So we did have a lot of questions on the sequencing of Phase 1 and Phase 2, which I think you've already covered there, Will. But we also had some questions on potential growth programs in Malaysia and France. Can you give a bit of detail on that? William Lundin: Yes. So as I mentioned in the presentation in the international asset section, we're really pleased with the production boost that we've seen at the Malaysian asset as a result of that step-out drilling campaign and the workover that's been achieved. That this asset, we do hold a couple of wells in our contingent resources, but we don't have any further development wells held within our 2P reserves at Malaysia. In France, there are a number of robust investment opportunities and specifically within a field called Fontaine-au-Bron that looks very attractive and is ultimately ready to be sanctioned at the discretion of the group, which will be largely dictated by oil prices. Rebecca Gordon: Great. And also a couple of questions on Canadian natural gas prices, which I think you've covered, Christophe. But perhaps you could give a bit of color on a question, which is, will Blackrod eventually make you a gas net consumer? If so, when is this point going to be reached? Christophe Nerguararian: Yes, that's correct. Obviously, as we are ramping up the oil production, we're going to ramp up our gas usage as well. And we're expecting at this stage that towards the end of the decade, so 2029 to 2030, we will turn into being -- everything being equal, we will turn into being a net gas consumer. That is the projection at this stage. Rebecca Gordon: Yes. And I think, Will, you've covered off really our sort of capital allocation priorities in the future. There were a couple of questions there about whether we would look to buy back shares in the future, whether it was Blackrod Phase 2. There was actually another question on M&A. So it would be interesting to hear your perspective on the recent M&A activity in the sector, thinking specifically of the big interest in the market for the long-lived assets of MEG. Any thoughts would be appreciated. William Lundin: Yes, it's been very interesting item to monitor in the market with respect to the MEG and Cenovus deal that is likely to close quite soon here, I believe. That type of -- how do you say, the takeover bid that took place or the hostile actions that have taken place on MEG were something that not, I think, a lot of the industry was expecting, quite savvily done in general by the Strathcona company. Obviously, very high-quality asset at Christina Lake and the Tier 1 oil sands deposit that they have within the MEG portfolio that we expected to close and go over to Cenovus very soon here. And so I think overall M&A landscape, I think I'd expect to see further consolidation to take place through time. And we're a company that's executed quite a few acquisitions in our recent history. And so something like growing through M&A is, again, within our DNA, and we're going to be opportunistically looking to assets or companies to grow through and combine with, provided they fit the right criteria for the company. Rebecca Gordon: Okay. Fantastic. I think that most of these other questions have actually been answered through the course of the operator questions. So we'll leave it there. We're out of time. So thanks to everyone. Will, you want to close? Christophe Nerguararian: Thank you. William Lundin: Thanks very much, Rebecca. Appreciate it. And thanks, everyone, for tuning in. And look forward to the next update, which will be our year-end results and Capital Markets Day presentation in early February 2026. Thank you.
Operator: Ladies and gentlemen, welcome to the Coloplast financial statement for the full year 2024/2025 and Annual Report 2024-2025 Conference Call. I am Sandra, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Lars Rasmussen, Interim CEO. Please go ahead. Lars Rasmussen: Thank you, and good morning, and welcome to our full year 24/25 conference call. I'm Lars Rasmussen, Interim CEO of Coloplast, and I'm joined by Anders Lonning-Skovgaard, our CFO; and by our Investor Relations team. We will start with a short presentation by Anders and myself and then open up for questions. Please turn to Slide #3. We delivered 7% organic growth and a reported EBIT before -- EBIT margin before special items of 28% for this financial year. That is in line with our revised guidance, but below the 8% to 9% organic growth expectations that we set forth at the beginning of the year. The adjusted return on invested capital after tax and before special items, was 15% on par with last year. Chronic Care, including Voice and Respiratory Care and excluding China, delivered a solid year while we faced performance challenges in Interventional Urology and Advanced Wound Dressings. Both businesses were impacted by product recalls with significant negative impact on performance. We also saw increased volatility in the biologics market, driven by the postponement of the final LCD policy, which led to a slowdown in the momentum for Kerecis in the second half of the year. In many ways, '24-'25 did not become the year we had anticipated. It became a significantly more turbulent year and one that forced us to take decisive actions. In the year, we restructured our business in China. Performance during Strive25 was muted. And while we remain committed to serving the Chinese market, we have streamlined our organization to align with the new market reality and ensure a sustainable focused presence. Secondly, we initiated several profitability initiatives in Wound Care, among others, the divestment of our skin care business in December 2024. These initiatives are aimed at simplifying our business operations and improving profitability. Thirdly, we took important steps toward optimizing our cost base in interventional urology. Both to protect our profitability in the light of recent performance challenges, but also to ensure that we have the capacity to invest in new growth initiatives, including in tibial, our implantable tibial nerve stimulator expected to launch in '26, '27, assuming we obtain FDA approval. At the group level, we have also made significant changes which I'm confident will be vital for a strong strategy execution towards 2030. By structuring our business into 2 distinct units, chronic and acute care, we will, to an even larger extent, be able to honor the differences in market dynamics, customer needs, patient pathways and business models. And with a new and strengthened executive leadership team, we now have a balanced mix of commercial and technical expertise and a strong team to lead Coloplast into the next strategy period. Please turn to Slide #4. Looking ahead, I believe the investments we have made in Strive25, combined with the structural changes that we made this year, provides Coloplast with a strong foundation and key building blocks for the future value creation. Our addressable market for Chronic Care and Acute Care has a combined value of more than DKK 120 billion, and we have the strongest product portfolio that we have ever had. There's ample opportunity to go for, and we are well positioned to capture it. With our new strategy, Impact4, we'll utilize our solid foundation while setting a new direction for the company with a strong focus on customers and value creation. The Impact4 focuses on 4 priorities: growth through innovative offerings, unlock next level efficiency gains, embrace technology, including AI, to elevate our user experience and scale, and finally, cultivate a winning and sustainable company. And these promises are supported by clear financial targets. The first is to deliver an organic revenue CAGR of 7% to 8% through '29/'30. Then to grow EBIT in line with or above revenue growth and finally, to achieve a return on invested capital above 20% by '29, '30. By putting customers at the center, we aim to deliver best-in-class products, services and support, reinforcing our ambition to double our impact and reach 4 million people long term. In the strategic period, we will also maintain a strong focus on sustainability, and we have set clear targets to reduce our environmental impact through emissions reductions and less material used in our products and packaging. Finally, we aim to positively impact society by improving reimbursement, ensuring access for users and health care professionals to the best products and services as well as investing in initiatives that benefits people and communities. Now let's shift gears for a moment and look at today's results in more detail. Please turn to Slide #5. In Ostomy Care, organic growth was 6% for the full year, and growth in Danish kroner was 4%. Organic growth in Q4 was 7% and growth in Danish kroner was 1%. Our SenSura Mio portfolio continues to be the main driver -- growth driver followed by Brava range of supporting products. Our SenSura and Assura/Alterna portfolios continue to contribute to growth in emerging markets. From a geographical perspective, growth in the quarter was broad-based across regions with good growth in Europe, a high baseline in the U.S. due to the resolution of the supply disruptions in Q4 last year, and strong growth in emerging markets driven by increased tender activity. Sales in China declined, reflecting weaker consumer sentiment and competitive pressures. In Continence Care, organic growth was 8% for the full year and growth in Danish kroner was 5%. In Q4, organic growth was 9% and growth in Danish kroner was 3%. Luja, our new intermittent catheter with Micro-hole Zone Technology was the main growth contributor in the quarter, especially the female version driven by solid contribution from Europe and the U.S. From a geographical perspective, all regions contributed to growth. Growth in Europe was driven by France, the U.K. and Italy. In emerging markets, growth was led by LatAm. Voice and Respiratory Care posted 9% organic growth for the full year with growth in Danish kroner of 8%. In Q4, organic growth was 9% and growth in Danish kroner was 7%. The good performance in Voice and Respiratory Care continues to be driven by broad-based contribution from both laryngectomy and tracheostomy, with high single-digit growth in laryngectomy and double-digit growth in tracheostomy. In Wound and Tissue repair, organic growth was 8% for the full year and growth in Danish kroner was minus 3%, which reflects 8 percentage points negative impact from the skin care divestment. Organic growth in Q4 was 5% and growth in Danish kroner was minus 11%, which includes 11% negative impact from the skin care divestment. The advanced wound dressings business in isolation declined 6% in the quarter as China detracted significantly from growth due to the product return initiatives in Q3. From a product perspective, Biatain Superabsorber and Biatain Fiber continued to perform well. Revenue from Kerecis amounted to around DKK 1.3 billion in the full year, of which DKK 339 million was in Q4. The organic growth in the quarter was 20% and an improvement compared to Q3 as expected. The inpatient setting continued to deliver solid growth and was the main growth contributor. The outpatient setting saw an improved momentum in Q4. This was in line with our expectations that the impact from our LCD postponement and the resulting market shift to higher-priced products would be most pronounced in Q3. In Interventional Urology, organic growth was 2% for the full year, and growth in Danish kroner was flat. In Q4, organic growth was 2% and reported growth in Danish kroner was minus 2%. Growth in the quarter was driven by good momentum in the Men's Health business. Our flagship product within Men's Health, the Titan Penile implant continued to perform well, with the patient funnel positively impacted by our patient support program targeted at prospective patients. The women's health business also contributed to growth in the quarter. Within kidney and bladder health, the thulium fiber laser drive continued to deliver a solid growth contribution, but the segment overall detracted from growth due to the impact from the product recall. We have begun to see early signs of recovery across key accounts, but expect some negative impact to persist into Q1. With this, I'll now hand over to Anders, who will take you through the financials and outlook in more detail. Please turn to Slide #6. Anders Lonning-Skovgaard: Thank you, Lars, and good morning, everyone. Reported revenue for the full year increased by DKK 844 million or 3% compared to last year. Organic growth contributed DKK 1.8 billion or around 7% to reported revenue. Divested businesses, mostly related to the skin care divestment in December '24, reduced reported revenue by DKK 352 million or around 1%. Foreign exchange rates had a negative impact of DKK 587 million on reported revenue or around 2%, mainly related to the depreciation of the U.S. dollar and a basket of emerging markets currencies against the Danish kroner. Please turn to Slide #7. Gross profit for the full year amounted to DKK 18.9 billion, corresponding to a gross margin of 68%, on par with last year. The gross margin was positively impacted by a favorable development in the input cost, pricing increases and country and product mix, partly offset by ramp-up costs at our manufacturing sites in Costa Rica and Portugal. The gross margin also included a small negative impact from currencies of around 20 basis points. Operating expenses for the full year amounted to around DKK 11.3 billion, a 3% increase from last year. The distribution to sales ratio for the full year was 33%, on par with last year. The increase in distribution cost was driven by continued commercial investments in Kerecis and higher sales activities across business areas. The admin to sales ratio for the full year was 5% on par with last year. The R&D to sales ratio for the full year was 3% on sales, also on par with last year. The special items expenses were extraordinary high in '24-'25 and amounted to DKK 469 million. The special items were related to profitability improvement initiatives including the skincare divestment, management restructuring and the integration of Atos Medical. Overall, this resulted in operating profit before special items of DKK 7.7 billion in the full year and a 5% increase compared to last year. The EBIT margin before special items for the year was 28% compared to 27% last year. The EBIT margin included negative impact of around 110 basis points from the inclusion of Kerecis, including PPA amortization costs, in line with the expectations as well as around 30 basis points benefit from the divestment of the skin care business. Currencies had a small negative impact on the reported EBIT margin of around 30 basis points related to the depreciation of the U.S. dollar and the basket of emerging market currencies against the Danish kroner. In constant currencies, EBIT before special items grew 6% in full year '24-'25. Financial items in the full year were a net expense of DKK 1.044 billion compared to a net expense of DKK 925 million last year. The increase in net expenses was mostly due to a noncash effect from currency exchange rate adjustments, which includes losses on balance sheet items driven by the depreciation of the U.S. dollar against the Danish kroner. The ordinary tax expense for the full year was DKK 1.4 billion with an ordinary tax rate of 22% on par with last year. The total tax expense for the full year was DKK 2.5 billion, impacted by the transfer of Kerecis intellectual property from Iceland to Denmark. As a result of the extraordinary tax expense, the effective tax rate amounted to 41%. As a result, net profit before special items for the full year was DKK 4 billion compared to DKK 5 billion last year. Diluted earnings per share before special items decreased by 21% to DKK 17.76. Adjusted for the extraordinary tax expenses related to Kerecis IP transfer, the net profit before special items was DKK 5.1 billion, DKK 123 million increase compared to last year. Adjusted diluted earnings per share before special items increased by 2% to DKK 22.84. Please turn to Slide #8. Operating cash flow for the full year was an inflow of DKK 6.6 billion compared to an inflow of DKK 2.8 billion last year. The positive development in cash flows was mostly driven by lower income tax paid as '24-'25 included DKK 2.5 billion extraordinary impact from the transfer of Atos Medical intellectual property. Changes in working capital and adjustment of noncash operating items also had a positive impact on the cash flows from operating activities. Cash flow from investing activities was an outflow of DKK 1.25 billion compared to an outflow of DKK 1.336 billion and included a positive impact from the divestment of Skin Care business of DKK 192 million. CapEx for the full year amounted to around 5% of sales on par with last year and includes around DKK 450 million related to the new manufacturing site in Portugal, expected to be operational in '25-'26. As a result, the free cash flow for the full year was an inflow of DKK 5.4 billion compared to an inflow of DKK 1.4 billion last year. The adjusted free cash flow for the full year was DKK 5.2 billion compared with DKK 3.9 billion last year or a 32% increase. The trailing 12-month cash conversion was 82%, while the adjusted free cash flow to sales was 19% compared to 15% last year. Net working capital amounted to around 26% of sales compared to 25% last year, impacted by increased inventories and decreased trade payables. Now let's look at the guidance for '25-'26 financial year. Please turn to Slide #9. For the '25-'26 financial year, we expect organic revenue growth of around 7%, and around 7% EBIT growth in constant currencies before space items. We also expect a return on invested capital of around 16%, up around 1 percentage point from 15% adjusted last year. The organic revenue growth guidance of around 7% assumes continued good momentum in Chronic Care, including Voice and Respiratory Care and an improvement in momentum in both Wound and Tissue Repair and Interventional Urology. In Chronic Care, we expect good contribution from our recent product innovation. In Continence Care, we expect Luja to continue driving the momentum in intermittent catheters. In Ostomy Care, we expect the recent line extensions such as SenSura Mio Black bags and the new 2-piece Sensura Mio offering to continue their good launch trajectory and support growth. In wound tissue repair, we expect an improved momentum driven by Kerecis, which is expected to deliver growth of around 25%, partly offset by the negative impact from the product return in advanced wound dressings in China from Q1 to Q3. On Kerecis, performance is subject to a higher degree of volatility due to the expected changes to the skin substitutes coverage and payments in the outpatient setting as of January 1, '26. In Interventional Urology, we expect growth to improve to around mid-single digit in '25-'26, up from low single digit last year. We expect continued strong momentum in our Men's Health business driven by the Titan Penile implant and stable performance in our Women's Health business. In kidney and bladder health, we expect to see a recovery as the impact from the product recall will lapse in December '25, after which we are up against an easier baseline. Reported revenue growth in Danish kroner is expected at 4% to 5% and assumed 2 to 3 percentage points negative impact from currencies, especially the U.S. dollar and to a smaller extent, the British pound and the Chinese yuan as well as 2-month negative impact from the Skin Care divestment. The EBIT growth in constant currencies of around 7% assumes stable inflation levels and continued ramp-up in Costa Rica and Portugal. The EBIT growth also assumes that Kerecis will deliver an EBIT margin uplift to around 20%, driven by scalability in non-sales functions and sales force efficiency improvements, enabled by a good top line momentum and a high gross profit margin of around 90%. Furthermore, the EBIT growth guidance includes the initiation of Impact4 investments, including global technology investments and AI, investments towards the new bowel care opportunity in the U.S. and investments related to -- in tibia. In terms of phasing, we expect the organic revenue growth to be second half weighted with a soft start in Q1, where we will have the impact from the product recall in both advanced wound dressings and interventional urology. Furthermore, we expect a soft start in ostomy care due to a high baseline in the U.S. and order phasing in emerging markets. For '25-'26, we expect around DKK 50 million in special items, from acquisition-related integration costs. The integration of Atos Medical is progressing according to plan, and will be finalized during the year. The net financial expenses for '25-'26 are expected at around minus DKK 500 million, down from around DKK 1 billion in '24, '25, mostly driven by a more favorable outlook on net exchange rate adjustments based on spot rates as of October 31, and to a smaller extent, lower net interest expenses due to lower net interest-bearing debt and lower interest rates. The effective tax rate for '25/'26 is expected to be around 22%. Net profit is expected to significantly increase year-over-year as '24-'25 has been impacted by extraordinary high special items, high financial items due to negative exchange rate adjustment and the extraordinary tax expense related to the transfer of Kerecis intellectual property. The CapEx to sales ratio is expected at around 5% and includes investment to complete the new manufacturing site in Portugal, investments in new machines for existing and new products and IT and sustainability investments. On net working capital, we expect the net working capital to sales ratio in '25-'26 of around 25%, down from 26% in '24-'25. Our guidance is based on the knowledge we have today and assumes immaterial impact from tariffs as we expect our products to remain exempted and no impact from health care reforms in the year. On October 31, '25, the centers for Medicare and Medicaid services in the U.S. issued a final rule on the Medicare physician fee schedule for calendar year '26 with a fixed payment of $127 per square centimeter for all products in the physician's private office in the outpatient setting. We consider both this rule as well as the final LCD policy as positive for the market and Kerecis in the long term, and will be closely monitored or -- and we will closely monitor market developments in relation to these initiatives. With this, I will hand it over to Lars for final remarks. Please turn to Slide #10. Lars Rasmussen: Thank you, Anders. Coloplast is now entering an exciting phase as we begin to unfold the potential of our new Impact4 strategy. And I look forward to continue leading this work until a new CEO takes office. As we move into Impact4, we do so from a position of strength with a strong product offering, a clear structure, a strengthened leadership team and an ambitious strategy towards 2030. I'd like to thank our customers, my colleagues and our investors for your trust and support in 2024, '25. Your engagement and partnership have been instrumental in advancing our mission, making a positive impact for patients, health care systems and society. Coloplast is well positioned to set the standard of care at scale, create lasting value for all stakeholders and continue making life easier for people with intimate health care needs. Thank you very much. And operator, we are now ready to take questions. Operator: [Operator Instructions] Our first question comes from Hassan Al-Wakeel from Barclays. Hassan Al-Wakeel: I'm going to try and sneak in 3, please. Firstly, can you talk about the China Ostomy business and the increased competition in the community channel and whether consumer sentiment is getting worse given the decline here and how you're thinking about business development in '26? Secondly, if you can expand on the drivers for the Kerecis margin ramp this year, and the phasing of that improvement, given some of the volatility you've observed around reimbursement changes. And then finally, Lars, when we met recently, you talked about slower volume uptake in the U.K. for Halo. How is this trending? And to what extent are you shelving potential launches elsewhere? And in hindsight, what went wrong? Lars Rasmussen: That was a good opening, Hassan. So the China the China situation first. So it's more or less a flat growth that we are seeing. We actually see that we are quite competitive in the market. So we -- in that specific part of the market, we don't see that we're losing traction. But we have a consumer sentiment, which is super important because it's out of pocket in the Chinese market, in the community market. We have a consumer sentiment, which is negative, and that basically reflects on how much consumers are willing to spend. We don't have an increased number of competitors. We still have a lot of competitors in the market, but the total market share is still super low. So we feel that our competitiveness is intact but that the market sentiment basically is the reason why we don't grow in China. On the Kerecis margin, yes, we expect to have a significantly better margin this year than we had in the year that we are coming out of. And it is basically due to scale. So now we -- now we start to be a little bit more of a mature business. It's not that we are not investing. But we do have more sales per head in the organization. We don't need to scale to the same extent all over the place when we are growing, and that is basically what is sitting in the increased margin for Kerecis. And yes, there is volatility as we go into this year. And as you all know, Friday night, we received news on the LCD and the physician fee schedule changes. And I expect that we'll also talk to that a little bit later, but that means that there is some turbulence as we go into the year. But we -- I would like to say from the get-go, we consider the changes to be positive for us. But of course, it also means that we will have a bit of volatility as we go into the year. And then for Halo, what went wrong? Super good question. We are addressing the most pronounced problem that any Ostomy patient has to understand how much of the adhesive that are still intact at this given point in time and how much of it have given up, and we can show that via the mobile phone. We haven't found a way to sell this where we get the uptake that we expect to have. We give it still a chance to do that in what we consider to be the most advanced market in the world for Ostomy Care in Great Britain. And we are not going to go anywhere else until we have found a way to solve that in that market. Operator: The next question comes from Jack Reynolds-Clark from RBC Capital Markets. Jack Reynolds-Clark: My first one was on the Atos integration. You mentioned that you're expecting that to be completed next year. I guess what's left to do on that? And when do you expect the benefits to start kind of going through meaningfully there? Then the next question was on tracheostomy. I think for the last couple of quarters, growth here has been a bit lower than it has been in the past. Is this a function of a low -- of a higher base? Or is there something else kind of going on here? How should we think about this going forward? Anders Lonning-Skovgaard: Jack, let me take the first one. So we are finalizing the integration of Atos into our IT infrastructure and into our processes, our shared services and all of that here during this financial year. And what we are -- it's basically some of the bigger markets that are left. So it's the U.S., the U.K. that we are currently focusing on and then the integration will be finished, and we will also reap the synergies of around the DKK 100 million that we have communicated when we acquired Atos some years ago. In terms of tracheostomy, yes, we have seen a little bit of a slowdown recently. It's also because we are up against a high baseline. So last year or the year before, we had a quite significant sales uptake due to forward integration. And when that is said, the tracheostomy business is developing very well, also compared to the acquisition case we did some years ago. And we actually expect that our tracheostomy will support our growth within Atos quite significantly towards 2030. We are currently sitting with a market share of around 10%, and we actually feel we have an okay product platform and this will be one of the key focus areas towards the 2030 and also an area we will invest further in. So the tracheostomy business is an area that we are very optimistic about going forward. Operator: The next question comes from Martin Parkhoi from SEB. Please go ahead. Martin Parkhoi: Yes, Martin Parkhoi, SEB. Two, I don't know, 2 questions, I guess. Just on your guidance, I just want to get your confident level because you're starting the year saying it will be back-end loaded, and that gave me some kind of this view for the last couple of years. How are your confident level this year of this actually will materialize? Do you think you have been more prudent this year than you have been in previous year? Are there a buffer or potential hiccups, which you have faced the last couple of years? And then second question is just on the ASP development. What kind of ASP development have you assumed in your guidance for this year? And maybe you can talk a little bit to that across your business areas? Anders Lonning-Skovgaard: Yes, Martin, let me take your 2 questions. On the guidance side, as we have communicated today, we expect organic growth to be around 7% for the year. We are, as I also said, seeing some headwinds here in Q1 due to the product recalls that we had last year. So the urology recall will -- we will lap that in December. And the recalls we have in China on the dressings part will still impact us in Q1 but also Q2, Q3. But overall, we are very confident that we are able to deliver on our organic growth guidance also back -- on back of a very challenging year. Last year, where we also had some challenges that we did not expect back to the product recalls. But also back to, as Lars said earlier, our Chinese momentum did not play out as we anticipated. And so that's how we see it. And I would also highlight that the Continence business, the Atos business is strong, and we also expect those to continue as well as the Kerecis business throughout the year. So then your second question around that was ASP. We are expecting a small positive on ASP development. We are not expecting any bigger health care reforms. So we are expecting small positive impact from ASP, especially within urology. We are also expecting some on the chronic side, and that is, again, primarily in emerging markets, and then we get the yearly inflation adjustment in the U.K. So those are some of the main reasons for us being positive on the ASP. Operator: The next question comes from Martin Brenoe from Nordea. Martin Brenoe: I'll build a bit on the other margins question here. We learned at the CMD that you held earlier in the year that you have quite normally 2 or 3 recalls during a year. And I just wonder how much you have baked into potential recalls in this year and how you have -- if you have a financial buffer for that potential outcome? And then secondly, on Kerecis, would be interesting to hear how you expect to reaccelerate 500 basis points? A few words on what is going to drive it in terms of product launches, new geographies, anything like that? Lars Rasmussen: So when you produce products in the numbers of billions, then of course, there can be from time to time, recalls. What we saw from urology, primarily is something which we see very, very rarely. And I would like to take this opportunity to remind everybody that the product returns that we have seen in China has nothing to do with products that doesn't work or complaint rates or anything like that. So that was -- the reason for that was actually reasons that we have never seen before and that we could not have done anything internally to avoid, I would say. So therefore, we do not have a buffer for very large recalls and it is something that we don't see. What we have seen of real events over the last couple of years has been the distribution center event that led to difficulties in delivering and then what we saw in IU. And they were completely unexpected and to a very large extent, internally driven. So we could have avoided them. And that's what we have tightened the system to make sure that we don't get into that situation. Having said that, you can't run a business and never have issues, but that we do have significant or not significant, but realistic buffers for. On Kerecis, the -- your question is how we are going to get the uptick on the EBIT margin? Martin Brenoe: No. Sorry, on organic growth. Lars Rasmussen: Okay. So as I started by saying, we actually consider this to be the changes to the physician fee schedule to be positive for us. And we also see that we have strong momentum. We are not in a situation where we have fully utilized the -- our sales muscle, so to speak. So we are, of course, still hiring sales reps to go to the market. But we see it as we get more access with what is happening now because there will be fewer companies to serve the same customer group as we had before, and that is definitely going to help us. We just need to see it, play fully out before we start to become too positive, but we think that with where we are now, we can have an uptick because the turmoil that we saw in Q3 is not going to come back. Operator: The next question comes from Aisyah Noor from Morgan Stanley. Aisyah Noor: My first one is on the competitive bidding program in the U.S. for chronic care products. You mentioned in the press release that any changes would take effect in 2028 at the earliest. But your peers are flagging that this could even be a bit later, so 2029. Just curious what your internal assessments involve towards this time line and whether you have any renewed thoughts on the potential magnitude of the sales impact for you? My second question is just a quick one on the wound recall impact in China. Could you help us quantify the negative impact that you're calling out in Q1, 2 and 3 for 2026? Anders Lonning-Skovgaard: Yes. Let me take the competitive bidding question. So as you all are aware, this is something that is currently going on, and we expect some kind of an outcome as we understand it during this quarter. We, however, believe that if there will be an impact, and that is still highly uncertain, that it will not impact us until '28 at the earliest. So that's the information we are currently sitting with. In terms of the wound recall in China, as we have said a number of times now, we expect that to have an impact in Q1, Q2, Q3 and my estimate per quarter is something around DKK 25 million based on the knowledge we have. It's DKK 25 million per quarter. Operator: The next question comes from Anchal Verma from JPMorgan. Anchal Verma: The first question is just around gross margin. How should we think of gross margin development over FY '26? Can you provide your assumptions around COGS inflation, Hungary wage inflation and the other moving parts? And then the second one was just around if you could provide us an update on how the search for new CEO is going? Or is the expectation still for having announced a replacement by spring next year? Anders Lonning-Skovgaard: Yes. Thanks for your question. Let me take the first one. So our gross margin, my high-level assumptions are that we are looking into a year with a pretty stable inflation levels. That also means that our raw material prices, utility costs, freight, et cetera, are pretty flattish compared to last year. But we will also have some headwinds still from high salary inflation in Hungary. We are still seeing a very intense labor market and then we are investing in ramping up our facilities still some ramp-up in Costa Rica. But next year, we will really start to ramp up in Portugal. We are expecting Portugal to be in operation in Q4 of '25-'26. So those are the main moving parts on our gross margin into '26. Lars Rasmussen: And on the CEO search, so in a sense, what I have said before, the search is going on. It's like a funnel, right? You start broad and then you -- then the field is narrowing down and that's, of course, where we are now. We haven't signed any contracts at this point in time, but we have a number of qualified candidates. And once we have a signature, you will be the first to know. And then, of course, it depends then on what kind of garden leave or other terms does that person have and that will then put a date on when a person can start. And until then, it will be the team that you are meeting today that will be running the company together with the rest of the leaders in Coloplast. Anchal Verma: That makes sense. And maybe just a quick follow-up on margins, please. Are you able to provide or quantify the FX headwind to margins for FY '26, the EBIT margin? Anders Lonning-Skovgaard: Yes. So what we are saying is that on the top line, we will -- we are expecting a reported growth in the level of 4% to 5%. And that is also again driven by the U.S. dollar to a large extent. On the EBIT growth, we will see some headwind also coming from the U.S. dollar, also some on the British pound and the Hungarian HUF . Operator: The next question comes from Veronika Dubajova from Citi. Veronika Dubajova: I'll keep it to 2, please. One, obviously, looking at the revenue growth and the EBIT growth guidance, and I appreciate, Anders, you don't want to talk about gross margin guidance, but it does seem to me that there is a fairly large amount of investments going into the business, obviously, year-on-year, especially stripping out Kerecis, which is delivering a nice little tailwind to profitability. I was just hoping you could talk about what are some of the areas of the business where you are investing meaningfully with this high single-digit kind of OpEx growth guidance, that would be super helpful. And then I just want to circle back on the China competition answer because it wasn't clear to me, Lars, from your comments at the beginning. If I look at the press release, you are calling out competition in China for the first time. It wasn't in the prior releases. So just trying to understand what really has changed? What has prompted you to put it into the release? And I guess, is that competition from local players? Or is it from other multinationals that are becoming more focused in the market? Anders Lonning-Skovgaard: Thanks a lot, Veronika. Let me take the first one in terms of the investments. So now we are entering into the first year of our Impact4 strategy. And as we also said at the Capital Markets Day, we are going to invest into new initiatives, both to drive the top line growth, but also to support our EBIT growth ambition. And what we will initiate this year is investments primarily into our U.S. chronic business. We see quite a few opportunities also with the new opportunity within bowel care. We will also initiate investments in urology to support the launch of INTIBIA. We are expecting when we get approval from the FDA that we will launch INTIBIA into '26-'27. So we will also initiate investments here. And then we will initiate quite a bit of investments into technology and AI, both to support improvement in our user experience, but definitely also to support activities to automate and optimize back-office activities, especially order management, the prescription management through AI. So those are some of the things that we will initiate basically to support our long-term growth and value creation agenda. Lars Rasmussen: And for China, yes, I think it's actually a very appropriate follow-up. Veronika, thank you for that. That gives me the opportunity to say that we have -- our community market share in Ostomy Care is very, very high in China. And we are not -- yes, well, more than 60%. So -- and as we are not seeing growth like we used to, it is primarily because we have a consumer sentiment that is not super positive. But of course, we also feel the pressure every single day that somebody would like to take away some of the market shares that we are having. We are seeing very able competitors in China. But having said that, the fact still is that we have a very, very -- even though we have many local competitors, they have a very, very small market share, very low single digit, I would say. And therefore, it is maybe just the way that we are writing it, it's not because we see an increased local competition. But of course, we feel local competition also in China. But it has not worsened. So that's not how you should read it. Operator: The next question comes from Oliver Metzger from ODDO BHF. Oliver Metzger: Yes. First question is also on Kerecis and you mentioned this market shift towards the higher-priced products. Can you just elaborate a little bit more about the dynamics and how sustainable you regard this shift? And the second question is about still also the operating cost development. So a follow-up on Veronika. So if I do the math and calculate a stable gross margin and, let's say, also a stable EBIT margin and still the amount of operating leverage you should have. It would be great if you can dive deeper into respective costs. And yes, you mentioned the ramp-up to INTIBIA, but I calculate still a quite significant operating leverage, which is according to your augmentation, eaten up. So it would be great to have a little bit more transparency regarding the cost positions and how the math works. Lars Rasmussen: So on your first one, Oliver, so the physician fee schedule changes to the payment as we are -- we are running right now with an average price of USD 110 per square centimeter. And the new fixed price is USD 127.3 per square centimeter from 1st of January 2026. That is, of course, positive on an average basis. There will also be fewer competitors we expect that has not been -- does not come out yet, but we expect before 1st of January that we will have a full list of who has coverage. And that dynamic altogether means that as the year progresses. And as the stocks that have been built, they are being consumed, that we will be in a better position to compete, than we are at this time because there are fewer competitors and what we compete with would have a higher average price. That's how we see it. That's also why we think that this, at the end of the day, is a positive change seen from our point of view. Anders Lonning-Skovgaard: And Oliver, to your second question around our cost development, I think I talked to the gross margin moving parts earlier. I also talked to where we are going to invest back to Veronika's question. And you should -- as I also said earlier, you should expect our inflation levels or the inflation levels, salary regulation, et cetera, to be pretty stable also compared last year. So we are really -- the leverage effect we have, we really invest that back into new initiatives and I explained those initiatives earlier. So it's the U.S., it's INTIBIA and then also invest into technology, AI to support long-term growth and long-term value creation. Operator: The next question comes from Julien Dormois from Jefferies. Julien Dormois: The first one relates to Continence. We should have the coding change taking effect in January of '26. So just curious what are your latest thoughts on this and how you ambition to make the most of that coding change? And whether we should see any positive impact in '26? Or is it more a mid- to long-term benefit we should observe? And the second question is trying to dissect a little more into the guidance for '26, particularly in chronic care. You have highlighted continued momentum in the business, but is it fair to assume that Continence will continue to outperform Ostomy as it has in the recent past and also considering the regulatory changes, the recent product launches and so on. So just curious whether Ostomy should remain slightly subdued compared to the Continence into the next year. Anders Lonning-Skovgaard: Thanks a lot, Julien. Let me start with the U.S. coding. Yes, it's going to have effect here from January. But we also are aware that there will be quite a lot of operational activities going on in moving the coding from the previous way -- or the previous reimbursement codes and now to specific hydrophilic codes. So there will be quite a big operational activities in our U.S. business to get that fully implemented. And it is still, for us, too early to call out the impact. But over time, we expect this to be positive. In terms to your second question around guidance on the chronic side, as you have seen also last year, we have a good momentum within the Continence, driven by our intermittent catheters driven by the Luja launch, but we're also seeing good momentum within our bowel care business. And we see that momentum also continue into '25-'26 and remember, the Ostomy franchise, as Lars also has mentioned a number of times now are also impacted by low growth or flattish growth in China. So that is the main headwind on OC versus CC. But overall, we are expecting that the chronic business will continue with good momentum also into '25-'26. Operator: The next question comes from Sam England from Berenberg. Samuel England: So the first one is just a follow-up on the investment and margins piece. Can you talk a bit about how the Impact4 investment evolves over the plan period? To understand how margins might trend from here? Is it pretty much front-end weighted? Or are there areas like AI and more sort of multiyear investments throughout the plan period? And then in Voice and Respiratory Care. Just wondering if you're expecting any more positive momentum on reimbursement during 2026 following the improved reimbursement that you saw in France for HMEs earlier this year? And then are you expecting any other new markets in Voice and Respiratory Care to open reimbursement in '26 like we saw with Poland this year? Anders Lonning-Skovgaard: Yes. So thanks, Sam. To your first question around investments during the Impact4 period. The ones we have talked about today, that is, yes, front loading some of the activities to support the growth and also value creation over the period. So we are -- yes, as I said a couple of times now, front-loading activities within the U.S. INTIBIA and technology AI to reap the benefits later in the strategic period. On Voice & Respiratory Care, we expect the momentum we have seen in recent years to continue. We have seen some reimbursement openings in some of our smaller emerging markets, but also in France, but you should not expect any bigger ones, at least not short term. Operator: The next question comes from Graham Doyle from UBS. Graham Doyle: Just one for Anders and one for Lars. Anders, just in terms of the Q4, it looked like there was a fairly sizable step-up in other operating income, which seems to be related to a transition services agreement. And it was kind of like 2%, 3% of EBIT. How sustainable is that? And when should we expect that to sort of run off? And then just a point on reimbursement, for Lars here. When you look at the skin subs, is there not a danger if the ceiling reimbursement, i.e., what a doctor receives is capped at $127. Why would there not be a race to the bottom to products for like $20, $30, $40, where you make this spread? So just to understand how you think doctors balance patient outcomes with, I suppose, financial incentives would be helpful. Anders Lonning-Skovgaard: So thanks a lot, Graham. Let me take the first one. Yes, we have a step-up in other operating income throughout the year. And this is really related to our TSA or our services to the buyer of our skin business in the U.S. But actually, the cost to do these services are sitting in the individual cost items. So when I net it up in our P&L, it's actually a neutral effect. You should expect the other operating income also to continue into '25-'26, and we expect to be done with the services towards the end of the year. But for the total EBIT, it's a neutral impact. Lars Rasmussen: So on the Kerecis, I think you know at least as much as I do about the dynamics, the financial dynamics of the skin care market in the U.S. The way I see this change is that for most vendors, they will get into a space where they have a significantly lower pay per square centimeter than they had before. And we come into a space where we have more. The vendors that are left in that space now -- they can only be there when they have good quality clinical data. And the clinical data that you have to obtain to be in that market, you can only get those when you have a certain investment in the -- in the quality of those data. And I think that it's hard to see with the kind of investments that you have to do to both create these products, but also to document them that it's going to be a substantial race to the bottom. On the contrary, I think that it's going to be a market that for some of the vendors will be hard to compete in. We just happen to be set up in a way where we have extremely strong clinical data. We also have a very competitive setup when it comes to the cost on this. So we are, of course, prepared to compete but we -- we just don't think that we are in a space where what you described there is there's a logic that, that will just be the right or the first thing that happens. But we might be proven wrong on this, of course. But I really think that what happens, the steps that have been taken here that gives a choice for the society to offer very, very strong products at a reasonable price. And those who would like to compete on that is in that space, that's how I see it. Graham Doyle: No, I completely hear you. Just -- it was just something I thought about as we looked at how some of the higher priced products are trending today. Lars Rasmussen: Thanks. Okay. Should -- I think that we'll have to end with the next question because we are over time, but could we take one more? Operator: The next question comes from Carsten Lonborg Madsen from Danske Bank. Carsten Madsen: I was just hoping that you could talk a little bit about the scenarios for the LCD because that is, of course, a sort of continuous rumors about it not being implemented and maybe being canceled. So what will actually happen with your organic revenue growth guidance for next financial year and if it should be in a situation where the LCD is not being implemented? Anders Lonning-Skovgaard: Carsten, let me take that one. Our assumption around Kerecis for the coming year is a growth of around 25%. And remember, around 70% of our business, that's the hospital business. And the hospital business, we have a very strong growth quarter-over-quarter. And it's really the outpatient setting when we discuss the LCD and the price levels where we have some volatility. But we are -- we expect to deliver growth of around 25% for our Kerecis business, '25-'26. Carsten Madsen: And then maybe a quick follow-up to this one in terms of the venous leg ulcers. I cannot completely remember your plans for submitting data and maybe potentially getting on to that list as well. Could you help me remember it? Anders Lonning-Skovgaard: Yes. So we are in the process of doing clinical studies, and we expect those to finish sometime next year. So that's the current assumption. Lars Rasmussen: Okay. So actually -- I changed my mind, that happens sometimes in life. So yes, but if you're still online, you can ask your questions because you're the last one who is left. So that would be like almost personally if we leave you out here. Operator: The next question comes from Jesper Ingildsen from DNB Carnegie. Jesper Ingildsen: Just maybe on the bowel care opportunity that you mentioned in regards to your increased investments into next financial year, could you just elaborate a bit on that opportunity? And what kind of contribution you expect to get from that? And then lastly, on Halo and the special items that you have specified. To my understanding, you don't do capitalization of your R&D. I'm just trying to understand what's specifically driving that? And to some extent, how big that cost is? Anders Lonning-Skovgaard: Jesper, let me take your questions. When we had the CMD back in September and described our Impact4 ambition also for the U.S., we also talked to an opportunity we are seeing in the U.S. for our bowel care business. So the good news are that we are now getting reimbursement for bowel care in the U.S. And that's why we are now initiating investments into this specific area. And that's what we have been planning for doing this year. In terms of your second question, the -- related to the Halo, yes, we have evaluated the value of Halo also as a consequence of the current sales in the U.K. and our plans not to launch in other markets. And therefore, we have included a quite significant amount in our special items. And it's related to the IT investments we have done, so to develop the solution and to develop the app and therefore, we have reassessed the -- basically the depreciation for the Halo solution, and that's what we have included in special items. Lars Rasmussen: Thank you very much, guys, and looking forward to seeing many of you over the next period. Thank you. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Operator: Good morning, ladies and gentlemen, and welcome to TIM S.A. 2025 Third Quarter Results Video Conference Call. We would like to inform you that this event is being recorded. [Operator Instructions] There will be a replay for this call on the company's website. [Operator Instructions]. Vicente Ferreira: Hello, everyone, and welcome to our earnings conference for the third quarter of 2025. I'm Vicente Ferreira, Investor Relations Officer of TIM Brasil. This video highlights our recent financial and operational performance as well as the initiatives that support our strategic plan. Following the highlights, we will have a live Q&A with our CEO, Alberto Griselli; and CFO, Andrea Viegas. Please note that management may make forward-looking statements, and this presentation may contain them. Refer to the disclaimer on the screen on our Investor Relations website. Now let's review our results. Alberto Griselli: Hello, everyone. I'm Alberto Griselli, CEO of TIM Brasil. Today, we'll explore how our commitment to innovation, customer experience and operational excellence is driving sustainable growth and value creation. Let's dive into the highlights and key achievements that are shaping our journey this year. We've achieved a 5.2% year-over-year increase in service revenues for the first 9 months of 2025, a sustainable growth pace that combined with our robust cash conversion machine is fueling solid value creation. We keep evolving our B2B to expand new revenue streams. The TIM Smart Mining solution is gaining traction with a new partnership with Vale, the mining company. Additionally, EBITDA rose 6.7% year-over-year with a 50.3% margin and net income up 42.2% year-over-year. Our disciplined approach to CapEx has kept investment efficiency and operational cash flow reached BRL 4.5 billion. Notably, we announced BRL 1.8 billion in interest on capital and repurchased BRL 369 million in shares, reinforcing our commitment to shareholder remuneration. Once more, we stood out in ESG practices. TIM reached the top 10 of the FTSE Russell Diversity and Inclusion Index, being the only Brazilian company and the only telco to appear on the list. As I pointed out, our net service revenues continues to grow at a solid pace, driven by the mobile segment. Postpaid expansion remains a key contributor, supporting overall growth. The more-for-more strategy is helping ARPU evolution and mobile service revenues increased 5.6% annually over 9 months and 5.2% in the third quarter. This quarter, we added 415,000 postpaid lines, with prepaid to postpaid migrations up by double digits. Postpaid monthly churn remains low at 0.8%, reflecting efficient customer base management. Our more-for-more approach optimizes the cost benefit equation by balancing offer attractiveness and revenue growth. Exclusive Black Friday offers, including iPhone 16E and PlayStation 5 are enhancing our value proposition, and we expect them to help maintaining a solid trend in postpaid. In prepaid, we are seeing first sign of stabilization, supported by targeted offers and improved customer experience. TIM ULTRAFIBRA is also showing operational improvements with broadband ARPU at BRL 94 in the third quarter. Stable ARPU and the client base resuming growth at 3.7% year-over-year marking 8 consecutive months of positive net adds should reduce the negative dilution for broadband to our numbers. TIM is reinforcing its leadership in network with 5G now available in 1,000 cities across Brazil. We have the broadest 4G and 5G coverage in the country. Sao Paulo's network modernization case is setting the base for next-generation connectivity. The project reached its completion with 100% of sites upgraded this November. We are now leaders in download speed in all rankings that measure throughput. We expanded our leadership in consistent quality indicator, leaving the second player even further down the scale. On top of that, we are seeing the first sign of operational improvement with churn linked to network reasons reducing by 1 quarter. All in all, our modernization efforts are successfully supporting customer base management and delivering superior network quality, and we are expanding this project to other cities. Completing our 3Bs approach, let's talk about service. Providing excellent service is at the heart of our strategy. The revamped MyTIM app is transforming the customer experience and selling journey. With over 17.7 million unique users and 33% penetration, the app is driving digital engagement and e-commerce growth. We are the first telco to integrate with Apple Pay and Google Pay, enabling secure direct recharges for prepaid customer, simplifying the journey and encouraging recurring transactions. Digital service Net Promoter Score for postpaid and prepaid are on the rise, signaling that we are on the right path to elevating the experience with our service. Our more than 60 million customers are TIM's most valuable asset. Having this thing in mind, we are always trying to improve our relationship with clients and better monetize this asset. TIM Mais is our enhanced loyalty program, offering more benefits, experiences and convenience. Since its launch at the beginning of the year, we have seen over 2 million monthly active users enjoy the program's benefits. We have distributed 120,000 movie tickets and 20,000 Uber Rides gift cards. The program NPS is over 80 points and reflects strong customer satisfaction. In parallel, we are accelerating base monetization with mobile ads. We reached over 1,000 campaigns and 270 advertisers by September. Through the combination of our own inventory with Google and Meta, we are boosting digital engagement and expanding revenue streams beyond connectivity. Mobile ads revenues closed the quarter growing in double digits versus last year. B2B is a key aspect of our strategic plan and another way to diversify our revenue base. Since we have little legacy, the evolution of connectivity through coverage as a service is the main driver for expanding our presence. B2B IT solutions now cover with 4G and NB-IoT, 23.5 million hectares, over 7,600 kilometers of highways, and we have sold almost 400,000 smart lighting spots, generating BRL 435 million in contracted revenues since first quarter '24. The mining vertical is gaining traction, and now we have another anchor customer. Vale is joining our portfolio of clients and will be able to enjoy the benefits of TIM Smart Mining solution. We offer 5G, 4G, IoT and artificial intelligence solutions to create safer, more efficient and more sustainable environment for our customers. TIM Smart Mining can be a key enabler of automation and reduce environmental impact in the mining industry. With that, I'll hand it over to Andrea Viegas, our CFO, who will walk you through the financials. Andrea Palma Marques: Hello, everyone. I'm Andrea Viegas, CFO of TIM. This quarter, we delivered another chapter of consistent and disciplined execution. We've stayed focused on what matters most: sustainable growth, productivity gains and creating value for our shareholders. Our efficiency program remains one of the basis of our strategy. Thanks to effort across all areas, we kept cost growth at just 1.8%, well below inflation. This discipline translated into a 7.2% increase in EBITDA with margin reaching 51.7%. EBITDA after lease also advanced 8.3% year-over-year with robust margin expansion, a direct result of our industrial cost optimization strategy, which we've been executing across 3 fronts: our make model, contract renegotiations and network sharing agreements. Also, CADE approved the expansion of our own sharing agreement with Vivo 2 weeks ago. These initiatives are helping us to keep lease costs stable and margin expanding even in a challenging environment. Our net income rose by a solid double digit in the quarter, reaching BRL 1.2 billion and bringing the year-to-date figure to almost BRL 3 billion. This performance enabled us to distribute BRL 1.8 billion in interest on capital and repurchased BRL 369 million in shares, reaffirming our commitment to create value for our shareholders. Building on this momentum, our operational cash flow measured as EBITDA after lease minus CapEx reached BRL 1.7 billion in the quarter, up 8.1% year-over-year, supported by a resilient financial structure. In 9 months, this metric is up by double digits, reaching BRL 4.5 billion. With a strong balance sheet, we are well positioned to sustain growth and deliver long-term value. Now back to Alberto. Alberto Griselli: Thank you, Andrea. As we close, I want to reinforce that in Brasil is on track to achieve its 2025 goals and set the stage for 2026 of continuous evolution. We are delivering on our full year guidance across service revenue, EBITDA, CapEx and shareholder remuneration. With results on the right track, we are confident we can finish the year successfully and continue delivering value through the following drivers: one, our mobile postpaid and B2B segments to keep performing strongly; two, prepaid and broadband to continue recovering; three, efficiency are keeping costs and leases under control; and lastly, the buyback program is accelerating, and we are maintaining strong momentum in shareholder returns. Thank you for your attention. Now let's move to the live Q&A session. Operator: [Operator Instructions] Our first question comes from Bernardo Guttmann from XP. Bernardo Guttmann: Congrats on the solid results again. My question is about mobile service revenues. We saw a slight deceleration this quarter. How much of that comes from competition versus the natural normalization of growth after the strong cycle we had over the last years? And if I may, I have a second one. There has been a lot of market talk around potential moves and M&As in the fiber space. How do you see this environment? Could this wave of consolidation change your strategy or timing around your fiber business? Alberto Griselli: Bernardo, thank you for the question. So let's start with the first one. So when you look at the mobile service revenues, I think that we anticipated in the previous quarter, this sort of dynamics, and it's pretty consistent with what you see in other years as well. So we have a curve whereby we are at a higher growth at the beginning of the year when we do our price adjustment, and then it tends to decelerate going forward. I think that in this quarter, looking at the revenue dynamics on our side, we have pretty favorable outcome in terms of maintaining our postpaid engine growth, double digit, whereby reducing the deceleration of prepaid. And this is a trend that we are going to expect in the coming quarters, whereby we are likely to balance a bit the growth with postpaid maintaining the growth momentum and prepaid, we are working to decelerate less year-over-year. So I would say that it's less dependent on the competitive dynamics that remain rational and more related to our own strategy and seasonal patterns. This is for the revenues, okay? And when we look at the M&A, I think that the -- we always say that he Brazilian market being hyper fragmented is a market that is not attractive at this point in time because of the pressure that we have on ARPU and churn. And therefore, we are looking to optimize our capital allocation in terms of how we allocate capital to broadband. So we got our specific strategy that is dependent on our specific situation whereby broadband for us is a limited revenue line. So the broadband is something that the market has been expected for many years. Given the number of players, it is going to be a process that will take some time. And we have our own strategy, organic and inorganic towards this space, and it is unchanged versus what we discussed in the previous calls. What has changed a bit is the results that we are having on broadband because as you see now, we have a quite better operating momentum in terms of net additions. ARPU is still under pressure. We posted still a negative revenue growth this quarter on broadband. But given the fact that on the net additions, we are on a positive territory or we have been on a positive territory for 8 months now. We are likely to see improvements on the top line as well as we move forward. That's okay, Bernardo? Bernardo Guttmann: Yes, it's very clear, Alberto. Operator: Our next question comes from Marcelo Santos from JPMorgan. Marcelo Santos: The first is, if you could just paint a bit what's the competitive environment on mobile? And the second, do you see room to increase pure postpaid prices maybe this year or maybe the next. This year maybe already over, so maybe in the next. Alberto Griselli: Okay. Yes, Marcelo. So when you look at the competitive environment, I would say that the competitive environment on mobile remains positive in our view. So of course, there are promotions here and there. But overall, I think that the price adjustment this year went through quite nicely. And we are coding in our systems as we speak, the price adjustment that we're planning to execute the back book prices for next year. The -- as for -- so the market dynamics remain favorable. Of course, you have the smaller players that are a bit more aggressive. But all in all, they're not disrupting the national market dynamics in terms of pricing. And when you look at pure postpaid, I think we have an opportunity to adjust it. Now we are on a promotional campaign because we just launched the Black Friday promotions. So it's -- from now to the end of the year, it's unlikely that we are considering an adjustment, but it's something that we are certainly assessing for the beginning of next year. Operator: Our next question comes from Leonardo Olmos from UBS. Leonardo Olmos: Can you give us more color on the lease efficiency plan, especially in terms of timing of the expected impacts coming from the partnership with IHS and rent sharing agreement and leasing contract renegotiations? Andrea Palma Marques: Leonardo, related to the -- our lease efficiency, as we mentioned, we are in a continual discussions with all the partners that we have. Specific about the agreement that we made with IHS was we wanted the [ operation ] to make sites. And we made this agreement with someone who have the acknowledgment and the people to construct sites for us. So this kind of site is for some specific customers like agrobusiness or mining. And we will fund a financial and they will build for us these sites. What we expect in the leases is -- or our goal for this year, as we mentioned before, is to have the leases growing related to the inflation, although we have an increase in the number of sites for our increasing in coverage of 5G. But our goal is to increase just the inflation tax this year. I don't know if I answer your question. Leonardo Olmos: Yes. Yes. Your mentioned about IHS and the overall goal. I was just wondering if -- I don't know, maybe you could talk a little bit about the RAN sharing and maybe if it's not so delicate about the renegotiations. Andrea Palma Marques: Yes. Sorry, you mentioned about RAN sharing. RAN share cards just allowed us to continue. We changed a little bit the series that we have before with Vivo. So we will continue our plan to make the RAN shares especially for the 3G and 4G. And we are continuing to discuss -- we are continuing to renegotiate our partners on the towers company to achieve our plan that is to not reduce the lease because we can, but growing the lease only related to inflation. We have another agreement, but we are not -- now we can't disclose it. But as soon as we achieve our new agreements, we will disclose for you. Leonardo Olmos: Okay. Okay. Sounds great. And you have been delivering quite excellent development on that front. Congratulations. Operator: Our next question comes from Vitor Tomita from Goldman Sachs. Vitor Tomita: Two main questions from my side. One is a quick follow-up on the fiber business. Just if you have an update on the organic side on what has been supporting those improving net additions, if it's the same initiatives that you had in place before, such as focusing more on higher-end customers, higher value customers [indiscernible] churn or if there is anything new that's interesting on the strategy there? The other question is a bit of a follow-up on what people are asking about the competitive environment. Very specifically, there has been some noise in markets in October due to new banks, new sell MVNO, increasing commercial outreach in some areas, promotions to some extent. Was that noticeable at all from the standpoint of our commercial teams or very -- or something in my mind or just noise? Alberto Griselli: Sorry, Vitor, I had my mic switched off. So going to the fiber business. So what happens -- what happened on the fiber business are primarily a number of things. primarily related to the quality of the acquisitions and the management of the customer life cycle. So when you go into the quality of the acquisitions, it's primarily related to optimization on our credit scoring of the customer base and local targeting and the commercial channel footprint. So there are some channels that are naturally -- that provides naturally more quality, whereby other channels provide less quality. And so we changed over time the mix of our acquisition, and we targeted better high-value segments within the footprint. So this is for the entrance of customers. On the other side, there has been a lot of improvements on the churn management side. And this is partly related to the first question because if you get more quality at the beginning, you lose less customers because of bad debt and delinquency rates. And at the same time, we improved the quality of the service as a whole. So these are the 2 main areas when we had some relevant progress that moved us into net growth. When you go to the competitive environment, you're right that over the last quarter since the launch, [indiscernible] has been increasing progressively the allowances to their customers. So they started with 3 plants with a specific allowance. And then over time, this is, I think, the third time where they're increasing their allowance, so more gigabyte per price. And to some extent, I think they reduced the price in some plants on some BTL offer to our knowledge. I would say that the -- playing the gigabyte per revenue side is something that we can respond quickly because it's our network. It's -- we are deploying 5G. We've got [ 4 ] of spare capacity. We didn't do so yet because so far, the -- what we see, it doesn't request an answer on our side. And so we keep monitoring the progress in terms of losing customers or potentially losing customers to them. So far, no need to respond. Operator: Our next question comes from Maria Clara Infantozzi from Itaú BBA. Maria Infantozzi: I would like to [indiscernible], please, how do you see the growth opportunities coming from B2B and IoT? You have been vocal about the monetization coming from the market. So just wanted to ask you about how do you see the size of the opportunity, your long-term goals and how you see the evolution of revenues in the short term? Alberto Griselli: I'm not sure that, Maria, understood correctly your question. I will try to rephrase it. And basically, if I understood correctly, is how we are going to maintain the growth in the BIoT segment? What is the question? Maria Infantozzi: Yes. Actually, I asked you to please explore more how you see the long-term growth coming from B2B as you have been vocal about the monetization opportunities. And if you could please comment how short-term and long-term goals are perceived by you, and where are the opportunities would be great. Alberto Griselli: Okay. So -- and Maria, just to be clear, it's just B2B or it's in general? Maria Infantozzi: B2B and IoT, which is... Alberto Griselli: B2B and IoT, okay. Got you. So, Maria, it's basically, the way we're -- as you know, our legacy on B2B is pretty small. So if you compare us to other players in the market, we don't have a legacy. And therefore, we put together a strategy that is specific to our DNA. So we selected some verticals and the verticals we selected, for the time being, are agribusiness. It is the first one that we launched. Infrastructure was the second one. We got utilities that it's quite promising in Brazil and mining. And we selected these verticals because we think they got a larger fit with our technological, let's say, DNA, let's put it this way. And the way we look at this is that we started organically now, and we got quite a traction on these 4 verticals on a concept that we call coverage as a service, primarily. And this has been driving in the -- as we speak, the growth in these verticals. When you look more at the medium term, we have the ambition to increase our portfolio of solutions to include security, to include cloud that we can cross upsell to our services and possibly to expand the number of verticals we are servicing. As an example, the one that we are working is manufacturing. And these competencies and capabilities, we can grow them internally, and we are working on that already. We've been working on that already. But we are also looking at ICT inorganic moves that will provide us the ability at a faster pace to win a larger share of wallet of our customers. So this is not something that -- so we moved -- it's something new within our strategy. It's been launched a few years ago. We almost reached BRL 1 billion of contracted revenues over these years. We are recognizing as a leading partner in the verticals where we operate. If you look at the clients we have there, we've been successful commercially. And now we have, in the coming years, the objective is to consolidate our positioning and expand the portfolio of services and the relationship with our customers. And therefore, if you look more on the medium term, it's going to be a mix of organic and inorganic growth. Operator: Our next question comes from Phani Kanumuri from Santander. Unknown Analyst: So I have a couple of questions here. The first one is on your operating cash flow after lease. In the first 9 months, it has a growth rate of 11.8%, but it's trending slightly lower than the 14% to 16% for this year. So what is driving that? And the second one is looking at the competitive situation now, how do you -- how confident are you on your 3-year plan in terms of revenue guidance and results? Alberto Griselli: Let me take the first one, and I will pass the second one to Andrea. I will repeat it just to be sure that we understand it correctly. So the first one in terms of competitive environment, we -- as I mentioned, I think, to Bernardo in the first question, we -- the overall -- at least on mobile and not on broadband, but on mobile, the competitive environment remains rational. And therefore, we are in the position basically to keep growing the top line according to the guidance that we shared with you last year. Of course, as every year, in February next year, we're going to upgrade it. And therefore, when you look at the overall mobile environment, I would say that it didn't change versus the picture that we presented when we shared our guidance in February. And therefore, everything is confirmed. Of course, there are nuances whereby we see postpaid in mobile driving the growth. and a potentially improving situation in the prepaid environment. When you look -- and the second question, if I understood correctly, is the operating free cash flow dynamics, 11.8% versus our guidance of 14%, 16%. Was that the question, Phani? Unknown Analyst: That's the question, Alberto. Alberto Griselli: Yes, that's the question. Basically, if you look at our dynamics, we are confirming our guidance. And we believe that when you look at how revenue growth, EBITDA expansion, EBITDA after lease expansion and CapEx will combine in the next quarter. This will put our operating free cash flow expansion within the range of our guidance. Now since we are at the end of the year, basically, you can easily do the calculation and see what this will imply in our numbers, but I'll leave this to you, but we are confirming our guidance for the full year. Operator: Next question comes from David Lopes from New Street Research. David-Mickael Lopes: Just a couple of follow-ups. On the price increase you did in Q3, I was wondering if you could give a bit more color like maybe the magnitude and what's the percentage of the base affected? And now that prepaid trends are easing, I was wondering if next year, do you have a possibility to do a price increase next year on prepaid? Or is it still too early? And the second question is on B2B. I was wondering if you could give any maybe color on margins you're getting from B2B? Is it dilutive to your margins or not? Alberto Griselli: Okay. David, I got the last 2 questions. I will address. I lost the first one. So on the second one, this is a prepaid price increase. Just an overall comment. Basically, the -- when you look at the more-for-more strategy, this is the way we implement it. So generally, it's a price adjustment that always comes with some extra benefits for our customer base. And on prepaid, given the construct of the offer, it's a bit trickier to change the price -- as today, we're basically marketing BRL 1 per day. So it's deeply linked in the offer construct as a sort of easy to deconstruct. I would say that we are exploring as a way to monetize our customer base, the prepaid to control migration. And that's a way that we found very effective to monetize our customer base. We'll keep doing it. And the other thing we are looking at is the way we balance the benefits between prepaid and control to make sure that the migration makes sense as we increase prices. And so therefore, not entering into a lot of details into how we're going to do this, we can explore this in the one-to-one section, where we got some plans there as well. When you look at the marginality of B2B, so the marginality of B2B, generally speaking, when you look, we got 50-plus EBITDA margin, the B2B offering goes below typically this number. But when you look at what really matters, which is cash flow generation, they are accretive. So they generally tends to be dilutive on the EBITDA margin, but that tends to be accretive on the bottom line. And that's it. The first question, I'm not sure I got it. There was a first question or was these 2 questions, David? David-Mickael Lopes: It was just on the -- if you could comment on the magnitude of the price increase you did and what percentage of the base? Did you do the price increase just to hybrid or some pure postpaid customers? Alberto Griselli: This year, we did -- there are 2 types of price adjustments. We classify front book and back book adjustment. On the back book adjustment, we impacted both control and pure postpaid. We did it already. And it's not 100% of the customer base because we personalize this depending on a number of things in order to minimize attrition and churn management. But we did the back book price adjustment at the beginning of the year for both control and pure postpaid. When you go to the front book price adjustment, we did those adjustments in midyear for control, and we didn't do it for pure postpaid. And I think that was the question from a colleague of yours before. And basically, what we are looking at is to make this adjustment. We are assessing. We didn't decide yet, but we think that there is space to adjust them, not now because we are in a promotional -- in a seasonal period of the year with the Black Friday and the Christmas campaign. So it's something that is probably going to happen in the first quarter of next year. Operator: [Operator Instructions] Ladies and gentlemen, without any more questions, I will return the floor back to Mr. Alberto Griselli for his final remarks. Please, Mr. Alberto, you may proceed. Alberto Griselli: So thank you all for joining today's video call. We are arriving at the end of the year with strong momentum. We are executing our strategy with discipline and consistency. Despite being just 2 months away from 2026, we still have a lot to accomplish in '25. This year-end will be very exciting, and we expect to deliver on the promises we made to the market. I really want to thank the entire team for their commitment and relentless drive. Thank you. And I look forward to catching up with you guys in the one-to-one session. Lastly, a final message to our sales team. We put together a special Black Friday offer for our customers. Let's go for it. Operator: We conclude the third quarter of 2025 conference call of TIM S.A. For further information and details of the company, please access our website, tim.com.br/ir. You can disconnect from now on, and thank you once again.
Operator: As it is time to start, we will now begin the Conference Call for the Presentation of the Financial Results for the Fiscal Year 2025 Second Quarter. Thank you very much for your participation. Today, Mr. Sasaki, Representative Director and Senior Managing Executive Officer, will give a briefing on the financial results for fiscal year 2025 second quarter. Later, he will be joined by Mr. Yamauchi, Executive Officer and General Manager of Accounting Department to take questions. We will conclude the call at 4:50. Mr. Sasaki, over to you. Keigo Sasaki: Thank you. I'm Sasaki from Sumitomo Chemical. Thank you very much for attending our conference call today despite your busy schedule. I'd like to thank the investors and analysts for your daily understanding and support to our management. Thank you very much for that. Now let me start with the presentation of the financial results for fiscal year 2025 second quarter. Please turn to Page 4. This is a summary page. Core operating income and net income attributable to owners of parent significantly improved compared to the same period of the previous year. Core operating income of Essential & Green Materials increased significantly year-over-year. There are also profits at Sumitomo Pharma with strong sales results, leading to recording of a sales milestone of ORGOVYX and partial divestiture of the Asian business. Compared to the forecast announced in August, in addition to strong sales at Sumitomo Pharma, there was improvement in foreign exchange gain or loss from a yen weaker than anticipated, as well as a reduction in the deferred tax liability, resulting in a reduction in the corporate income tax expenses, leading to increase in both core operating income and net profit. Please turn to Page 5. Consolidated financial results of the second quarter. Sales revenue was JPY 1,954 billion, down JPY 146 billion year-on-year. Core operating income was JPY 108.7 billion, up JPY 79.2 billion year-on-year. Nonrecurring items not included in core operating income was a loss in total of JPY 5 billion. In the same period of the previous year, there was an impact of recognizing our interest in Petro Rabigh' debt forgiveness gain of JPY 86.5 billion as a nonrecurring factor, leading to a profit of JPY 91.8 billion. So compared to the same period of the previous year, this has worsened by JPY 96.8 billion. As a result, operating income was a profit of JPY 103.7 billion, down JPY 17.6 billion year-over-year. Finance income was a loss of JPY 15.8 billion. Improvement of JPY 136 billion compared to previous year when a loss on debt waiver Petro Rabigh was recognized. Gain or loss on foreign currency transactions, including finance income expenses was a loss of JPY 6.5 billion, improvement of JPY 28.4 billion year-on-year. Income tax expenses was a gain of JPY 3 billion, increase of tax burden of JPY 7.2 billion year-over-year. Net income or loss attributable to noncontrolling interests was a loss of JPY 51.2 billion, worsening by JPY 65 billion year-on-year with the improvement of Sumitomo Pharma's income. As a result, net income attributable to owners of the parent for the second quarter was a profit of JPY 39.7 billion, up JPY 46.2 billion year-over-year. Exchange rate and naphtha price, which impact our performance, average rate during the term was JPY 146.02 to $1 and naphtha price was JPY 64,900 per kiloliter. Yen appreciated and feedstock price declined compared to the same period of the previous year. Next, Page 6. Total sales revenue was down JPY 146 billion year-on-year. By segment, sales revenue decreased in all segments, except Sumitomo Pharma. As for year-on-year changes of sales revenue by factor, sales price decreased by JPY 25 billion. Volume variance decreased by JPY 88.1 billion, and foreign exchange transaction variance of foreign subsidiaries sales revenue decreased by JPY 32.9 billion. Next, Page 7. Total core operating income increased by JPY 79.2 billion year-over-year. Analyzing by factor, price was plus JPY 6.5 billion, cost, plus JPY 6.5 billion. Volume variance, including changes in equity in earnings of affiliates was plus JPY 66.2 billion, all were positive factors. Next is performance by segment. First, Agro & Life Solutions. Core operating income was a profit of JPY 11.2 billion, down JPY 2.9 billion year-over-year. Price variance. Profit margin improved for overseas crop protection products. Volume variance, in addition to decrease in shipments of overseas crop protection products, there was lower income from exports due to stronger yen and stronger yen's effect on the sales of subsidiaries outside Japan when converted into yen. Next is ICT & Mobility Solutions segment. Core operating income was a profit of JPY 33.1 billion, down JPY 10.5 billion year-over-year. Price variance, selling prices of display-related materials declined. Volume variance, though there was a gain on the sale of a large LCD polarizing film business, there was lower income from exports due to stronger yen and stronger yen's effect on the sales of subsidiaries outside Japan when converted into yen and decrease in shipments of display-related materials. Advanced Medical Solutions segment. Core operating income was a loss of JPY 1.4 billion, down JPY 1.7 billion year-over-year. Shipments decreased because of difference in the timing of shipments compared to the same quarter previous year for some pharmaceutical ingredients and intermediates. Essential & Green Materials segment. Core operating income was a loss of JPY 18.6 billion, improvement of JPY 16.1 billion year-over-year. Price variance with a drop in naphtha price, which is a feedstock, profit margins improved in synthetic resins and aluminum. Volume and other variances, there was improvement in profitability in investments accounted for using the equity method at Petro Rabigh due to factors such as improved refining margins. For Sumitomo Pharma segment, core operating income was a profit of JPY 97.3 billion, up JPY 94.3 billion year-over-year. Price variance, selling prices declined in Japan with NHI drug price revisions. Cost variance. There was a decrease in selling expenses and general and administrative expenses due to progress in rationalization. Volume and other variances in addition to expanded sales of ORGOVYX, a therapeutic agent for advanced prostate cancer and GEMTESA treatment for overactive bladder, gain posted on a partial divestiture of Asian business and ORGOVYX sales milestone are included. This is all for the results per segment. Next is consolidated statement of financial position. As of the end of September 2025, the total asset stood at JPY 3,364.5 billion year-on-year, this is dropped by JPY 75.3 billion. This is mostly due to a drop in related company's shares by sales of businesses as well as a decrease in cash and equivalents by repayment of interest-bearing liabilities. Interest-bearing liabilities stood at JPY 1,191.7 billion, which has dropped by JPY 94.5 billion compared to the end of the previous term. Equity stood at JPY 1,179.6 billion, which is up by JPY 105.2 billion compared to the end of the previous term. And now let me explain the consolidated cash flow. The operating cash flow is plus JPY 57.5 billion. However, year-on-year, this is a drop by JPY 5.9 billion. The profit level improved. We saw a deterioration of working capital due to revenue increase at Sumitomo Pharma as well as corporate tax increase. And investing cash flow was minus JPY 16.7 billion year-on-year, this is a drop by JPY 91.1 billion. This term, we had a partial sales of Asian business at Sumitomo Pharma. But in the same period last year, we had a significant income by sales of [ low bound of ] shares by Sumitomo Pharma as well as the sales of Sumitomo Bakelite shares. As a result, free cash flow stood at JPY 41 billion compared to JPY 138 billion the same period of previous year. This is a deterioration by JPY 97 billion. Cash flow from financing activity was minus JPY 114.8 billion due to repayment of borrowing compared to the same period of last year. This is an increase in outflow of JPY 39.4 billion. And now I'd like to explain the outlook for fiscal year 2025 on a full year basis. First, let me explain the business environment surrounding our company. Regarding the economic situation, the global economy continues to show signs of a slowdown. Amid heightened uncertainty, the outlook remains unclear. Below, our assessment of the business environment for our key sector is indicated using weather symbols as usual. For agrochemicals at the top, crop protection, price competition is expected to persist with regional variations in slow-moving inventories in distribution. Methionine market bottomed out at the end of last fiscal year and recovered in the first half of this year, but is expected to decline in the second half. In displays, mobile-related components remained robust. For semiconductors, although there is a variation by sector, but the demand is anticipated to show a gradual recovery trend. Regarding petrochemicals and raw materials, low margins are expected to persist. And now on Page 17, you can see the summary of our financial forecast for fiscal year 2025. We have revised the previous forecast in May to incorporate the recent performance trends and the impact of the partial sales of Petro Rabigh shares. The core operating profit forecast for fiscal year 2025 is JPY 185 billion, which is an increase of approximately JPY 45 billion year-on-year and an increase of JPY 35 billion compared to the previous forecast. On the left-hand side, the actual gain on sales of business shown in gray was projected to be approximately JPY 50 billion in the May forecast. But by incorporating partial sales of shares in Petro Rabigh, it is revised to approximately JPY 80 billion. The profit from the business activities shown in blue, representing the underlying profit and loss is projected to show a significant year-on-year increase due to sales expansion at Sumitomo Pharma and reduced stake in Petro Rabigh, we revised it upward from the May forecast, targeting over JPY 100 billion. By segment, growth areas are -- these 2 segments, Agro & Life Solutions and ICT, Mobility, we expect achieving JPY 100 billion in profit from the business activities. Regarding the profit and loss associated with the partial sales of Petro Rabigh shares, the combined impact of the valuation loss associated with subscription to new class shares and the increase in loss accounted for by the equity method is expected to be minimal on the final P&L because they are offset with each other. And now the business performance forecast. We forecast the revenue of JPY 2.29 trillion, a decrease of JPY 50 billion from the previous projection. Core operating profit of JPY 185 billion. Net profit attributable to the owners of the parent of JPY 45 billion. Assumption on the FX and naphtha prices are as stated. Regarding sales revenue, Sumitomo Pharma expects a strong sales in North America, mainly for ORGOVYX. But Essential & Green Materials except the decrease in revenue due to a decline in shipments resulting from the sales suspension of Petro Rabigh products, which is our subsidiary company. Core operating profit by segment will be explained on the following slide. Net income attributable to the owners of the parent is expected to increase by JPY 5 billion from the previous forecast. And related to Petro Rabigh company's shares. Cash contribution methodology associated with Petro Rabigh was not clearly identified and the series of profit and loss impact was accounted for and the nonrecurring items. That is how it was incorporated in the forecast. But this year, this time, the methodology for cash contribution and the accounting treatment was finalized. As a result, for 6 months, the sales timing was delayed by 6 months. As a result, the losses we bear under the equity method will increase. As a result, the gains on sales of equity will increase. As a result, core profit significantly increases. And next, we incur valuation losses of the Class B shares we newly acquired. As a result, there are additions and deductions among accounting items, but the impact on net income is limited as they had been already incorporated in the previous projections. And therefore, impact is not big. Next, regarding the full year performance or the sales revenue and core operating income by reporting segment. On to Agro & Life Solutions, though shipments shifted from the first to the second half, performance has largely progressed as previously announced with the previous forecast kept unchanged. For ICT and Mobility, EV market recovery is slow and the semiconductor market recovery is slightly moderate compared to our projection with some unevenness. As a result, we have adopted a little bit conservative outlook compared to the previous announcement. Essential & Green Materials, as I explained earlier, is expected to see a significant increase in core operating profit. At Sumitomo Pharma, mainly due to strong sales in North America, therefore, is expected to see a significant increase in profit compared to the previous forecast. The other segment sees its profit drop compared to the previous forecast. This is due to the fact that at the time of the previous forecast, a certain degree of performance improvement measures were factored in. So they were incorporated into the other categories. However, in this announcement, based on the assumption that they are likely to materialize in each segment, Essential and Sumitomo Pharma numbers are calculated. And therefore, those factors are not incorporated into others. This concludes our explanation on the financial results and earnings forecast. And now we would like to entertain your questions. Thank you. Operator: [Operator Instructions] Now the first question from Morgan Stanley MUFG Securities, Mr. Watabe. Takato Watabe: In your new forecast, Petro Rabigh's sales impact, I'd like to hear more about it. In Essential, JPY 50 billion is included this time, but the increase in profit is JPY 23 billion. What is the reason for that? Not related to Petro Rabigh, there is minus JPY 40 billion for others. You explained because there were recoveries in other segments, but it seems to be too large. And nonrecurring items, it was minus JPY 45 billion, but with the gains for sale of Rabigh that was assumed, but that is negative. So what is the reduction of JPY 25 billion in nonrecurring items? With the sales related to Petro Rabigh, maybe your forecast was too bearish. Could you explain the reason? Keigo Sasaki: Yes. Thank you for your question. For Petro Rabigh, we announced the influence recently. But for the sales, it's JPY 50 billion of sales proceeds was announced. And as you know, here, there was a time gap of 6 months, and that impact is included. So 22.5% means that the equity method is continued to be applied. So there is an increase in the burden in terms of losses based on the equity method. And that is one factor. And JPY 50 billion, because there were losses from equity method, the sales cost dropped. So in net, it is lower than that. So that included -- the increase in profit was only about JPY 23 billion. Besides, there is included under finance losses for the B shares newly acquired, there is a valuation loss included. So sales of equities, when you calculate the total loss, actually, the impact is not that large. Takato Watabe: Yes, I understand. Petro Rabigh, there is a negative in terms of sales proceeds because of equity method. Keigo Sasaki: So let me add to that explanation. How was that included in the original forecast? I think that is your question. In the original forecast, core operating income -- essentially in Green and EGM, it was not included at all. That is one point. So that makes the difference. And for nonrecurring items, we were including some impact. And by adding some items, for example, valuation loss, it is very difficult to express. So the losses were included in the nonrecurring items. But that is not a nonrecurring item. That is a financial loss. So improvement of a nonrecurring item compared to the forecast is because of this background. So we are not considering the sales gains. Well, when it's not that we are not taking into consideration at all, as I will explain. And your question, you asked about other corporate expenses compared to the forecast, this has worsened about JPY 24 billion, JPY 25 billion. And that part, in the initial forecast, we included some forecast of improved performance in EGM and Sumitomo Pharma. For both, we had conservative figures and Petro Rabigh equity sales, we were not -- we couldn't talk about it. So without including those figures, these were all added together and included under other corporate expenses, but that is now being distributed into other segments. It is now included in the figures of the relevant segments. So it looks as if the total corporate figures has worsened, but that is the reason. Takato Watabe: Is it possible to have such a big negative figure for corporate, about JPY 40 billion? Is that what you mean? Keigo Sasaki: Yes. The reason why it was good so far. Sumitomo Bakelite and other items of profit and loss are included and sales proceeds that happened last year are included. And besides Sumitomo Chemical Engineering and Nihon Medi-Physics, those losses are included under others. But these 2 are already sold. So this fiscal year, there are not so many positive factors. And under others and adjustments, expenses are high. That is how you should interpret it. Medi-Physics, I think that was Life Science, but I understand. So it's not that you are assuming a larger buffer. If you ask me if you are -- we are conservative, basically, yes, our forecast is intended to be conservative, but we are not including a large buffer. Takato Watabe: So you are conservative. I understand. Operator: Now we would like to go on to the next question. Mizuho Securities, Yamada-san, please. Mikiya Yamada: I am Yamada from Mizuho Securities. I would like to double check about the core profit. Agro & Life Solutions in the first half, there was some shortfall. From the first to the second quarter, there was a seasonality. So you said that there is some visibility, but you had some shortfalls from the first half to the second half, there was a timing difference of the shipments. Was it the reason? On a full year basis, there was no change in the forecast. Therefore, my understanding must be correct, but I'd like to double check. And ICT Mobility Solutions, downward revision, the operating profit and the revenue were revised downward. EV and the semiconductor recovery or delayed that is the reason. Marginal profit margin -- marginal profit ratio against the revenue dropped by JPY 30 billion, operating profit drop was limited to JPY 3 billion. Therefore, the balance seems to be optimistic between the 2. So could you please explain this situation? Keigo Sasaki: First of all, AGL, from the first half to the second half, there was some shift. At this point, in Latin America, business is struggling. From the second to the third quarter, there is some shift that is our awareness. As much as possible, we would like to make a recovery within the third quarter. On the other hand, in North America or in India, in these regions, so because they are Northern Hemisphere there, we expect more to come. We do not have any unfavorable factors. Well, the slow-moving inventories start to recover. And based on that, so comprehensively, when it comes to AGL, we are likely to achieve the initial projection. Furthermore, JPY 145, that is the ForEx assumption for this projection. Currently, yen is a little bit weaker than that. So I believe that this will also make a further contribution. And then on to ICT, the major factors are, as correctly pointed out by you, EV and the semiconductor. Although there is some recovery, but not much recovery than we anticipated. So that is some negative impact. They are incorporated. And the profit margin is off, that is what you pointed out. Well, the revenue in itself may be we put the numbers quite roughly and sometimes we round the numbers. So it is not precise. It is better not pay too much attention to the profit. It does not mean that you made a significant change to ForEx assumption. That is why I thought something is off. However, you more precisely calculate core operating profit. That is why you ended up this result. Am I correct? Mikiya Yamada: Yes. And Agro & Life Solutions, regarding the sales status of new products, is there any delay? Or are there any new products that are sold earlier than schedule? Keigo Sasaki: Well, there is no major delay. That is our current understanding. Operator: The next question is from SMBC Nikko Securities, Mr. Miyamoto. Go Miyamoto: I'm Miyamoto from SMBC Nikko Securities. I also have a question about Agro & Life Solutions. As a business environment, you have a cloud mark. So what's the current situation? What is the situation of the inventory? There are differences from product to product. So could you explain a little more about it? And in addition, price competition continues. And in terms of price variance, there were improvements of profit margin of foreign crop protection chemicals. So it seems that -- could you explain the price trend and by rationale in different sales situation, could you talk a little more about it? Keigo Sasaki: Yes. Thank you for your question. For AGL, in the first half, in Latin America, situation was a little worse than what we had assumed. For our distribution inventory compared to the previous year, there are improvements, but still the level is high. And generic products, competition is still expected. For Rapidicil, Argentine, still, we will continue to emphasize expansion of sales. And [ differing ] in Brazil, it is the second season. So this -- we will also continue to expand sales of this large-scale insecticide. So we want to recover from the first half towards the second half. And the other regions, in the United States, it is improving quite a lot, I believe. And of course, competition with generic products exist. But as North America in general, there's improvement in the desire of our customers to accept our product. North America is a place that is just starting. So we will keep watching. And in India, India as well, there is a question of the distribution inventory, but there are improvements seen. Not only North America, but also in India, I think we can look forward to the situation in India by watching with care, we hope we will achieve our target at the beginning of the fiscal year. Go Miyamoto: About the price variance in Latin America, there's still a drop in price and is it getting higher in other regions? Keigo Sasaki: That is a general image. Go Miyamoto: And how about the situation, the places which price is getting higher? Keigo Sasaki: Price itself, rather than higher prices in the price variance, that is a tug of war with cost. So including the cost, the improvements in some places. That is the meaning here. Go Miyamoto: I understand. And on Page 29, in Latin America, there was sales and some carried forward in Japan, but the impact in North America is bigger. Keigo Sasaki: Yes, in Japan, currently, including the price of rice, prices are getting higher in Japan. The customers, the farmers have quite a strong desire to purchase their advanced sales. In Central South America, the market is larger. So still the impact remains. Operator: Now we'd like to go on to the next question. Daiwa Securities, Umebayashi-san. Hidemitsu Umebayashi: I am Umebayashi from Daiwa Securities. I would like to ask you some questions on ICT and Mobility Solutions. From the first quarter to the second quarter, the revenue is approximately JPY 8 billion. So therefore, it is a significant increase, but the profit, JPY 4 billion drop. So there was a gain on sales of the business in the first quarter. I understand that. But excluding that, so the revenue increase is significant. However, the profit was almost flat. So what is the reason for that? And especially in the industry, smartphone in North America is strong. And in the second half, you mentioned that you might be a little bit conservative. Why is it that the situation is deteriorating to this extent? Could you elaborate on that? Keigo Sasaki: Well, let me see. ICTM, in comparison with previous year, currently, yen is stronger. That is our assumption. So this is the segment most affected by the ForEx fluctuation. Another factor is the impact of tariff. So at the beginning of the year, we told you that in total, JPY 10 billion of impact will be felt from tariff. And we start to feel that impact now. Throughout the year, this is likely to be within the scope of our projection at the beginning of the year. So the reason for drop this time is, as I explained earlier, EV as well as mobility. These are the major reasons, partially compared to our initial expectation, there are some change from the semiconductor situation. Therefore, they are separately incorporated. Separator of EV feel the impact. So please understand in that way. Hidemitsu Umebayashi: Between the first quarter and the second quarter, revenue increased. However, the profit dropped. Well, the profit dropped because in the first quarter, there was gains on sales, but it did not occur in the second quarter. However, between the first quarter and the second quarter, what was the major change in the mobile business? Keigo Sasaki: What was the major change for the polarizing film between the first quarter and the second quarter? Well, there is an impact of the gains on sales, which did occur in the first quarter. So that may have an impact on profit. The display was performing quite well last year. So there was some rebound from the previous year. So there are some irregular elements incorporated here. So please do understand in that manner. Operator: The next question is from Nomura Securities, Mr. Okazaki. Shigeki Okazaki: I'm Okazaki from Nomura Securities. For core operating income, a question for confirmation. Essential Green Materials, you made upward revision. But in terms of fundamentals, compared to 6 months ago, is it right to say that there are no major changes? What is your view about Rabigh and Singapore and other places, as was included in previous question, from the first half to second half, losses -- core operating loss tends to increase. What is the item for that? This year, I understand there's not so much difference between first half and second half in terms of sales of business. Could you explain that? Keigo Sasaki: Yes. Thank you. First, for Essential, in terms of wafer mark, I explained, basically, from the beginning of the year until now, there are no changes. So Singapore, for example, for PCS, we are studying the possibilities of optimization in TPC, MMA. In particular for MMA, restructurings and also rationalizations took place. And on top of that, high profitability items, high value-added items are areas that we plan to shift to maintain the profit. So that is a policy. As for the environment, we have not changed our view. And for other areas comparing first and the second half, in the second half, for example, this is a matter of how we spend our expenses. For R&D expenses tends to be concentrated in the second half. That is a trend that we see. So that is also included. Operator: Now we are getting closer to the ending time. So now we would like to take the final question. BofA Securities, Enomoto-san, please. Takashi Enomoto: BofA Securities, I am Enomoto. I have a question on net income. Looking at the plan for the second half, there is a significant gap from the operating profit to net income. Various items are included in the operating profit. Why is it that the net income is so compressed in the second half of the year? Keigo Sasaki: Thank you very much for your question. Throughout the year, nonrecurring items, at which timing they will be recorded that also have an impact. JPY 5 billion was the only one that was generated in the first half. However, there are several structural reform-related expenditures that will be occurring, which will be around JPY 25 billion throughout the year. So the remaining portion will incur in the second half. And regarding the financial profit, it will be skewed towards the second half of the year. That is our view. This is due to ForEx. So this is the current view. It is currently at JPY 150. But based on the assumption of the yen is stronger to JPY 155, then the ForEx loss may occur. And talking about the tax, as I mentioned earlier, Sumitomo Pharma deferred tax liability reversal gain was observed in the first half. This is extraordinary items in the first half. So this will not appear in the second half. So there are several factors. And therefore, the loss will incur in the second half of the year. So that is my explanation. Takashi Enomoto: The ForEx loss, what is your projection of that for the second half? Keigo Sasaki: Not so much. But our assumption is that, the ForEx is JPY 145. Operator: This concludes the Q&A session. Lastly, Mr. Sasaki will give the final greetings. Keigo Sasaki: Thank you very much for attending today. This fiscal year is the first year of our medium-term plan. And within the medium-term plan, we have set targets. So to achieve the target, we will do our best. So we hope we can continue to have your support. Thank you very much for your participation today. Operator: This concludes today's conference call. Thank you very much for your participation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Welcome to BICO Q3 2025 Report Presentation. [Operator Instructions] Now I will hand the conference over to the speakers, CEO, Maria Forss; and CFO, Jacob Thordenberg. Please go ahead. Maria Forss: Hello, and welcome to BICO Group's Quarter 3 2025 Earnings Call. I'm Maria Forss, President and CEO, and I will, together with BICO's CFO, Jacob Thordenberg, present this interim report. Here's today's agenda. I will open today's session by presenting how BICO serves the world's leading pharma and biotech companies with solutions that transform how labs operate and innovate. Following that, Jacob will provide a summary of the quarter's key developments and present the Group's financial performance. We will proceed and comment on our 2 business areas, Life Science Solutions and Lab Automation. Additionally, we will highlight our R&D pipeline with ongoing product development efforts. And this session will conclude with final remarks before opening up for Q&A. At BICO, we serve the world's leading pharma and biotech companies. Our portfolio ranges from Biosero's market-leading Green Button Go software, enabling full lab orchestration to off-the-shelf automation products and bioprinting from our Life Science Solutions business. Our solutions enable smarter, faster and more efficient labs and here lies an underlying strong demand. Pharma and biotech companies face the same fundamental challenge, long and costly development cycles for new therapies. And the development of a new therapy often takes more than 10 years and cost between USD 2 billion and USD 4 billion, where 90% of the pipeline ultimately fails. To overcome this, these companies are investing heavily in automation to increase efficiency, speed and quality, bringing innovations to the market faster and at a lower cost. The next wave of automation goes beyond instrument orchestration to connect entire workflows and data streams, where AI and machine learning continuously optimize experimentation and decision-making. And BICO is at the core of this development, providing the data backbone that unifies AI-powered services with Lab Automation. Our products and services enable our customers to connect data across diverse informatics systems and apply AI tools to plan, run and optimize experiments in real time. And already today, we are powering AI drug discovery workflows that follow the design, make, test, analyze paradigm using our Green Button Go platform. Further, we integrate AI-driven image analysis as high throughput analytical tools into cell line development workflows, enhancing speed and precision in bioprocess optimization. Today, researchers spend too much time on manual tasks and fragmented data, resulting in wasted samples and stalled projects. And combined with macroeconomic pressure, talent shortages and cut of budgets, automation has become not just a competitive advantage, but a necessity for the future of discovery. BICO is at the core of this transformation, connecting workflows and data streams and enabling AI powered experimentation. And this is what our mission and vision is all about. Our Vision is to enable and automate the life science lab of the future. And our mission is to be the first-choice lab automation partner and provider of selected workflows to pharma and biotech. And this brings us to a video I'm about to share, which shows an example of an integrated lab automation solution we have designed and delivered to one of our customers. And in my view, this truly reflects our mission. [Presentation] Maria Forss: With this introduction, my aim has been to emphasize BICO's mission, our strategic direction and the value we deliver to our customers. We lead the way in solving the challenges in life science with speed, accuracy and efficiency. Speed by reducing the time to find optimal candidates for treatment therapies and supporting our customers in driving forward a personalized approach to treatment. Accuracy by enabling the development of physiological relevant models and enhancing the reproducibility through automated processes that reduce variability in experimental outcomes. And by efficiency, we develop solutions to maximize productivity of automated lab equipment and scientists. All in all, our customers can run their processes faster, improve their quality of data and ultimately make better decisions. I will now hand over to Jacob to present the results for the third quarter. Jacob Thordenberg: Thank you, Maria. I will summarize the third quarter of 2025 for the group and then provide more financial details for the quarter. When looking at the performance for the third quarter, Life Science Solutions delivered 4% organic sales growth, in line with market performance. The growth was mainly driven by a positive uptick in diagnostics as well as increased demand for Lab Automation components. Scienion continued to perform well, delivering double-digit growth after major commercial and operational improvements in a diagnostic market, which is coming back to more normal investment levels. Lab Automation delivered 35% organic sales growth, rebounding after an abnormal Q2. Good progress has been made in the execution of the action plan, significantly enhancing processes, leadership and operational capabilities. In addition, Biosero received orders from a global pharma company worth USD 15.2 million as a part of a global master framework agreement. This showcases the strong underlying demand for Lab Automation and Biosero's market-leading software suite, Green Button Go. We have also resolved impairments in Discover ECHO and Biosero totaling SEK 1,036 million. These impairments will not affect cash flow but impacted EBIT for the quarter. With that said, I would like to highlight that we anticipate long-term growth of around 10% CAGR, which is in line with our financial targets for both Discover ECHO and Biosero. I will elaborate more about this shortly. The closing of the transaction of the divestments of MatTek and Visikol was finalized in early July. These divestments generated SEK 740 million, which significantly strengthened our cash position. Next slide, please. Q3 was a quarter of solid progress. Net sales reached SEK 387 million despite ongoing macroeconomic challenges and funding headwinds in key markets with an organic sales growth at 12%. We also experienced that academic and biotech funding remains constrained, especially in North America, which has led to cautious customer spending and extended sales cycles. Adjusted EBITDA amounted to SEK 17 million, corresponding to an adjusted EBITDA margin of 5%, which is an improvement in the adjusted EBITDA margin of 3 percentage points year-over-year. The improved margin is a result of continued cost control activities, mainly due to synergies derived from centralization of functions as well as initiatives for operational efficiencies. Maria will now comment on the progress of the execution of the comprehensive action plan to scale up Biosero. Maria Forss: Since September, we have a new Managing Director in Biosero with long and extensive experience in the global life science industry, and he has the right toolbox to drive sustainable growth and create long-term value for customers and shareholders. And we have made solid progress in executing the action plan, significantly strengthening not only leadership, but also processes and operational capabilities. We have also continued substantial investments in operational resources to better serve our customers and accelerate closing of delayed projects. Furthermore, we're implementing more standardization to scale the business and introducing new commercial concepts with shorter lead times to balance the project portfolio. Also worth mentioning again is that Biosero secured several orders from a global pharma company valued at USD 15.2 million in the quarter. And this project will develop integrated lab automation solutions, which will support this big pharma customers' drug development process. I will now hand over to Jacob again for comments on the divestments and impairments. Jacob Thordenberg: Thank you. Well, in Q3, we completed the divestments of MatTek and Visikol, generating SEK 740 million, as previously mentioned. And this significantly strengthened our cash position. And these divestments follow our updated strategy with a focus on Lab Automation and selected workflows. Sartorius acquired both companies at a 2024 sales multiple of 3.7x and an adjusted EBITDA multiple of 15.3x. The companies have been treated as discontinued operations from Q2 2025. And if we move on to the next slide. In the quarter, we also resolved SEK 1,036 million in impairments for Discover ECHO and Biosero, which are noncash flow affecting one-off items, but affecting EBIT in Q3. In May 2024, we implemented an updated model for impairment with shortened the forecast period before terminal calculations from 10 to 5 years, following recommendation from the Swedish Financial Reporting supervision. The impairments stem from a short forecast period and lower year-to-date trading in 2025, leading to changed forecast assumptions compared with previous periods. With that said, we see a strong underlying demand for Biosero's integrated lab automation solutions centered around the company's market-leading software suite, Green Button Go. And in ECHO, we see a market recovery in the U.S. academic segment over time. We anticipate long-term growth of around 10% CAGR in both companies, which is also in line with our financial targets. I will now move on to the next section, group financial performance. In Q3, sales amounted to SEK 387 million and grew 5% in total and 12% in organic sales growth. The difference of 7 percentage points is mainly explained by a weaker U.S. dollar against the Swedish krona. Adjusted EBITDA amounted to SEK 17 million, corresponding to a margin of 5%. The improved margin is a result of continued cost control activities, mainly from centralization of functions as well as initiatives for operational efficiencies. And if we move on to Q3 cash flow. Cash flow from operating activities amounted to negative SEK 32 million, impacted by working capital changes of negative SEK 30 million. Total cash flow during the quarter amounted to SEK 570 million. And as mentioned before, MatTek and Visikol were divested as of July 1, 2025, and generated net proceeds of SEK 740 million. We also made a third bond buyback in our convertible debt in August 2025, which amounted to SEK 98 million. So in connection to this, I will also comment on BICO's outstanding convertible debt and our cash position. In total, we have made 3 buybacks in our convertible bond between November 2024 and August 2025, totaling a nominal amount of SEK 492 million. The rationale for the bond buybacks has been to optimize BICO's capital structure and further reduce long-term debt. Post buybacks, the convertible debt now amounts to nominal SEK 1,008 million. As per Q3, BICO's cash position was SEK 1,241 million, leaving BICO with a positive net cash position. As mentioned on the previous slides, the effects of changes in working capital amounted to negative SEK 30 million for the quarter. And out of this, operating receivables increased by SEK 96 million, inventories increased by SEK 1 million and operating liabilities increased by SEK 65 million. In percentage of last 12-month sales, net working capital in the quarter corresponded to 13%, confirming that the operational excellence actions implemented in 2023 and onwards have been successful. For Q1 up until Q3 in 2025, the further decrease in net working capital to low double digits is primarily an effect of less net working capital in Biosero due to decreases in receivables. I will now hand over to Maria to present the results in our 2 business areas. Maria Forss: Thank you, Jacob. Let's now turn to our target business -- largest business area, Life Science Solutions, which accounted for 2/3 of our revenue this quarter. Life Science Solutions delivered SEK 263 million in sales with a 4% organic sales growth and an adjusted EBITDA of SEK 19 million, corresponding to 7% adjusted EBITDA margin. The growth was mainly driven by a positive uptick in diagnostics as well as increased demand for Lab Automation components. Scienion continued to perform well, delivering double-digit growth after major commercial and operations improvements in a diagnostic market, which is coming back to more normal investment levels. And if we move on to our business area Lab Automation. In quarter 3, Lab Automation delivered 35% organic sales growth year-over-year, rebounding after the abnormal quarter 2. The business area sales for the quarter amounted to SEK 124 million. The adjusted EBITDA was SEK 10 million, corresponding to an adjusted EBITDA margin of 8%, turning the negative trend from the recent quarters. The profitability is still impacted though by continued substantial investments in operational resources for the benefit of our customers to accelerate closing of projects. And as mentioned earlier in this presentation, good progress has been made during the quarter in the execution of the comprehensive action plan to scale Biosero. We have significantly enhanced processes, leadership and operational capabilities. I will now introduce a new section where I will share our data on our ongoing product innovation efforts. One focus area for growth is continuous product innovation. BICO has a solid R&D pipeline and road map in place, and this is based on the portfolio strategy, which is part of BICO 2.0. Our current product portfolio covers the full spectrum of lab automation solutions and selected workflows. And it's important to emphasize that we have lab automation products and solutions in both of our business areas. And this is illustrated on this slide where you can see instruments from various BICO business units positioned along different stages of the Lab Automation continuum. Products in the business area Life Science Solutions are also Green Button Go ready. In BICO, we invest substantially in product development. We're continuing to bring new products and innovations to the market. Recent product launches include I.DOT LT and TurnStation. The I.DOT LT is a new addition to the I.DOT series and offers a compact solution optimized for automated low-volume liquid dispensing. This product is Green Button Go ready. TurnStation by QINSTRUMENTS is a Lab Automation device for liquid handlers. It optimizes the workflows for plate handling and it's purpose-built for seamless Lab Automation. This is an example of how we are driving growth through synergies in the BICO Group. Let's now move on to an example of a successful product launch from an ongoing external collaboration. This is a result of the scientific collaboration between Sartorius and BICO. Sartorius' Octet and Biosero's Green Button Go is an integrated solution, delivering faster results to the market, enabling labs to operate more efficiently and effectively. And these were just a few examples of recent launches and collaborations. Let's now move on to look at R&D pipeline and road map. We have a comprehensive product development pipeline within our prioritized focus areas, as you can see on this slide. The majority of the R&D investments are made in software development, while there are several upgrades of the instrument portfolio meeting customer needs. Multiple product launches are planned for 2026, and these include both software, instruments and consumable products. And as mentioned before, we are also introducing new commercial concepts in Lab Automation, with shorter lead times to balance the product portfolio. And these concepts are developed both through internal collaboration between the 2 business areas as well as together with external collaborators. Before the Q&A, I will give some concluding remarks. One year ago, we launched BICO 2.0, which is our updated strategy to enable and automate the life science lab of the future. Since then, we have streamlined our portfolio, we have strengthened our commercial engine, we have invested in our people and culture and delivered operational excellence. It's been a year of change, and we have worked hard. The impact that we together have achieved is clear, significantly strengthened cash position, leaner operations and a more customer-centric solutions, and this is just the beginning. We're excited to drive Lab Automation forward and equip pharma companies with tools to shorten drug development time lines. By enabling increased success rate and reducing time to market, we empower scientists to accelerate innovation and deliver breakthroughs that shape healthier societies. I would also like to take the opportunity to thank our customers for your continued trust in BICO as well as our employees around the world for your work and dedication, which enable our customers to deliver what matters the most, the discoveries that advance human health. This was our final slide before the Q&A. I will hand over to the earnings call host for further instructions. Operator: [Operator Instructions] The next question comes from Ulrik Trattner from DNB Carnegie. Ulrik Trattner: A few questions from my end. And if we can start off with Lab Automation, and you talked about healthy demand in Lab Automation. If you can clarify what that entails? Maria Forss: Well, as we can see in the quarter, we are landing substantial orders of more than USD 15.2 million, and we continue to see demand also from other big pharma customers, and that's what is the basis for our claim of healthy demand. Ulrik Trattner: And just to sort of clarify, are you seeing increased tender activity? Are you seeing a growing order intake? Or is there customer assessment of your software or like just to get some sense on how this could be quantified? Maria Forss: As you know, like we are never guiding or talking about our order stock or order intake due to competitive reasons, but we have several ongoing discussions with customers and help the business. Ulrik Trattner: And I know that you don't quantify sort of order intake, but in terms of any type of granularity, have this improved over the last 6 months versus -- in terms of customer interest? Or how should we view this? Maria Forss: I think the customer interest has been retained. But as we have talked about in previous calls, and we'll talk about today, too, is that the first half of 2025 has been a challenging first half for us as well as many other peers, and that has also been reflected in not the demand, but the time it takes to close orders. And some of those orders are now being executed. Ulrik Trattner: Do you expect the sort of time line from sort of interest to close the deal have sort of shortened? Or is it still the same? Maria Forss: When you have master service agreements with large pharma customers or customers overall, of course, those will facilitate the time it takes to get orders in place. Ulrik Trattner: Okay. And again, on Lab Automation, and you've done some structural changes in the management of these contracts. Does this apply for the newly assigned contract, the one you signed in September? Or is this under the sort of same type of agreement that you had in -- like prior to doing the restructuring? Maria Forss: We have changed the way we are operating overall, both in terms of how we run projects, how we are scoping the projects, the way we are structuring the contracts to make sure that, that is clear moving forward. So I would say it's a new way of working that has been implemented since earlier this year, which is now starting to show effect. Ulrik Trattner: Great. And on the phasing of the USD 15 million contract, should we sort of assume and apply the same type of phasing that we have seen historically, which has been a lot of revenue and profit being front-end loaded and then that being tapered off gradually throughout '26 when -- since it's set to be delivered throughout '26 as well? Jacob Thordenberg: Yes. Maybe I can answer that question, Ulrik. And the short answer is yes, and that is due to the revenue recognition profile that we have in Biosero, which is based on percentage of completion. And our percentage of completion model is based on anticipated costs. And in these projects, a large chunk of the anticipated costs is indeed related to hardware. And roughly speaking, the other part of the anticipated cost is labor hours. And given that we typically buy a lot of instruments when we start a project, you usually see a spike in revenues due to the purchase of hardware and that being a quite significant share of the anticipated costs. And then you have less acceleration in revenue recognition related to the labor hours. So yes, it has a similar profile as we have seen from previous large orders. Ulrik Trattner: And I guess you assume given sort of your outlook that you will be signing new orders to bridge sort of that gap into '26? Jacob Thordenberg: I'm not sure I follow that question, Ulrik. Ulrik Trattner: Given the tapering off of revenues into '26 in order for you to grow from the level in absolute terms, you would need to add additional contracts? Jacob Thordenberg: Yes, correct. Yes. Ulrik Trattner: Great. And just on the discontinuation effects, both in the quarter as well as for Q4, if it's possible to quantify to what sort of -- what are the sort of actual numbers here that we should be modeling for Q4? Jacob Thordenberg: The numbers are -- we don't have any effect from MatTek and Visikol in the quarter, given that they were sort of completely out of our books as of July 1. Ulrik Trattner: Yes. But if it's possible to quantify, I know that you've restated it, but based on sort of general modeling purposes for... Jacob Thordenberg: But there's nothing in our books in Q3. So there's nothing to quantify because the assets are not in our economic ownership anymore in the quarter. Ulrik Trattner: Sure. But from a comparable perspective in Q3 last year, they were in your books and in reported numbers and [indiscernible] deviation. Jacob Thordenberg: Yes, [indiscernible] in the report. So there's no effect in the report. It has been excluded in the comparison. Ulrik Trattner: Yes, yes. Sure. Yes, yes. But if we were to quantify it for Q4 then, I guess like you reported some sales in Q4 for some of these subsidiaries that will not be presenting for Q4... Jacob Thordenberg: Okay. So the comparison figure for Q4 last year. I can perhaps provide you that separately. I don't have those numbers in my head right now. Ulrik Trattner: Okay. Great. And just last 2 questions from my end. I know that sales expenses is down sequentially while your top line is up. Is there something to read into that? Are you doing something different in terms of your selling expenses? And secondly, where is kind of sort of a steady state like working capital level to top line in percentage terms? Jacob Thordenberg: Yes. Do you want to answer the first question, Maria, in terms of – Maria Forss: Yes. I think overall, we have -- as we have talked about earlier, we have made sure that we can get the commercial synergies as well as operational synergies in the group. And with our sales skills group as well as other commercial skills group, we are then reaping those synergies. Part of the cost management that Jacob talked about earlier in the call is about those synergies, but also centralizing some functions as well as operational efficiencies. So that's where the improvement in the margin comes from. And then this second part of... Jacob Thordenberg: I can answer the second question in terms of working capital in relation to sales. And as we mentioned in the call, we're very happy to see that we have had great progress in our working capital, and now it's down to 13% in relation to LTM sales. We do believe that a stable level should be between 15% and 20% of sales. Operator: The next question comes from Ludvig Lundgren from Nordea. Ludvig Lundgren: So continuing a bit on Lab Automation. Sales was positively affected by this order you received in September. So I just wonder if you could elaborate a bit more on the effect we saw here in Q3 and whether the positive contribution will increase sequentially as we move into Q4? Jacob Thordenberg: That's a good question, Ludvig. And I expect to see a similar type of impact in Q4. I won't disclose how much the impact will be, but we saw a positive impact from the purchase of hardware in Q3, and we will see a similar impact also in Q4 [indiscernible] Ludvig Lundgren: Yes. Great. And then also on Lab Automation. So I think like median reported EBITDA margin in the last 3 years is close to the current level actually at 80%. So I just wonder like if you can give some flavor on this current margin level and if it's reasonable to expect a significant increase in margin for Lab Automation as we move into '26 because you highlight some elevated costs here in Q3 as well. Jacob Thordenberg: Yes. I won't go into sort of specifically commenting on what kind of margin we can expect, but we do have higher ambitions for the cost base in Biosero, and we expect to be able to scale that cost base in a more efficient way going into 2026. And by that, of course, also expand our EBITDA margins that we do believe could be higher than the margins that we see today. Ludvig Lundgren: Okay. And so it's largely a consulting business. So like is it possible to quantify the utilization that you currently have? And like how much more projects could you add on this current cost base without -- yes. Jacob Thordenberg: Yes, we won't go into utilization rate because that would be quite commercially sensitive, but we do believe that we can gain more efficiencies on the cost that we have in Biosero and by that, also be able to take on more projects. But we won't comment specifically on what kind of utilization rate we have as of today. But we do believe that we can scale the cost base in a more efficient way in Biosero. Ludvig Lundgren: Perfect. Great. And then finally, on the framework agreement, I just wonder if you could share a bit more on the potential for further similar orders from this customer. Like does this relate to only one location and then they could possibly expand it to other locations as well? Or how should we view this in the longer-term? Maria Forss: The framework agreement that was signed early in the quarter is a global framework agreement. And the orders that we won now in quarter 3 are for one project in one site, but the framework agreement applies to all the different sites for this big pharma customer. Ludvig Lundgren: Okay. So is it fair to assume then if this is a successful project, then they could expand this to other sites as well, I guess? Maria Forss: Yes, that's correct. Having that framework agreement in place facilitates the whole procurement process, which is usually quite long and tedious in big companies. So it's a very good thing to have that in place. Ludvig Lundgren: Okay. Just a follow-up on that then. So like what would you say is the visibility for an order from this customer? Like will you have some -- how much visibility will you have into an order coming in, so to say? Maria Forss: Well, with these type of large customers, it's really a strategic collaboration. And some of these strategic collaborations, they have usually plans for a couple of years ahead. And then it's a dialogue between us and the customers, so we can ensure that we have the capacity and resources when -- to meet their demands when the different orders will come in. So it's a good collaboration. Operator: The next question comes from Suzanna Queckborner from SHB. Suzanna Queckbörner: Suzanna Queckborner, Handelsbanken. Just a follow-on on the Biosero. Regarding the write-down, perhaps you could give us a better or like a more detailed explanation of how you're thinking about this given that you see continued high demand, but you have now reduced the forecast for 2025 and to some extent beyond. So maybe explain what the thinking is here and how we should think about it? Jacob Thordenberg: Yes. Thank you, Suzanna. Well, I think the way you should see it is that when we started 2025, we had much higher ambitions for Biosero and expected more out of Biosero. And now when we are about to conclude the year, we can see that we will not meet the expectations that we set for Biosero when we started 2025. And by that, we also see that the implicit growth then between what we expected in 2025 and what we then expect for 2026 was too ambitious given where current trading is at Biosero. And when looking at year-to-date trading in Biosero and what we expected for 2026 going into 2025, we realized that the growth targets for 2026 were too high and have adjusted those targets, but with that said, still high ambition. But given the outcome in 2025 and the year-to-date trading in 2025, we realized that we had to revisit 2026. And by that, we also had knock-on effects for the following years following 2026. Suzanna Queckbörner: Right. And then also a question on consumables and services. You've seen a pick up. Should I see this as a one-off? Or are you actually making some kind of transition to selling more consumables, for example? What's happening here? Maria Forss: There are several initiatives to increase recurring revenue. That's one of our 5 focus areas commercially. And as you can also see from other peers in the industry, consumables is going very well. We have also focused on increasing our service sales. And as you noted, Suzanna, there has been an increase in this particular quarter. I think we should look at that trend looking at several quarters and because there can also be an effect of the product mix, but much focus on consumables and service overall. Operator: [Operator Instructions] The next question comes from Filip Einarsson from Redeye. Filip Einarsson: So I'd be curious to get to understand a little bit more on the sort of operational efficiency and margin improvements, which we saw in Q3. Could you help us with sort of a reasonable expectations on the OpEx base for the coming quarters? That's the first. Jacob Thordenberg: Okay. Well, in terms of the OpEx base, I would say that it's quite stable at the moment. We do talk about in the report that we have elevated costs in Biosero as we're investing into our customers. And if anything, we want to continue to scale on the current OpEx base rather than increasing costs in the coming quarters. And as we have also been quite clear, we do keep a strict cost control, and we want to continue that and get operational leverage on our current cost base. Filip Einarsson: Okay. And a short follow-up on that would be then on what sort of line item in the income statement would you see you can make the sort of primary savings with the current outlook? Jacob Thordenberg: No, I wouldn't say that we see any primarily savings. The opposite, I do believe that we should be able to grow while keeping all lines in OpEx flat. Filip Einarsson: Okay. Okay. So I've got one more, which is sort of a broader type of question. But I mean, we saw that Sartorius lowered the equity exposure in the second half of 2025. And I just thought maybe you could provide some additional color on this. It might be hard for you, but anyway. And maybe if you could also provide some commentary on the current status of the collaboration with Sartorius after the divestments. Jacob Thordenberg: Yes, I can answer the first question, and then Maria can answer the second question. And the first question is quite simple. We cannot comment on sort of the activities of Sartorius. That's not our job to do that. It's the job of Sartorius. Maria Forss: And when it comes to our collaborations, we have a handful of different scientific collaborations ongoing that will eventually coming to the market and these are all going great, and are evaluated on a continuous basis to make sure that assumptions and business cases are holding. And so all fine when it comes to the collaborations. And you saw an example of a result of a collaboration with Sartorius in our presentation with Octet and powered by Green Button Go, which was launched earlier this year, has been a good commercial success so far. Filip Einarsson: Right, right. So what -- that was out was more like there are no -- has there been any sort of changes in the sort of collaboration dynamics following the recent half year of happenings? Maria Forss: No. Filip Einarsson: I would take that as a no then. Maria Forss: No, no. Things are going according to plan. Operator: The next question comes from Ludvig Lundgren from Nordea. Ludvig Lundgren: So just a follow-up on the cost base that you mentioned there. So R&D on a gross level has really decreased a lot in the last 12 months at, I think, around SEK 50 million now in Q3. Like is it fair to extrapolate this level of R&D ahead? Or will this increase in Q4 as you typically have somewhat of a sales increase there as well? Or for us to model this, how would you do it? Maria Forss: I think it's important to understand here that we do substantial investments in R&D. And what you find in the report is capitalized R&D, what is put on the balance sheet. And we have taken on a much, much more conservative way of capitalizing R&D. So then it's the different projects will have to pass toll gate 3 in our gate stage project model before we capitalize any R&D to make sure that we have more security and success of the project. So the capitalized R&D and the level of that is not an indication of the amount of R&D that we're doing, but rather what we put on the balance sheet or not. Ludvig Lundgren: Okay. I was actually referring to the like gross total level, including both the amount in the P&L and in the balance or in the cash flow. And that one as well has decreased a lot. So just this SEK 50 million, is that a sustainable level in the P&L then? Jacob Thordenberg: Well, yes, it is a sustainable level. And I don't see that we will change this. However, as Maria mentioned, we have a much more stringent model now in terms of capitalizing R&D. And that is contingent that the different R&D projects within the group pass certain toll gates. But the level of R&D, I don't expect that to -- in terms of both P&L and what's capitalized I don't expect that to change dramatically in the coming quarters, no. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Maria Forss: Thank you for all the questions received. And thank you for your continued interest and support in BICO Group. Together with Jacob, I wish you all a great Tuesday. Thank you, and goodbye.
Operator: Greetings, and welcome to the Gladstone Commercial Corporation Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. David Gladstone, CEO. Thank you. You may begin, sir. David Gladstone: Well, thank you, Latania. Good to hear from you again. That's a nice introduction, and thank you all for calling in this morning. We enjoy this time we have with you and on the phone, and I wish we had more time with you. Now I'll turn it over to Catherine Gerkis, she's our Director of Investor Relations and she will provide a brief overview regarding certain items in this report today. Catherine, go ahead. Catherine Gerkis: Good morning. Today's call may include forward-looking statements, which are based on management's estimates, assumptions and projections. There are no guarantees of future performance, and actual results may differ materially from those expressed or implied in these statements, due to various uncertainties, including risk factors set forth in our SEC filings, which you can find on the Investors page of our website, gladstonecommercial.com. We assume no obligation to update any of these statements unless required by law. Please visit our website for a copy of our Form 10-Q and earnings press release for more detailed information. You can also sign up for our e-mail notification service and find information on how to contact our Investor Relations department. We are also on X at Gladstone Comps as well as Facebook and LinkedIn, Keyword for both is the Gladstone Companies. Today, we'll discuss FFO, which is funds from operations, a non-GAAP accounting term defined as net income, excluding the gains or losses from the sale of real estate and any impairment losses on property, plus depreciation and amortization of real estate assets. We may also discuss core FFO, which is generally FFO adjusted for certain other nonrecurring revenues and expenses. We believe these metrics can be a better indication of our operating results and allow better comparability of our period-over-period performance. Now let's turn the presentation to Buzz Cooper, Gladstone Commercial's President. Arthur Cooper: Thank you, Catherine, and thank you all for joining today's call. We look forward to updating you on our results for the quarter ending September 30, 2025, our current portfolio and our 2025 outlook. From a macro level, Q3 provided a welcome sense of stability and positivity in the capital markets. The Fed reduced their funds rate by 50 basis points this year and long-term rates trended downward as well with a 10-year treasury making its way back to the 4% range. New acquisition offerings had the typical summer slowdown with an uptick after Labor Day weekend. We also noticed a gradual downward trend in asking cap rates, which we expected as those tend to move in harmony with long-term treasury yields. In spite of the standard summer slowdown, our team achieved several key accomplishments both at the balance sheet and portfolio levels. Dealing with the portfolio first. As we have discussed in the past, we remain steadfast in several key focus areas: growing our industrial concentration, adding value on our existing portfolio through renewals, extensions, strategic capital investments, and disposing of noncore assets and strategically redeploying those proceeds into quality industrial assets. By concentrating on these key focus areas, we expect to achieve increased portfolio WALT, strong occupancy rates and straight-line rental growth across the portfolio. These focus areas drove our activity in Q3. Regarding industrial concentration, we acquired a 6-facility cross-regional industrial manufacturing portfolio via a $54.5 million sale-leaseback transaction. This brings our acquisition total for the year through Q3 to $206 million and brings our industrial concentration to 69% of our annualized straight-line rents compared with industrial concentration of 63% at the start of the year. We're making great progress along those lines. As it relates to our working our existing portfolio, our asset management team continues to effectively manage the existing portfolio, evidenced by 100% collection of cash-based rents in the period, completing leasing activity of 734,000 square feet with remaining lease terms ranging from 0.7 years to 11.4 years at 14 of our properties and provided a total straight-line rental increase of $1.1 million and the disposition of 1 noncore industrial property. These combined efforts as of September 30, the portfolio is 99.1% occupied, which is the highest since Q1 of 2019. The weighted average lease term 7.5 years, is the longest WALT at quarter end since Q1 2020. Same-store lease revenues increased by 3.1% compared to the same period a year ago, and each of these milestones is a testament to the mission-critical nature of the assets in our portfolio, the quality of tenant credit and our underwriting. In short, our relationship with our tenants, the capital market community and our financial capability have allowed us to execute upon our focused areas at a high level. Moving to the balance sheet. I'll allow Gary to share the specifics during his remarks, but we also worked hard on our balance sheet during this quarter. As such, in addition to increasing our equity base through stock issuance throughout the quarter and subsequent to the end of the quarter, we successfully increased our credit facility to $600 million, extending and laddering our debt maturities. We are grateful to our lenders for their continued trust and partnership with us. These long-standing relationships are critical to our continued investment in the current portfolio and the addition of mission-critical industrial real estate going forward. Also looking ahead to the fourth quarter, we remain focused on evaluating opportunities to acquire high-quality industrial assets that are mission-critical to tenants and industries and accretive to our long-term strategy. At the same time, we will work to continue with our existing tenants to extend leases, capture mark-to-market opportunities and support tenant growth through targeted expansions, capital improvement initiatives and build-to-suit opportunities. While we remain aware of the challenging office environment, we will be strategic and intentional in evaluating our specific portfolio, seeking opportune times to dispose of office and noncore industrial as part of our continued capital recycling efforts. With the availability via our increased line of credit and access to private placement bond market, cash on hand and the ability to raise equity at our ATM, although currently we believe our stock price does not reflect the quality of our portfolio, tenant credit and shareholder returns, we are positioned to deploy capital into accretive industrial acquisitions and portfolio improvements. In closing, these last several quarters have seen a lot of activity and the team is focused on continuing their efforts as we head towards 2026. We are pleased with their efforts and their accomplishments. I'll now turn the call over to Gary to review our financial results for the quarter and liquidity position. Gary Gerson: Thank you, Buzz. I'll start my remarks regarding our financial results this morning. by reviewing our operating results for the third quarter of 2025. All per share numbers referenced are based on fully diluted weighted average common shares. FFO and core FFO share available to common stockholders for both $0.35 per share, respectively. FFO and core FFO available to common stockholders during the third quarter of 2024 were both $0.38. FFO and core FFO for the 9 months ended September 30, 2025, were $1.02 and $1.03 per share, respectively. FFO and core FFO for the same period in 2024 were $1.07 and $1.08 per share, respectively. Same-store lease revenue increased by 3.1% in the 9 months ended September 30 over the same period in 2024 due to an increase in recovery revenue from property expenses and an increase in rental rates from leasing activity subsequent to the 9 months ended September 30, 2024, partially offset by a settlement received at 1 of our properties related to deferred maintenance in the prior period. Our third quarter results reflect the total operating revenues of $40.8 million with operating expenses of $26 million as compared to operating revenues of $39.2 million and operating expenses of $28.5 million for the same period in 2024. Operating revenues were higher in 2025 due to increased recovery and higher rental rates, expenses were lower in the third quarter of 2025 versus the same period in 2024, mainly due to an impairment charge in 2024 and crediting back all the incentive fee in 2025 offset by higher depreciation and property operating expenses in 2025. In Q3, we increased net assets from $1.21 billion to $1.265 billion, which was a result of the portfolio acquisition this quarter. During the quarter, we increased our revolver commitment by $30 million to $155 million. Subsequent to the end of the quarter, we extended and upsized our bank credit facility to $400 million in term loans and a $200 million revolver. The revolving credit facility maturity was extended to October 2029 and the maturity dates for Term Loan A and Term Loan B components were extended until October 2029 and February 2030, respectively. The amended credit facility also provides the company with options to extend the maturity dates of the revolving line of credit and term loan C components until October '30 -- October 2030 and February 2029, respectively. The transaction led by KeyBank as joint lead arranger and book manager as well as Bank of America, the Huntington National Bank and Fifth Third Bank National Association as joint leader arrangers, Synovus Bank and S&T also renewed their commitments. In addition, PNC Bank and Webster Bank, both joined as lenders. As of today, we have no remaining 2025 loan maturities and $28 million of loan maturities in 2026. As of the end of the quarter, we had $145.4 million in revolver borrowings outstanding. Looking at our debt profile. As of September 30, 39% was fixed rate, 37% was hedge floating rate and 24% was floating rate, which is the amount drawn on our revolving credit facility and the amounts outstanding on term loans B and D. As of today, all of our term loans are hedged to maturity and only 13% is floating rate. As of September 30, our effective average SOFR was 4.24%. Our outstanding bank term loans are all hedged to maturity with interest rate swaps. We continue to monitor interest rates closely and update our hedging strategy as needed. During the 9 months ended September 30, 2025, we sold 4.4 million shares of common stock under our ATM program, raising net proceeds of $61 million. We continue to manage our equity activity to ensure that we have sufficient liquidity for upcoming capital requirements and new acquisitions. As of today, we have approximately $6 million in cash and $63 million of availability under our line of credit. We encourage you to review our quarterly financial supplement posted on our website which provides more detailed financial and portfolio information for the quarter. Our common stock dividend is $0.30 per share per quarter or $1.20 per year. And now I'll turn the program back to David. David Gladstone: Well, it's a good day today. It is a good one for Buzz and Catherine too. The teams are really performing very well. Overall, a very nice quarter for all of us, I enjoy those dividends, I'm sure you guys do. We acquired a 6-facility industrial portfolio for a total of $54.5 million during the quarter, and we sold 1 industrial property and completed leasing activities on 14 properties comprising of 734,000 square feet. That is an annual increase in our straight-line rents of about $1.1 million, so that's nice to see. Subsequent to the end of the quarter, we extended and increased our bank credit facility, which is now at about $600 million. The commercial team is growing the real estate we own at a nice pace, and we're doing a good job of monitoring properties we own, especially during some of these challenging times that we have. Our team is strong professionals and continue to pursue potential quality properties on the list of acquisitions they are reviewing and our acquisition team is seeking strong credit tenants. Well, that's a good summary, and let's move on now to some good questions from those. So operator, Catania, could you come on and call on these people, and let's hear some questions from them. Operator: [Operator Instructions] The first question comes from Gaurav Mehta with Alliance Global. Gaurav Mehta: I wanted to ask on your industrial allocation, it's running close to 70% target that you've talked about in the past. I wanted to get some more color on what you expect going forward? Do you expect that industrial allocation will keep increasing beyond 70%? Or are you around where you want it to be? Arthur Cooper: Thank you, Gaurav. Yes, we do anticipate that increasing going forward. Obviously, there may be some ups and downs as it relates to dispositions within the portfolio. But our intent is to increase our industrial percentage as it relates to the straight-line rent going forward, certainly for the foreseeable future. Gaurav Mehta: Okay. Second question I want to ask is on your expenses. The same property operating expenses for third quarter and year-to-date are running at more than 20%. I just want to get some more color on the expense increase you're seeing in your portfolio. Arthur Cooper: We had some capital expense items. Gary Gerson: Are you talking about operating expenses? Gaurav Mehta: Yes, same property operating expenses. Gary Gerson: We have -- unfortunately, we've seen increases in expenses mainly due to things like inflation, and that's one of the main drivers. Arthur Cooper: Insurance. Gary Gerson: Yes. And that's -- and those are the -- insurance is -- that's been driven by returns for insurance companies as well as inflation. Arthur Cooper: And as you know, Gaurav, we pass on to the tenant and what we can and charge them back as it relates to the structure of the lease. But as Gary references, we have seen obviously a little effect of inflation and costs rising. Gaurav Mehta: Okay. And then lastly, on the capital expenditure for third quarter at more than $10 million. Can you provide some more color on what drove that higher? Arthur Cooper: What drove that higher was renewals. You noticed we had several renewals both from the second quarter into the third quarter. And so as a result of that, that's positive CapEx accretive to the company as it relates to those dollars put out, obviously are keeping tenants, adding tenants and with increased rents. David Gladstone: Okay. Operator, do you have some more questions? Operator: Next question comes from Barry Oxford with Colliers. Barry Oxford: David, just to build on that CapEx being higher in the quarter. How do you think of that in relation to the dividend? Are you confident in the dividend when you look at your CapEx expenditures going out. Now I realize that that's kind of good CapEx because on the renewals, you're going to be getting higher income going forward. But how do you think about the dividend in relation to the CapEx? Arthur Cooper: The dollars going out are accretive. So I don't see that it has an effect relative to the dividend other than at some point in time increasing. Barry Oxford: Okay. And then switching gears. When you look at the acquisitions pipeline for now and going out into '26, do you feel you can match '25 or just too early? Arthur Cooper: I think it may be a little too early. We obviously plan to and hope to, we have 2 transactions currently that we'd love to see getting the door perhaps by the end of the year, if not into the next. I think 1 may fall into this year. Competition, as we have referenced previously and I think as all of us do, is strong. But again, as we've worked on our balance sheet and look to bring our cost of capital down, we believe we'll be able to be competitive in the marketplace. And again, the team is doing a really strong job uncovering off-market transactions as well as repeat transactions. Operator: The next question comes from Craig Kucera with Lucid. Craig Kucera: I saw in the Q that you had on lease termination. Can you give us some color on the tenant and what type of assets it is? And was that the termination fee? Gary Gerson: No, we didn't have a termination fee. We had 1 lease termination. I believe that was the... Arthur Cooper: [indiscernible]. Craig Kucera: Okay. I thought I saw some accelerated right now. I was just trying to figure out when and how that would be recognized because none of it has been recognized yet year-to-date. Arthur Cooper: We'll look into that. Honestly, I need to -- I'm trying to get a little help here. Okay. We did have 1 small tenant quest that we did terminate and we're rolling into a new lease within that building in Ohio. So the termination was let the tenant out, but a new tenant jumped right in and took more of that space in the building. Craig Kucera: Got it. So with that remaining termination fee be recognized in the future? Or is that not going to be recognized? Arthur Cooper: There was no fee. We just terminated that and rolled right into the new tenancy. Craig Kucera: Okay. That's helpful. Changing gears, you stepped up and certainly added to your automotive exposure here with the portfolio acquisition. I think it's now about 15% of our ABR. Just given the recent bankruptcy news out there, I'd be curious to hear your thoughts on the space and how it relates to what's in your portfolio. Arthur Cooper: One thing, of course, and we have shown this over the years, we do extensive underwriting within our tenancies, as you know, and we have a robust investment committee. We do keep an eye on our concentration. Yes, we have 1 asset you know with GM down in Austin, Texas, that is not, for lack of a better word, concerned from a credit standpoint nor are they a manufacturer, it is an office building and that does mature at the end of next year. So we are currently looking to reposition that property as we get into next year with hopeful additional tenancy or end user. So when you do calculate that, we have to take into consideration the fact that, that's strictly just an office building in a good market, but unfortunately, in Austin, there currently is about $5 million, both industrial and office under construction. So we have heavy competition there. But as I mentioned, that we do underwrite heavily to keep an eye on concentration, but we feel confident with the tenancy that we have. Craig Kucera: Okay. Great. Your leverage has ticked up year-over-year. You've obviously been very active in the acquisition market, issued some equity but mostly debt. I'm curious, are you looking to maybe ramp up your asset sales to maybe bring down leverage or any dispositions on the horizon expected? Gary Gerson: No. I mean we'll continue to, with our capital recycling program, to reinvest into more secondary markets, from tertiary markets, industrial, from office and so forth. But what we will probably be doing is issuing a little more equity and bringing our leverage down upon new acquisitions. So when we acquire a new acquisition, we'll probably put more equity into it to continue to delever the balance sheet. Yes, we got -- we're a little higher than we want to be. But I think the results speak for themselves, and we're going to -- we're not going to go higher on the leverage than we are today. Operator: The next question comes from Dave Storms with Stonegate. David Storms: Just want to start maybe trying to get a read on where you see cap rates at or going? I know it was mentioned in the prepared remarks that you're seeing rates move down with the rate cut, the Fed rate cut. But it looks like between last quarter's acquisitions to this quarter's acquisitions, the weighted average cap rate expanded by like 65 basis points or so. Is this more one-off transactions? Or maybe just any thoughts there around cap rates? Arthur Cooper: We do see cap rates coming down. I think that there was an anticipation of a greater rate cut than what occurred. So that had an effect, obviously, and does at the moment. We'll see what happens, I guess, in December. But we do see cap rates compressing a bit. So we hope to take advantage of that, again, from our capital and the cash that we have on hand. But we are seeing good accretive plus 8.5% on average cap rates for us, and we just hope to find other good solid and you noticed we've moved up as it relates to the size of transaction going forward at the end of this year, but also into '26. David Storms: That's very helpful. And then maybe just circling back to some of your underwriting. Are you seeing any impact from the government shutdown on any of your tenants, maybe you can call up as second order impact, anything like that? Arthur Cooper: We actually have not. And as you know, we have a very robust property management team. One of the foundations of this company is our underwriting and the portfolio management team staying in front of our tenancies and they have not, as they've checked in with them, had expressed great concerns as of this moment as it relates to the shutdown. Operator: The next question comes from John Massocca with B. Riley. John Massocca: Maybe touching on the CapEx -- maybe touching on the CapEx spend during the quarter a little bit more. I mean, is that typical of what we should expect going forward as you kind of address some of the remaining '26 and '27 lease expirations and get in front of them? Or was this quarter just because of the amount of leasing activity may be a little abnormal relative to what you would expect as we look into 2026? Arthur Cooper: Yes, I would say you're correct. Just as we did have great success with a great number of re-leasings as we look forward into '26 and even '27. Several of our tenants, we've been in contact with all of them, and we feel confident on the renewals and the properties involved, honestly we don't see the heavy CapEx we've had this past 9 months, the past 3 quarters. We do see it trailing down. So again, it's good dollars spent, but we are not anticipating as heavy a hit. John Massocca: And now in the spending in the quarter, does that reflect at all the mix of the lease -- leasing activity being between office and industrial? Is it -- I guess it was a heavier office component this quarter? Or just kind of curious if there's another factor involved. Arthur Cooper: No other factor involved as a combination between the 2 with and again, office is more expensive than industrial. So it was more weighted toward office, which, of course, extending those terms will become part of our capital recycling moving out of office. John Massocca: And then on the investment front, just given where kind of cost of capital is moving both on the debt and equity side for you all, how should we think about kind of a return hurdle you're looking at, either in terms of a GAAP cap rate, cash cap rate IRR, I mean, are you still, you think, in a place where your cost of equity capital allows you to be expressive on the acquisition front? And a, kind of how is that looking versus what you're seeing in terms of cap rate movements in the pipeline? Arthur Cooper: And the cap rates within the pipeline, if you will, and what we see is some compression. We do believe we'll have to -- as we analyze our transactions depending on where our cost of capital goes. We're averaging north of 8.5% and I see that going forward. And again, as we move up the chain as it relates to size a little bit, hopefully, we'll have a little better efficiency as it relates to those cap rates. John Massocca: And I guess at 8.5%, if that's where cap rates are today, do you think you're able to kind of -- your cost of capital is at a place where that's essentially you have a green light to acquire assets? Arthur Cooper: Yes. Operator: At this time, I would like to turn the call back over to Mr. David Gladstone for closing comments. David Gladstone: Well, thank you. We've got a good team, and they've done a good job and we continue to grow the assets and pretty soon, we'll catch up with some of those bigger deals out there. But hopefully, this next quarter is going to be just as good as the past quarter. That's the end of this, and we thank you all for calling in. Next time, be more prepared with more questions. We like questions because that tells us where you're thinking and where you're going. Operator: Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.
Operator: Ladies and gentlemen, welcome to the HUGO BOSS Q3 2025 Results Conference Call and Live Webcast. I'm Moritz, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Christian Stohr, Senior Vice President, Investor Relations. Please go ahead. Christian Stoehr: Thank you and good morning, ladies and gentlemen. Welcome to our third quarter 2025 results presentation. Hosting our conference call today is Yves Muller, CFO and COO of HUGO BOSS. Before we begin, please be reminded that all growth rates related to revenue will be discussed on a currency adjusted basis unless stated otherwise. To ensure a smooth and efficient Q&A session, we kindly ask you to limit your questions to 2. And with that, let's get started. Yves, the floor is yours. Yves Muller: Thank you, Christian, and a warm welcome from Metzingen, ladies and gentlemen. As outlined in our press release this morning, HUGO BOSS delivered a solid set of third quarter results despite ongoing headwinds across the global consumer landscape. While the environment remained volatile and traffic levels in many markets faced pressure, we executed with discipline and focus, prioritizing the levers within our control. In particular, we stayed committed to advancing our long-term priorities with a strong emphasis on further strengthening our brand equity through investments in brand building initiatives. This dedication coupled with our focus on operational excellence and strict cost discipline resulted in robust gross margin improvements and notable bottom line enhancements. Let's, therefore, take a closer look at our Q3 financial performance. Group sales declined 1% year-over-year mainly due to an unfavorable timing of wholesale deliveries. In reported terms, revenues were down 4% as substantial currency headwinds, particularly from the weaker U.S. dollar, weighed on the top line performance. Meanwhile, EBIT remained stable at EUR 95 million with the EBIT margin improving by 30 basis points to 9.6%. This solid margin expansion highlights the success of our structural efficiency measures across both COGS and OpEx. Beyond the numbers, Q3 was marked by several high profile initiatives that further elevated the desirability of our brands fully aligned with the priorities of our CLAIM 5 strategy. The 2 key events deserve a special mention. The BOSS Spring/Summer 2026 Fashion Show in Milan, which captured global attention and achieved even higher social media engagement than last year's event. Additionally, the second drop of the BECKHAM x BOSS collection in late September saw a successful start delivering strong social media results and promising sell-through rates. This underscores the relevance and influence of David Beckham and the unique value of our partnership. Building on these achievements, let's take a closer look at how our brands performed in Q3. Our BOSS Menswear business once more demonstrated its resilience in the third quarter with revenues remaining stable year-over-year. This performance highlights the enduring appeal of our premium positioning and the versatility of our 24/7 lifestyle approach. At the same time, we advanced our strategic efficiency measures initiated earlier this year for BOSS Womenswear and HUGO. These initiatives focused on sharpening product assortments and refining distribution strategies are now in full swing and are critical to positioning both brands for sustainable value creation in the years ahead. And while they are temporary, weigh on top line development with revenue for both BOSS Womenswear and HUGO below prior year levels in Q3, we remain confident in the underlying strength of both brands. By addressing these short-term challenges we targeted and decisive actions, we are creating a solid foundation for future growth. Let's now turn to our performance by region. In EMEA, sales declined 2% year-over-year. Revenue improvements in both Germany and France were offset by softer trends in the U.K. reflecting the muted discretionary spending across the market. Moving over to the Americas where momentum continues to improve sequentially and drove revenues up by 3%. The performance was supported by another quarter of growth in the important U.S. market while Latin America even accelerated to double-digit growth. In Asia Pacific, sales declined 4% year-over-year mainly driven by lower revenues in China. Encouragingly, however, revenues in China showed a slight sequential improvement quarter-over-quarter. To further support brand relevance locally, at the beginning of October we celebrated the release of the latest BECKHAM x BOSS collection with a pop-up launch event in Shanghai. Meanwhile, Southeast Asia Pacific achieved a modest revenue increase in Q3 supported by another solid performance in Japan. Turning to our channel performance. Our brick-and-mortar retail business showed a modest sequential improvement with sales remaining stable versus prior year period. This performance was primarily driven by stronger conversion rates and higher sales per transaction, which helped to offset muted store traffic seen across several markets. Also, our digital business continued its positive trajectory with sales up 2% to last year. Growth was supported by a solid performance on hugoboss.com alongside sustained momentum in our digital partner business, both grew by 2% in the third quarter. Meanwhile, in brick-and-mortar wholesale, sales declined 5% year-over-year primarily due to the timing of delivery, which impacted Q3 performance by approximately EUR 20 million. However, we are confident that this effect will be fully offset in the fourth quarter as our Fall/Winter collections continue to resonate well with our partners. Accordingly, we anticipate a recovery in wholesale revenues in the final quarter complementing the momentum in our retail business as we approach year-end. Turning to the gross margin, which was a clear standout in the quarter and a testament to our progress in driving structural efficiency. In Q3, our gross margin improved by a strong 100 basis points reaching 61.2%. The expansion was fueled by further efficiency gains in sourcing, lower product cost and reduced global freight rates. At the same time, we experienced slightly negative mix effects while promotion activity had a neutral impact on gross margin development. Let's now shift to our cost base. Operating expenses declined 3% year-over-year marking 5 consecutive quarters of disciplined OpEx management. These gains were achieved across key business areas including sales, marketing and administration and underscore our commitment to operational excellence. In particular, selling and marketing expenses decreased 3% supported by a 4% reduction in brick-and-mortar retail expenses. In addition, we further optimized marketing investments, which amounted to 7.1% of group sales in Q3 and 7.4% for the first 9 months. Our approach remains highly targeted, prioritizing brand initiatives that generate the greatest commercial impact while continuously strengthening brand relevance. Lastly, administration expenses declined 2% compared to the prior year period as we continue driving efficiency across our global support functions. Driven by the robust gross margin expansion and our focus on optimizing operating expenses, EBIT reached EUR 95 million in Q3, thus stable compared to the prior year period. This translated into a 30 basis point increase in the EBIT margin reaching 9.6%. Below the operating line, our financial results significantly improved year-over-year supported by favorable ForEx effects and lower interest expenses. As a result, net income after minority increased by 7% translating into earnings per share of EUR 0.85, equally up 7% compared to last year. Also when we look at the first 9 months of the year, we delivered solid profitability improvements. Our gross margin expanded by 30 basis points to 61.8% while operating expenses declined by 2% underlying the continued success of our various efficiency measures. Consequently, the EBIT margin improved by 30 basis points to 7.9% in the first 9 months while earnings per share rose by 9% year-over-year. Looking at cash flow and key balance sheet items. Trade net working capital increased 11% in currency-adjusted terms reflecting both higher inventories and lower trade payables. Importantly, when compared to the previous quarter, inventories improved slightly and were down 1% reflecting our ongoing commitment to inventory management. On a 12-month moving average basis, trade net working capital amounted to 20.2% of group sales. Capital expenditure, on the other hand, declined substantially year-over-year down 51% to EUR 44 million. The decline was driven by increased investment efficiency and a more disciplined allocation of resources. As a result, for the full year, we now expect CapEx to come in at the lower end of our guidance range with investments expected to total around EUR 200 million in 2025. Altogether, our disciplined cost control combined with enhanced CapEx efficiency drove a solid improvement in cash flow generation in the third quarter. Free cash flow increased by 63% to a level of EUR 66 million. Importantly, we further expect improvements in cash generation in the final quarter, which has historically been our strongest period for cash generation. Ladies and gentlemen, this concludes my remarks on the third quarter performance. Let's now turn to the full year outlook and how we're approaching the final quarter of 2025 from an operational perspective. As we enter Q4, we remain fully committed to executing our strategic agenda. Building on the progress of previous quarters, our approach is twofold. First, to unlock growth opportunities and strengthen brand relevance in order to support top line momentum. And second, to drive operational excellence while optimizing cost efficiency across key business functions. It is our deepest passion to inspire our consumers globally and strengthen engagement with both our brands, BOSS and HUGO, and Q4 has a lot to offer in that regard. After a busy October with a stunning BOSS Bottled event in New York City and the immersive in-store experience with Aston Martin, the countdown to BOSS Holiday Campaign has now begun. Officially launching tomorrow, the capsule represents a unique collaboration between BOSS and iconic plush toy company, Steiff. It will be visible across all key markets and will help to further fuel brand excitement heading into the peak season. Driving customer engagement remains another priority. In this context, we are building on the successful rollout of our customer loyalty program HUGO XP, which was launched in China and the U.S. during the third quarter. With now almost 30 million members worldwide, the global expansion of XP is well underway. The program enables us to deepen relationships with our most important customers, foster long-term loyalty and leverage commercially relevant moments during the upcoming holiday season and beyond. Equally as important, we will continue to leverage our global sourcing platform in the fourth quarter to secure additional efficiency gains and thus tailwinds to our margin development. In addition, the low to mid-single-digit price increases that we are currently introducing with the Spring/Summer 2026 collections are expected to provide a modest positive contribution to profitability in the final quarter. Last, but not least, we will stick to our rigorous optimization of operating expenses, particularly in sales and marketing and administration. Taken together, these actions will ensure that HUGO BOSS is well positioned to strengthen its earning profile and successfully deliver on its full year commitments. In light of our performance during the first 9 months and our determined improvement game plan, we confirm our full year outlook for both sales and EBIT. As indicated in today's release, we now anticipate both top and bottom line results to come in at the lower end of our respective guidance ranges. This reflects the ongoing volatility in the global consumer environment as well as substantial currency headwinds recorded throughout the year. To be more precise, we now expect group sales for fiscal year 2025 to come in at a level of around EUR 4.2 billion. This includes an estimated negative currency impact of around EUR 100 million for the full year, primarily reflecting the depreciation of the U.S. dollar during the course of 2025. Consistent with this, we now expect EBIT to come in at the level of around EUR 380 million, likewise reflecting anticipated currency headwinds of up to EUR 20 million. Accordingly, we now forecast EBIT margin to improve to a level of around 9% as compared to 8.4% in the prior year. Ladies and gentlemen, let me briefly summarize today's key takeaways. As we look back on the third quarter and forward towards the end, a few points stand out. First, our performance in Q3 demonstrates the resilience and strength of our business model supported by sequential improvements in brick-and-mortar retail, solid gross margin expansion and the continued effectiveness of our cost efficiency measures. These factors provide a strong foundation as we enter the final quarter of the year. Second, while Q3 wholesale revenues were impacted by the timing of deliveries, we anticipate a recovery in Q4. Alongside continued efforts to drive our global D2C business, this positions us for a renewed acceleration of group sales heading into year-end. And third, the disciplined execution of our operational priorities together with our ongoing brand investments positions us well to further progress in Q4 and achieve our full year targets. Finally, looking beyond 2025, we are set to take the next steps on our CLAIM 5 journey. On December 3, we will share an update focused on the progress achieved so far in the key strategic areas that will guide our work in the years ahead. The update will reaffirm our strategic direction and underline how we are building on the foundation established over the past 4 years. And with this, we are now very happy to take your questions. Operator: [Operator Instructions] And the first question comes from Grace Smalley from Morgan Stanley. Grace Smalley: My first one, Yves, would just be on the strategic update in December. You touched on it at the end there, but could you just give us an idea of what we should be expecting come December? Will there be kind of multiyear financial targets, 3-year targets, 5-year targets? And just broadly, any high level thoughts on how you see the strategy evolving from here? And then my second question, understood on the wholesale shift between Q3 and Q4. But as you look at wholesale order books into 2026, could you give us an update on how you're seeing those order books evolve especially in the U.S. market given the uncertainty there? Yves Muller: Yes. Thank you very much for your questions. Taking your first question regarding the strategic update. Yes, like I said during my presentation, we will talk about what we have achieved during CLAIM 5 and we will give you a kind of strategic update for the next years. Don't expect this to be for the next 5 years because I think in this kind of volatile environment, a 5-year horizon is far out. So rather expect a kind of, let's say, midterm perspective of strategic priorities that we are taking on our journey. And regarding the wholesale shift, yes, overall, our Q3 results, and I just want to make it clear, were impacted by around EUR 20 million. The positive thing is we can see already in Q4 that we see the reversal of this delivery shift. So the October results show a material improvement regarding the wholesale development in Q4 and that this delivery shift has somehow reversed, which is a positive. And overall, we have seen regarding our wholesale orders and I said this already back in August that we have seen a kind of softening of our wholesale orders. I think please bear in mind that over the last years we have seen -- over '21 and '24, we've seen a CAGR of 20% of growth in wholesale brick-and-mortar and this is actually what we overall have expected a kind of softening. And for the Fall collection, we are just selling it. It's too early to call because we're in the middle of the selling period. So no further news on these kind of order impacts. Operator: And the next question comes from Manjari Dhar from RBC. Manjari Dhar: I had 2 as well, if I may. My first question is just a quick follow-up on wholesale. I just wondered if you could give some color on how much the replenishment business is down and perhaps sort of color -- I presume most of the softness there is in the U.S., but any color on that would be helpful. And then secondly, just a question on the sourcing efficiency gains. I just wondered sort of as you look forward, how much more upside do you see for gross margin from sourcing efficiency and how much more work do you think there is to be done in improving that sourcing layout? Yves Muller: Manjari, I was just talking to Christian because I tried to recall your first question regarding wholesale and the replenishment business. So the replenishment business in Q3 was down by low to mid-single digit. It was more or less somehow also expected was a kind of slight improvement also versus our Q2 results. And regarding U.S. wholesale preorders, it's pretty similar with the overall general view that we have given. So the order intakes and the delivery, it's very much in line with the global development. So not a kind of, let's say, further comments that need to be done on the U.S. market. And regarding your second question regarding sourcing efficiency, I think sourcing efficiency was a major driver in Q3 regarding our performance on gross margin and this is actually to be continued going further. So we still see more potential in terms of vendor consolidation and optimizing our portfolio and this should be continued. And actually what we are expecting for our gross margin going into the -- or finalizing our year 2025 that we want to be actually above the 62% gross margin. Originally that was our target. And we are very confident that with the support of the sourcing efficiency and with the freight cost optimization that we will get beyond the 62% gross margin mark. Operator: And the next question comes from Jurgen Kolb from Kepler Cheuvreux. Jurgen Kolb: First of all, on number of stores. If my numbers are not incorrect, I think you closed stores in the APAC region for the first time in a long history. Is that a change of positioning in that region? First question. And then secondly, on the inventory side, which is still obviously a little bit up or, let's say, inflated. How much of this inventory level is covered by your order book and how do you see really the freshness and the current situation of the inventory side? Yves Muller: Jurgen, thank you very much for your 2 questions. Regarding the space in retail. So I think it's worth mentioning that if you compare the space Q3 2024 versus 2025, there has been actually no effect from space so it was on the same level. And those stores that might have disappeared in APAC, these are actually continued optimizations that we are taking. For example if we don't achieve those results in renegotiating the rents, we take a risk approach in closing stores. I think I said this already in August and this will -- at the end, we want to have a robust store portfolio and this applies not only to APAC, but also applies to EMEA and the United States. We have defined clear profitability levers and if we do not achieve this by renewing the rents, we might take the action to close those stores. So there's nothing specific that we want to call out besides a continuous optimization of the store portfolio. And regarding the inventory, I think it's also worth mentioning that our inventory position slightly declined versus Q2, point one. And point two is that our aged merchandise, if I compare my aged merchandise in comparison to last year, has also in percentage improved versus last year. So the merchandise is very fresh. It's driven by stock in transit and by the current collections and the aging of the inventories have not deteriorated year-over-year. Operator: And the next question comes from Andreas Riemann from ODDO BHF. Andreas Riemann: Two topics. First one, HUGO and Womenswear, both are down significantly year-to-date and it sounds like you are reducing the product range and there's also adjustment in the distribution. So can you explain that in more detail and when is this exercise going to end? This would be the first topic. And the second one, the U.S. business. So to what extent did you adjust the prices actually in North America? And would you say your price increases in the U.S. are in line with what you see in the market or did you differ? These would be my 2 topics. Yves Muller: Yes. Andreas, thank you very much for your 2 questions. Actually you already took your answers for HUGO and BOSS Womenswear. So we are streamlining our product range. This is point one for both brands, BOSS Womenswear and HUGO. So this has something to do with collection complexity. So the mindset is to get better before bigger. So this is the mindset we have for those 2 brands. And the second thing is that we look at the distribution and for example, especially for BOSS Womenswear, if our space is somehow limited, we'd rather take BOSS Womenswear out with BOSS Green into those spaces if the space is somehow limited in the distribution. This is the exercise that we have now started with Q2 and will materialize over the second half of this year. And I think further comments I would somehow refer to our strategic update on the 3rd of December to be more explicit for the way forward for both brands, BOSS and HUGO. And regarding U.S. so like I said already back in August, we have taken a kind of global price increase overall low to mid-single digit for the Spring campaign. So this will be visible now in the second half of Q4 where we drop this kind of merchandise. This will also help us in terms of top line development globally and also will help us from a profitability standpoint. But your question was related to the U.S. I think we try to do smart price increases and we are very much in line with our competition here how we increase the prices and we observed the market. But nothing that would -- really needs to be emphasized regarding the U.S. market. Andreas Riemann: Yes. But maybe a follow-up. Is the U.S. then more than low to mid or is it in line with low to mid that you did for the group? Yves Muller: It's in line with low to mid. Operator: And the next question comes from Anthony Charchafji from BNP Paribas. Anthony Charchafji: Just 2. The first one on top line and then one on profitability. So just on top line given the low range of the guide, it would imply an organic growth in Q4 rather flattish to slightly positive, which would be 1 or 2 percentage point improvement. Could you please comment on the retail part? Comps are getting quite tougher especially in December for the whole sector. Could you maybe give some color on current trading retail and how you see it evolves? And my second question is on profitability. If I take again the low end of the guidance, EUR 380 million, it seems that your Q4 is quite derisked because you have some quite a bit of impairment in the base EUR 47 million. What changed in terms of deciding, I would say, to narrow the range? Do you previously expected some impairment reversal and now not anymore or is there anything else to have in mind? Yves Muller: Anthony, thank you very much for your questions. So first regarding top line, let me try to phrase it. First of all, I think from a wholesale point of view, you have to keep in mind that this delivery shift will or, like I already said, has materialized. So this is the kind of tailwind that we are seeing. Secondly, regarding retail brick-and-mortar, you have seen now over the last quarters a kind of sequential improvement coming from minus 4% to minus 1% now to flattish in terms of retail improvement. So we expect that this improvement will prevail also going into Q4. Thirdly, I think what is worth mentioning is that with the sale of the Spring season, you will see also a kind of price increase that will somehow materialize and will help us. And fourthly, I think we are now really entering into Black Friday. You have seen also on hb.com and our digital sphere that we have seen major improvements from Q3 versus Q2. So we will somehow take this kind of improvement also into Q4 to reach our top line targets. And regarding profitability, I think you're right. We have disclosed we had our impairments last year on the level that were close to EUR 50 million. They were definitely kind of elevated if I look at the latest -- if I look at the last years of impairments that we did. So I think what you can expect from a bottom line perspective that we can see a kind of technical support coming from the impairments for the year in 2025. Operator: And the next question comes from Daria Nasledysheva from Bank of America. Daria Nasledysheva: This is Daria from Bank of America. Can I please ask what is your view on promotional backdrop as we head into Q4? Wondering on a global basis, but also in the U.S. considering the inventory positions, yours and more broadly for the industry? And my second question is could you please help us contextualize the trends that you have seen during Q3 especially on retail? What has been the cadence of the quarter? Did trends improve in September to support your expectation of improvement into Q4? Yves Muller: Thank you, Daria, for your questions. So regarding promotions, I think it's worth mentioning that overall that the promotional activity is overall intense. On the other side, you have to bear in mind that our promotional numbers were somehow neutral in Q3 and actually we expect this also for Q4 that they are more or less neutral. I mean they have been elevated now for the last 5 quarters and we expect that the promotional activity, I would say, globally because if you look at the consumer sentiment globally, I think it's a remark that applies for a lot of important markets. I think they will remain on this elevated level and our expectation is that they remain -- it's neutral. And regarding retail, I was pointing out in the last question in my answer that actually for Q4 that we further expect the kind of, let's say, sequential improvement also that were visible now for the latest quarters, I said Q1, Q2, Q3. So we've seen this kind of slight improvement over the last quarters and we expect that this continues to prevail now for the final important quarter. Operator: And the next question comes from Robert Krankowski from UBS. Robert Krankowski: Just 2 questions for me, please. So first one is just on the cost control. You made pretty good job on the cost control year-to-date. But I just want to think in terms of, let's say, persistent pressures on your top line going forward, would you consider maybe stepping up investments behind the brand to support the growth? And you talked about the acceleration in Q4 that you expect towards the end of the year and could you talk maybe a bit about the beginning of the quarter? I think the comp is relatively changing. Maybe if you could give us a bit more color on the regions; the U.S., Europe; how the quarter has started. Yves Muller: Yes. So thank you very much for your words around cost control. So I think it's worth mentioning that we are continuously working on cost control. You have seen that we started actually last year in Q3 with these kind of cost decreases and now actually the comp base is getting more difficult. But I think we have shown also in Q3 that we really have a high cost discipline and that we have come up with some structural efficiency moves also when it comes to cost now because now year-over-year, we have seen 2 years not only in 2024 and Q4, but also in 2025 in Q3, a kind of cost decrease. So we really lay emphasis on this in order to have the full alignment between our top line performance and bottom line. And definitely even if you look at marketing, we are now after 9 months at 7.4% marketing spending. We always said during CLAIM 5, we want to be in the range between 7% and 8%. So I would say even from a marketing perspective, we are well in line with what we have promised to the capital market. Of course we see positive impacts. We are now starting our Holiday Campaign. So we keep on investing into the brand. I think this is very important for us. On the other side, I want to highlight that we want to make our marketing spendings more efficient. So the idea is always to get most out of EUR 1 spend. A good example is for example the Fashion Show, which was less expensive than last year, but we got higher media value out of our Fashion Show with positive comments. I think this is what we like if we spend less and actually get more out of it, it has a higher impact. So definitely, we want to invest in our brand. There are a lot of initiatives coming up in the most commercial period of the year and at the same time we keep our costs under control. And regarding the color of current trading, let me be -- let's say, let's keep it on a global level because otherwise the discussion gets, let's say, too detailed around regions. But I can comment that we were happy how we started into the Q4 like I already said in the beginning. Christian Stoehr: Great. Thank you, Yves. Thanks, Robert, for your question and thanks to all of you for today's session. There is no further questions or hands raised in the queue. So I would like to thank you for dialing in today. This officially concludes today's conference call. Thanks for your participation. And of course we look forward to connecting with many of you over the next days and weeks. Look forward to speaking to you soon. Thanks very much. And in case of any questions, please reach out to the IR team. Yves Muller: Thank you and have a great day. Bye now. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Operator: Ladies and gentlemen, welcome to the Coloplast financial statement for the full year 2024/2025 and Annual Report 2024-2025 Conference Call. I am Sandra, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Lars Rasmussen, Interim CEO. Please go ahead. Lars Rasmussen: Thank you, and good morning, and welcome to our full year 24/25 conference call. I'm Lars Rasmussen, Interim CEO of Coloplast, and I'm joined by Anders Lonning-Skovgaard, our CFO; and by our Investor Relations team. We will start with a short presentation by Anders and myself and then open up for questions. Please turn to Slide #3. We delivered 7% organic growth and a reported EBIT before -- EBIT margin before special items of 28% for this financial year. That is in line with our revised guidance, but below the 8% to 9% organic growth expectations that we set forth at the beginning of the year. The adjusted return on invested capital after tax and before special items, was 15% on par with last year. Chronic Care, including Voice and Respiratory Care and excluding China, delivered a solid year while we faced performance challenges in Interventional Urology and Advanced Wound Dressings. Both businesses were impacted by product recalls with significant negative impact on performance. We also saw increased volatility in the biologics market, driven by the postponement of the final LCD policy, which led to a slowdown in the momentum for Kerecis in the second half of the year. In many ways, '24-'25 did not become the year we had anticipated. It became a significantly more turbulent year and one that forced us to take decisive actions. In the year, we restructured our business in China. Performance during Strive25 was muted. And while we remain committed to serving the Chinese market, we have streamlined our organization to align with the new market reality and ensure a sustainable focused presence. Secondly, we initiated several profitability initiatives in Wound Care, among others, the divestment of our skin care business in December 2024. These initiatives are aimed at simplifying our business operations and improving profitability. Thirdly, we took important steps toward optimizing our cost base in interventional urology. Both to protect our profitability in the light of recent performance challenges, but also to ensure that we have the capacity to invest in new growth initiatives, including in tibial, our implantable tibial nerve stimulator expected to launch in '26, '27, assuming we obtain FDA approval. At the group level, we have also made significant changes which I'm confident will be vital for a strong strategy execution towards 2030. By structuring our business into 2 distinct units, chronic and acute care, we will, to an even larger extent, be able to honor the differences in market dynamics, customer needs, patient pathways and business models. And with a new and strengthened executive leadership team, we now have a balanced mix of commercial and technical expertise and a strong team to lead Coloplast into the next strategy period. Please turn to Slide #4. Looking ahead, I believe the investments we have made in Strive25, combined with the structural changes that we made this year, provides Coloplast with a strong foundation and key building blocks for the future value creation. Our addressable market for Chronic Care and Acute Care has a combined value of more than DKK 120 billion, and we have the strongest product portfolio that we have ever had. There's ample opportunity to go for, and we are well positioned to capture it. With our new strategy, Impact4, we'll utilize our solid foundation while setting a new direction for the company with a strong focus on customers and value creation. The Impact4 focuses on 4 priorities: growth through innovative offerings, unlock next level efficiency gains, embrace technology, including AI, to elevate our user experience and scale, and finally, cultivate a winning and sustainable company. And these promises are supported by clear financial targets. The first is to deliver an organic revenue CAGR of 7% to 8% through '29/'30. Then to grow EBIT in line with or above revenue growth and finally, to achieve a return on invested capital above 20% by '29, '30. By putting customers at the center, we aim to deliver best-in-class products, services and support, reinforcing our ambition to double our impact and reach 4 million people long term. In the strategic period, we will also maintain a strong focus on sustainability, and we have set clear targets to reduce our environmental impact through emissions reductions and less material used in our products and packaging. Finally, we aim to positively impact society by improving reimbursement, ensuring access for users and health care professionals to the best products and services as well as investing in initiatives that benefits people and communities. Now let's shift gears for a moment and look at today's results in more detail. Please turn to Slide #5. In Ostomy Care, organic growth was 6% for the full year, and growth in Danish kroner was 4%. Organic growth in Q4 was 7% and growth in Danish kroner was 1%. Our SenSura Mio portfolio continues to be the main driver -- growth driver followed by Brava range of supporting products. Our SenSura and Assura/Alterna portfolios continue to contribute to growth in emerging markets. From a geographical perspective, growth in the quarter was broad-based across regions with good growth in Europe, a high baseline in the U.S. due to the resolution of the supply disruptions in Q4 last year, and strong growth in emerging markets driven by increased tender activity. Sales in China declined, reflecting weaker consumer sentiment and competitive pressures. In Continence Care, organic growth was 8% for the full year and growth in Danish kroner was 5%. In Q4, organic growth was 9% and growth in Danish kroner was 3%. Luja, our new intermittent catheter with Micro-hole Zone Technology was the main growth contributor in the quarter, especially the female version driven by solid contribution from Europe and the U.S. From a geographical perspective, all regions contributed to growth. Growth in Europe was driven by France, the U.K. and Italy. In emerging markets, growth was led by LatAm. Voice and Respiratory Care posted 9% organic growth for the full year with growth in Danish kroner of 8%. In Q4, organic growth was 9% and growth in Danish kroner was 7%. The good performance in Voice and Respiratory Care continues to be driven by broad-based contribution from both laryngectomy and tracheostomy, with high single-digit growth in laryngectomy and double-digit growth in tracheostomy. In Wound and Tissue repair, organic growth was 8% for the full year and growth in Danish kroner was minus 3%, which reflects 8 percentage points negative impact from the skin care divestment. Organic growth in Q4 was 5% and growth in Danish kroner was minus 11%, which includes 11% negative impact from the skin care divestment. The advanced wound dressings business in isolation declined 6% in the quarter as China detracted significantly from growth due to the product return initiatives in Q3. From a product perspective, Biatain Superabsorber and Biatain Fiber continued to perform well. Revenue from Kerecis amounted to around DKK 1.3 billion in the full year, of which DKK 339 million was in Q4. The organic growth in the quarter was 20% and an improvement compared to Q3 as expected. The inpatient setting continued to deliver solid growth and was the main growth contributor. The outpatient setting saw an improved momentum in Q4. This was in line with our expectations that the impact from our LCD postponement and the resulting market shift to higher-priced products would be most pronounced in Q3. In Interventional Urology, organic growth was 2% for the full year, and growth in Danish kroner was flat. In Q4, organic growth was 2% and reported growth in Danish kroner was minus 2%. Growth in the quarter was driven by good momentum in the Men's Health business. Our flagship product within Men's Health, the Titan Penile implant continued to perform well, with the patient funnel positively impacted by our patient support program targeted at prospective patients. The women's health business also contributed to growth in the quarter. Within kidney and bladder health, the thulium fiber laser drive continued to deliver a solid growth contribution, but the segment overall detracted from growth due to the impact from the product recall. We have begun to see early signs of recovery across key accounts, but expect some negative impact to persist into Q1. With this, I'll now hand over to Anders, who will take you through the financials and outlook in more detail. Please turn to Slide #6. Anders Lonning-Skovgaard: Thank you, Lars, and good morning, everyone. Reported revenue for the full year increased by DKK 844 million or 3% compared to last year. Organic growth contributed DKK 1.8 billion or around 7% to reported revenue. Divested businesses, mostly related to the skin care divestment in December '24, reduced reported revenue by DKK 352 million or around 1%. Foreign exchange rates had a negative impact of DKK 587 million on reported revenue or around 2%, mainly related to the depreciation of the U.S. dollar and a basket of emerging markets currencies against the Danish kroner. Please turn to Slide #7. Gross profit for the full year amounted to DKK 18.9 billion, corresponding to a gross margin of 68%, on par with last year. The gross margin was positively impacted by a favorable development in the input cost, pricing increases and country and product mix, partly offset by ramp-up costs at our manufacturing sites in Costa Rica and Portugal. The gross margin also included a small negative impact from currencies of around 20 basis points. Operating expenses for the full year amounted to around DKK 11.3 billion, a 3% increase from last year. The distribution to sales ratio for the full year was 33%, on par with last year. The increase in distribution cost was driven by continued commercial investments in Kerecis and higher sales activities across business areas. The admin to sales ratio for the full year was 5% on par with last year. The R&D to sales ratio for the full year was 3% on sales, also on par with last year. The special items expenses were extraordinary high in '24-'25 and amounted to DKK 469 million. The special items were related to profitability improvement initiatives including the skincare divestment, management restructuring and the integration of Atos Medical. Overall, this resulted in operating profit before special items of DKK 7.7 billion in the full year and a 5% increase compared to last year. The EBIT margin before special items for the year was 28% compared to 27% last year. The EBIT margin included negative impact of around 110 basis points from the inclusion of Kerecis, including PPA amortization costs, in line with the expectations as well as around 30 basis points benefit from the divestment of the skin care business. Currencies had a small negative impact on the reported EBIT margin of around 30 basis points related to the depreciation of the U.S. dollar and the basket of emerging market currencies against the Danish kroner. In constant currencies, EBIT before special items grew 6% in full year '24-'25. Financial items in the full year were a net expense of DKK 1.044 billion compared to a net expense of DKK 925 million last year. The increase in net expenses was mostly due to a noncash effect from currency exchange rate adjustments, which includes losses on balance sheet items driven by the depreciation of the U.S. dollar against the Danish kroner. The ordinary tax expense for the full year was DKK 1.4 billion with an ordinary tax rate of 22% on par with last year. The total tax expense for the full year was DKK 2.5 billion, impacted by the transfer of Kerecis intellectual property from Iceland to Denmark. As a result of the extraordinary tax expense, the effective tax rate amounted to 41%. As a result, net profit before special items for the full year was DKK 4 billion compared to DKK 5 billion last year. Diluted earnings per share before special items decreased by 21% to DKK 17.76. Adjusted for the extraordinary tax expenses related to Kerecis IP transfer, the net profit before special items was DKK 5.1 billion, DKK 123 million increase compared to last year. Adjusted diluted earnings per share before special items increased by 2% to DKK 22.84. Please turn to Slide #8. Operating cash flow for the full year was an inflow of DKK 6.6 billion compared to an inflow of DKK 2.8 billion last year. The positive development in cash flows was mostly driven by lower income tax paid as '24-'25 included DKK 2.5 billion extraordinary impact from the transfer of Atos Medical intellectual property. Changes in working capital and adjustment of noncash operating items also had a positive impact on the cash flows from operating activities. Cash flow from investing activities was an outflow of DKK 1.25 billion compared to an outflow of DKK 1.336 billion and included a positive impact from the divestment of Skin Care business of DKK 192 million. CapEx for the full year amounted to around 5% of sales on par with last year and includes around DKK 450 million related to the new manufacturing site in Portugal, expected to be operational in '25-'26. As a result, the free cash flow for the full year was an inflow of DKK 5.4 billion compared to an inflow of DKK 1.4 billion last year. The adjusted free cash flow for the full year was DKK 5.2 billion compared with DKK 3.9 billion last year or a 32% increase. The trailing 12-month cash conversion was 82%, while the adjusted free cash flow to sales was 19% compared to 15% last year. Net working capital amounted to around 26% of sales compared to 25% last year, impacted by increased inventories and decreased trade payables. Now let's look at the guidance for '25-'26 financial year. Please turn to Slide #9. For the '25-'26 financial year, we expect organic revenue growth of around 7%, and around 7% EBIT growth in constant currencies before space items. We also expect a return on invested capital of around 16%, up around 1 percentage point from 15% adjusted last year. The organic revenue growth guidance of around 7% assumes continued good momentum in Chronic Care, including Voice and Respiratory Care and an improvement in momentum in both Wound and Tissue Repair and Interventional Urology. In Chronic Care, we expect good contribution from our recent product innovation. In Continence Care, we expect Luja to continue driving the momentum in intermittent catheters. In Ostomy Care, we expect the recent line extensions such as SenSura Mio Black bags and the new 2-piece Sensura Mio offering to continue their good launch trajectory and support growth. In wound tissue repair, we expect an improved momentum driven by Kerecis, which is expected to deliver growth of around 25%, partly offset by the negative impact from the product return in advanced wound dressings in China from Q1 to Q3. On Kerecis, performance is subject to a higher degree of volatility due to the expected changes to the skin substitutes coverage and payments in the outpatient setting as of January 1, '26. In Interventional Urology, we expect growth to improve to around mid-single digit in '25-'26, up from low single digit last year. We expect continued strong momentum in our Men's Health business driven by the Titan Penile implant and stable performance in our Women's Health business. In kidney and bladder health, we expect to see a recovery as the impact from the product recall will lapse in December '25, after which we are up against an easier baseline. Reported revenue growth in Danish kroner is expected at 4% to 5% and assumed 2 to 3 percentage points negative impact from currencies, especially the U.S. dollar and to a smaller extent, the British pound and the Chinese yuan as well as 2-month negative impact from the Skin Care divestment. The EBIT growth in constant currencies of around 7% assumes stable inflation levels and continued ramp-up in Costa Rica and Portugal. The EBIT growth also assumes that Kerecis will deliver an EBIT margin uplift to around 20%, driven by scalability in non-sales functions and sales force efficiency improvements, enabled by a good top line momentum and a high gross profit margin of around 90%. Furthermore, the EBIT growth guidance includes the initiation of Impact4 investments, including global technology investments and AI, investments towards the new bowel care opportunity in the U.S. and investments related to -- in tibia. In terms of phasing, we expect the organic revenue growth to be second half weighted with a soft start in Q1, where we will have the impact from the product recall in both advanced wound dressings and interventional urology. Furthermore, we expect a soft start in ostomy care due to a high baseline in the U.S. and order phasing in emerging markets. For '25-'26, we expect around DKK 50 million in special items, from acquisition-related integration costs. The integration of Atos Medical is progressing according to plan, and will be finalized during the year. The net financial expenses for '25-'26 are expected at around minus DKK 500 million, down from around DKK 1 billion in '24, '25, mostly driven by a more favorable outlook on net exchange rate adjustments based on spot rates as of October 31, and to a smaller extent, lower net interest expenses due to lower net interest-bearing debt and lower interest rates. The effective tax rate for '25/'26 is expected to be around 22%. Net profit is expected to significantly increase year-over-year as '24-'25 has been impacted by extraordinary high special items, high financial items due to negative exchange rate adjustment and the extraordinary tax expense related to the transfer of Kerecis intellectual property. The CapEx to sales ratio is expected at around 5% and includes investment to complete the new manufacturing site in Portugal, investments in new machines for existing and new products and IT and sustainability investments. On net working capital, we expect the net working capital to sales ratio in '25-'26 of around 25%, down from 26% in '24-'25. Our guidance is based on the knowledge we have today and assumes immaterial impact from tariffs as we expect our products to remain exempted and no impact from health care reforms in the year. On October 31, '25, the centers for Medicare and Medicaid services in the U.S. issued a final rule on the Medicare physician fee schedule for calendar year '26 with a fixed payment of $127 per square centimeter for all products in the physician's private office in the outpatient setting. We consider both this rule as well as the final LCD policy as positive for the market and Kerecis in the long term, and will be closely monitored or -- and we will closely monitor market developments in relation to these initiatives. With this, I will hand it over to Lars for final remarks. Please turn to Slide #10. Lars Rasmussen: Thank you, Anders. Coloplast is now entering an exciting phase as we begin to unfold the potential of our new Impact4 strategy. And I look forward to continue leading this work until a new CEO takes office. As we move into Impact4, we do so from a position of strength with a strong product offering, a clear structure, a strengthened leadership team and an ambitious strategy towards 2030. I'd like to thank our customers, my colleagues and our investors for your trust and support in 2024, '25. Your engagement and partnership have been instrumental in advancing our mission, making a positive impact for patients, health care systems and society. Coloplast is well positioned to set the standard of care at scale, create lasting value for all stakeholders and continue making life easier for people with intimate health care needs. Thank you very much. And operator, we are now ready to take questions. Operator: [Operator Instructions] Our first question comes from Hassan Al-Wakeel from Barclays. Hassan Al-Wakeel: I'm going to try and sneak in 3, please. Firstly, can you talk about the China Ostomy business and the increased competition in the community channel and whether consumer sentiment is getting worse given the decline here and how you're thinking about business development in '26? Secondly, if you can expand on the drivers for the Kerecis margin ramp this year, and the phasing of that improvement, given some of the volatility you've observed around reimbursement changes. And then finally, Lars, when we met recently, you talked about slower volume uptake in the U.K. for Halo. How is this trending? And to what extent are you shelving potential launches elsewhere? And in hindsight, what went wrong? Lars Rasmussen: That was a good opening, Hassan. So the China the China situation first. So it's more or less a flat growth that we are seeing. We actually see that we are quite competitive in the market. So we -- in that specific part of the market, we don't see that we're losing traction. But we have a consumer sentiment, which is super important because it's out of pocket in the Chinese market, in the community market. We have a consumer sentiment, which is negative, and that basically reflects on how much consumers are willing to spend. We don't have an increased number of competitors. We still have a lot of competitors in the market, but the total market share is still super low. So we feel that our competitiveness is intact but that the market sentiment basically is the reason why we don't grow in China. On the Kerecis margin, yes, we expect to have a significantly better margin this year than we had in the year that we are coming out of. And it is basically due to scale. So now we -- now we start to be a little bit more of a mature business. It's not that we are not investing. But we do have more sales per head in the organization. We don't need to scale to the same extent all over the place when we are growing, and that is basically what is sitting in the increased margin for Kerecis. And yes, there is volatility as we go into this year. And as you all know, Friday night, we received news on the LCD and the physician fee schedule changes. And I expect that we'll also talk to that a little bit later, but that means that there is some turbulence as we go into the year. But we -- I would like to say from the get-go, we consider the changes to be positive for us. But of course, it also means that we will have a bit of volatility as we go into the year. And then for Halo, what went wrong? Super good question. We are addressing the most pronounced problem that any Ostomy patient has to understand how much of the adhesive that are still intact at this given point in time and how much of it have given up, and we can show that via the mobile phone. We haven't found a way to sell this where we get the uptake that we expect to have. We give it still a chance to do that in what we consider to be the most advanced market in the world for Ostomy Care in Great Britain. And we are not going to go anywhere else until we have found a way to solve that in that market. Operator: The next question comes from Jack Reynolds-Clark from RBC Capital Markets. Jack Reynolds-Clark: My first one was on the Atos integration. You mentioned that you're expecting that to be completed next year. I guess what's left to do on that? And when do you expect the benefits to start kind of going through meaningfully there? Then the next question was on tracheostomy. I think for the last couple of quarters, growth here has been a bit lower than it has been in the past. Is this a function of a low -- of a higher base? Or is there something else kind of going on here? How should we think about this going forward? Anders Lonning-Skovgaard: Jack, let me take the first one. So we are finalizing the integration of Atos into our IT infrastructure and into our processes, our shared services and all of that here during this financial year. And what we are -- it's basically some of the bigger markets that are left. So it's the U.S., the U.K. that we are currently focusing on and then the integration will be finished, and we will also reap the synergies of around the DKK 100 million that we have communicated when we acquired Atos some years ago. In terms of tracheostomy, yes, we have seen a little bit of a slowdown recently. It's also because we are up against a high baseline. So last year or the year before, we had a quite significant sales uptake due to forward integration. And when that is said, the tracheostomy business is developing very well, also compared to the acquisition case we did some years ago. And we actually expect that our tracheostomy will support our growth within Atos quite significantly towards 2030. We are currently sitting with a market share of around 10%, and we actually feel we have an okay product platform and this will be one of the key focus areas towards the 2030 and also an area we will invest further in. So the tracheostomy business is an area that we are very optimistic about going forward. Operator: The next question comes from Martin Parkhoi from SEB. Please go ahead. Martin Parkhoi: Yes, Martin Parkhoi, SEB. Two, I don't know, 2 questions, I guess. Just on your guidance, I just want to get your confident level because you're starting the year saying it will be back-end loaded, and that gave me some kind of this view for the last couple of years. How are your confident level this year of this actually will materialize? Do you think you have been more prudent this year than you have been in previous year? Are there a buffer or potential hiccups, which you have faced the last couple of years? And then second question is just on the ASP development. What kind of ASP development have you assumed in your guidance for this year? And maybe you can talk a little bit to that across your business areas? Anders Lonning-Skovgaard: Yes, Martin, let me take your 2 questions. On the guidance side, as we have communicated today, we expect organic growth to be around 7% for the year. We are, as I also said, seeing some headwinds here in Q1 due to the product recalls that we had last year. So the urology recall will -- we will lap that in December. And the recalls we have in China on the dressings part will still impact us in Q1 but also Q2, Q3. But overall, we are very confident that we are able to deliver on our organic growth guidance also back -- on back of a very challenging year. Last year, where we also had some challenges that we did not expect back to the product recalls. But also back to, as Lars said earlier, our Chinese momentum did not play out as we anticipated. And so that's how we see it. And I would also highlight that the Continence business, the Atos business is strong, and we also expect those to continue as well as the Kerecis business throughout the year. So then your second question around that was ASP. We are expecting a small positive on ASP development. We are not expecting any bigger health care reforms. So we are expecting small positive impact from ASP, especially within urology. We are also expecting some on the chronic side, and that is, again, primarily in emerging markets, and then we get the yearly inflation adjustment in the U.K. So those are some of the main reasons for us being positive on the ASP. Operator: The next question comes from Martin Brenoe from Nordea. Martin Brenoe: I'll build a bit on the other margins question here. We learned at the CMD that you held earlier in the year that you have quite normally 2 or 3 recalls during a year. And I just wonder how much you have baked into potential recalls in this year and how you have -- if you have a financial buffer for that potential outcome? And then secondly, on Kerecis, would be interesting to hear how you expect to reaccelerate 500 basis points? A few words on what is going to drive it in terms of product launches, new geographies, anything like that? Lars Rasmussen: So when you produce products in the numbers of billions, then of course, there can be from time to time, recalls. What we saw from urology, primarily is something which we see very, very rarely. And I would like to take this opportunity to remind everybody that the product returns that we have seen in China has nothing to do with products that doesn't work or complaint rates or anything like that. So that was -- the reason for that was actually reasons that we have never seen before and that we could not have done anything internally to avoid, I would say. So therefore, we do not have a buffer for very large recalls and it is something that we don't see. What we have seen of real events over the last couple of years has been the distribution center event that led to difficulties in delivering and then what we saw in IU. And they were completely unexpected and to a very large extent, internally driven. So we could have avoided them. And that's what we have tightened the system to make sure that we don't get into that situation. Having said that, you can't run a business and never have issues, but that we do have significant or not significant, but realistic buffers for. On Kerecis, the -- your question is how we are going to get the uptick on the EBIT margin? Martin Brenoe: No. Sorry, on organic growth. Lars Rasmussen: Okay. So as I started by saying, we actually consider this to be the changes to the physician fee schedule to be positive for us. And we also see that we have strong momentum. We are not in a situation where we have fully utilized the -- our sales muscle, so to speak. So we are, of course, still hiring sales reps to go to the market. But we see it as we get more access with what is happening now because there will be fewer companies to serve the same customer group as we had before, and that is definitely going to help us. We just need to see it, play fully out before we start to become too positive, but we think that with where we are now, we can have an uptick because the turmoil that we saw in Q3 is not going to come back. Operator: The next question comes from Aisyah Noor from Morgan Stanley. Aisyah Noor: My first one is on the competitive bidding program in the U.S. for chronic care products. You mentioned in the press release that any changes would take effect in 2028 at the earliest. But your peers are flagging that this could even be a bit later, so 2029. Just curious what your internal assessments involve towards this time line and whether you have any renewed thoughts on the potential magnitude of the sales impact for you? My second question is just a quick one on the wound recall impact in China. Could you help us quantify the negative impact that you're calling out in Q1, 2 and 3 for 2026? Anders Lonning-Skovgaard: Yes. Let me take the competitive bidding question. So as you all are aware, this is something that is currently going on, and we expect some kind of an outcome as we understand it during this quarter. We, however, believe that if there will be an impact, and that is still highly uncertain, that it will not impact us until '28 at the earliest. So that's the information we are currently sitting with. In terms of the wound recall in China, as we have said a number of times now, we expect that to have an impact in Q1, Q2, Q3 and my estimate per quarter is something around DKK 25 million based on the knowledge we have. It's DKK 25 million per quarter. Operator: The next question comes from Anchal Verma from JPMorgan. Anchal Verma: The first question is just around gross margin. How should we think of gross margin development over FY '26? Can you provide your assumptions around COGS inflation, Hungary wage inflation and the other moving parts? And then the second one was just around if you could provide us an update on how the search for new CEO is going? Or is the expectation still for having announced a replacement by spring next year? Anders Lonning-Skovgaard: Yes. Thanks for your question. Let me take the first one. So our gross margin, my high-level assumptions are that we are looking into a year with a pretty stable inflation levels. That also means that our raw material prices, utility costs, freight, et cetera, are pretty flattish compared to last year. But we will also have some headwinds still from high salary inflation in Hungary. We are still seeing a very intense labor market and then we are investing in ramping up our facilities still some ramp-up in Costa Rica. But next year, we will really start to ramp up in Portugal. We are expecting Portugal to be in operation in Q4 of '25-'26. So those are the main moving parts on our gross margin into '26. Lars Rasmussen: And on the CEO search, so in a sense, what I have said before, the search is going on. It's like a funnel, right? You start broad and then you -- then the field is narrowing down and that's, of course, where we are now. We haven't signed any contracts at this point in time, but we have a number of qualified candidates. And once we have a signature, you will be the first to know. And then, of course, it depends then on what kind of garden leave or other terms does that person have and that will then put a date on when a person can start. And until then, it will be the team that you are meeting today that will be running the company together with the rest of the leaders in Coloplast. Anchal Verma: That makes sense. And maybe just a quick follow-up on margins, please. Are you able to provide or quantify the FX headwind to margins for FY '26, the EBIT margin? Anders Lonning-Skovgaard: Yes. So what we are saying is that on the top line, we will -- we are expecting a reported growth in the level of 4% to 5%. And that is also again driven by the U.S. dollar to a large extent. On the EBIT growth, we will see some headwind also coming from the U.S. dollar, also some on the British pound and the Hungarian HUF . Operator: The next question comes from Veronika Dubajova from Citi. Veronika Dubajova: I'll keep it to 2, please. One, obviously, looking at the revenue growth and the EBIT growth guidance, and I appreciate, Anders, you don't want to talk about gross margin guidance, but it does seem to me that there is a fairly large amount of investments going into the business, obviously, year-on-year, especially stripping out Kerecis, which is delivering a nice little tailwind to profitability. I was just hoping you could talk about what are some of the areas of the business where you are investing meaningfully with this high single-digit kind of OpEx growth guidance, that would be super helpful. And then I just want to circle back on the China competition answer because it wasn't clear to me, Lars, from your comments at the beginning. If I look at the press release, you are calling out competition in China for the first time. It wasn't in the prior releases. So just trying to understand what really has changed? What has prompted you to put it into the release? And I guess, is that competition from local players? Or is it from other multinationals that are becoming more focused in the market? Anders Lonning-Skovgaard: Thanks a lot, Veronika. Let me take the first one in terms of the investments. So now we are entering into the first year of our Impact4 strategy. And as we also said at the Capital Markets Day, we are going to invest into new initiatives, both to drive the top line growth, but also to support our EBIT growth ambition. And what we will initiate this year is investments primarily into our U.S. chronic business. We see quite a few opportunities also with the new opportunity within bowel care. We will also initiate investments in urology to support the launch of INTIBIA. We are expecting when we get approval from the FDA that we will launch INTIBIA into '26-'27. So we will also initiate investments here. And then we will initiate quite a bit of investments into technology and AI, both to support improvement in our user experience, but definitely also to support activities to automate and optimize back-office activities, especially order management, the prescription management through AI. So those are some of the things that we will initiate basically to support our long-term growth and value creation agenda. Lars Rasmussen: And for China, yes, I think it's actually a very appropriate follow-up. Veronika, thank you for that. That gives me the opportunity to say that we have -- our community market share in Ostomy Care is very, very high in China. And we are not -- yes, well, more than 60%. So -- and as we are not seeing growth like we used to, it is primarily because we have a consumer sentiment that is not super positive. But of course, we also feel the pressure every single day that somebody would like to take away some of the market shares that we are having. We are seeing very able competitors in China. But having said that, the fact still is that we have a very, very -- even though we have many local competitors, they have a very, very small market share, very low single digit, I would say. And therefore, it is maybe just the way that we are writing it, it's not because we see an increased local competition. But of course, we feel local competition also in China. But it has not worsened. So that's not how you should read it. Operator: The next question comes from Oliver Metzger from ODDO BHF. Oliver Metzger: Yes. First question is also on Kerecis and you mentioned this market shift towards the higher-priced products. Can you just elaborate a little bit more about the dynamics and how sustainable you regard this shift? And the second question is about still also the operating cost development. So a follow-up on Veronika. So if I do the math and calculate a stable gross margin and, let's say, also a stable EBIT margin and still the amount of operating leverage you should have. It would be great if you can dive deeper into respective costs. And yes, you mentioned the ramp-up to INTIBIA, but I calculate still a quite significant operating leverage, which is according to your augmentation, eaten up. So it would be great to have a little bit more transparency regarding the cost positions and how the math works. Lars Rasmussen: So on your first one, Oliver, so the physician fee schedule changes to the payment as we are -- we are running right now with an average price of USD 110 per square centimeter. And the new fixed price is USD 127.3 per square centimeter from 1st of January 2026. That is, of course, positive on an average basis. There will also be fewer competitors we expect that has not been -- does not come out yet, but we expect before 1st of January that we will have a full list of who has coverage. And that dynamic altogether means that as the year progresses. And as the stocks that have been built, they are being consumed, that we will be in a better position to compete, than we are at this time because there are fewer competitors and what we compete with would have a higher average price. That's how we see it. That's also why we think that this, at the end of the day, is a positive change seen from our point of view. Anders Lonning-Skovgaard: And Oliver, to your second question around our cost development, I think I talked to the gross margin moving parts earlier. I also talked to where we are going to invest back to Veronika's question. And you should -- as I also said earlier, you should expect our inflation levels or the inflation levels, salary regulation, et cetera, to be pretty stable also compared last year. So we are really -- the leverage effect we have, we really invest that back into new initiatives and I explained those initiatives earlier. So it's the U.S., it's INTIBIA and then also invest into technology, AI to support long-term growth and long-term value creation. Operator: The next question comes from Julien Dormois from Jefferies. Julien Dormois: The first one relates to Continence. We should have the coding change taking effect in January of '26. So just curious what are your latest thoughts on this and how you ambition to make the most of that coding change? And whether we should see any positive impact in '26? Or is it more a mid- to long-term benefit we should observe? And the second question is trying to dissect a little more into the guidance for '26, particularly in chronic care. You have highlighted continued momentum in the business, but is it fair to assume that Continence will continue to outperform Ostomy as it has in the recent past and also considering the regulatory changes, the recent product launches and so on. So just curious whether Ostomy should remain slightly subdued compared to the Continence into the next year. Anders Lonning-Skovgaard: Thanks a lot, Julien. Let me start with the U.S. coding. Yes, it's going to have effect here from January. But we also are aware that there will be quite a lot of operational activities going on in moving the coding from the previous way -- or the previous reimbursement codes and now to specific hydrophilic codes. So there will be quite a big operational activities in our U.S. business to get that fully implemented. And it is still, for us, too early to call out the impact. But over time, we expect this to be positive. In terms to your second question around guidance on the chronic side, as you have seen also last year, we have a good momentum within the Continence, driven by our intermittent catheters driven by the Luja launch, but we're also seeing good momentum within our bowel care business. And we see that momentum also continue into '25-'26 and remember, the Ostomy franchise, as Lars also has mentioned a number of times now are also impacted by low growth or flattish growth in China. So that is the main headwind on OC versus CC. But overall, we are expecting that the chronic business will continue with good momentum also into '25-'26. Operator: The next question comes from Sam England from Berenberg. Samuel England: So the first one is just a follow-up on the investment and margins piece. Can you talk a bit about how the Impact4 investment evolves over the plan period? To understand how margins might trend from here? Is it pretty much front-end weighted? Or are there areas like AI and more sort of multiyear investments throughout the plan period? And then in Voice and Respiratory Care. Just wondering if you're expecting any more positive momentum on reimbursement during 2026 following the improved reimbursement that you saw in France for HMEs earlier this year? And then are you expecting any other new markets in Voice and Respiratory Care to open reimbursement in '26 like we saw with Poland this year? Anders Lonning-Skovgaard: Yes. So thanks, Sam. To your first question around investments during the Impact4 period. The ones we have talked about today, that is, yes, front loading some of the activities to support the growth and also value creation over the period. So we are -- yes, as I said a couple of times now, front-loading activities within the U.S. INTIBIA and technology AI to reap the benefits later in the strategic period. On Voice & Respiratory Care, we expect the momentum we have seen in recent years to continue. We have seen some reimbursement openings in some of our smaller emerging markets, but also in France, but you should not expect any bigger ones, at least not short term. Operator: The next question comes from Graham Doyle from UBS. Graham Doyle: Just one for Anders and one for Lars. Anders, just in terms of the Q4, it looked like there was a fairly sizable step-up in other operating income, which seems to be related to a transition services agreement. And it was kind of like 2%, 3% of EBIT. How sustainable is that? And when should we expect that to sort of run off? And then just a point on reimbursement, for Lars here. When you look at the skin subs, is there not a danger if the ceiling reimbursement, i.e., what a doctor receives is capped at $127. Why would there not be a race to the bottom to products for like $20, $30, $40, where you make this spread? So just to understand how you think doctors balance patient outcomes with, I suppose, financial incentives would be helpful. Anders Lonning-Skovgaard: So thanks a lot, Graham. Let me take the first one. Yes, we have a step-up in other operating income throughout the year. And this is really related to our TSA or our services to the buyer of our skin business in the U.S. But actually, the cost to do these services are sitting in the individual cost items. So when I net it up in our P&L, it's actually a neutral effect. You should expect the other operating income also to continue into '25-'26, and we expect to be done with the services towards the end of the year. But for the total EBIT, it's a neutral impact. Lars Rasmussen: So on the Kerecis, I think you know at least as much as I do about the dynamics, the financial dynamics of the skin care market in the U.S. The way I see this change is that for most vendors, they will get into a space where they have a significantly lower pay per square centimeter than they had before. And we come into a space where we have more. The vendors that are left in that space now -- they can only be there when they have good quality clinical data. And the clinical data that you have to obtain to be in that market, you can only get those when you have a certain investment in the -- in the quality of those data. And I think that it's hard to see with the kind of investments that you have to do to both create these products, but also to document them that it's going to be a substantial race to the bottom. On the contrary, I think that it's going to be a market that for some of the vendors will be hard to compete in. We just happen to be set up in a way where we have extremely strong clinical data. We also have a very competitive setup when it comes to the cost on this. So we are, of course, prepared to compete but we -- we just don't think that we are in a space where what you described there is there's a logic that, that will just be the right or the first thing that happens. But we might be proven wrong on this, of course. But I really think that what happens, the steps that have been taken here that gives a choice for the society to offer very, very strong products at a reasonable price. And those who would like to compete on that is in that space, that's how I see it. Graham Doyle: No, I completely hear you. Just -- it was just something I thought about as we looked at how some of the higher priced products are trending today. Lars Rasmussen: Thanks. Okay. Should -- I think that we'll have to end with the next question because we are over time, but could we take one more? Operator: The next question comes from Carsten Lonborg Madsen from Danske Bank. Carsten Madsen: I was just hoping that you could talk a little bit about the scenarios for the LCD because that is, of course, a sort of continuous rumors about it not being implemented and maybe being canceled. So what will actually happen with your organic revenue growth guidance for next financial year and if it should be in a situation where the LCD is not being implemented? Anders Lonning-Skovgaard: Carsten, let me take that one. Our assumption around Kerecis for the coming year is a growth of around 25%. And remember, around 70% of our business, that's the hospital business. And the hospital business, we have a very strong growth quarter-over-quarter. And it's really the outpatient setting when we discuss the LCD and the price levels where we have some volatility. But we are -- we expect to deliver growth of around 25% for our Kerecis business, '25-'26. Carsten Madsen: And then maybe a quick follow-up to this one in terms of the venous leg ulcers. I cannot completely remember your plans for submitting data and maybe potentially getting on to that list as well. Could you help me remember it? Anders Lonning-Skovgaard: Yes. So we are in the process of doing clinical studies, and we expect those to finish sometime next year. So that's the current assumption. Lars Rasmussen: Okay. So actually -- I changed my mind, that happens sometimes in life. So yes, but if you're still online, you can ask your questions because you're the last one who is left. So that would be like almost personally if we leave you out here. Operator: The next question comes from Jesper Ingildsen from DNB Carnegie. Jesper Ingildsen: Just maybe on the bowel care opportunity that you mentioned in regards to your increased investments into next financial year, could you just elaborate a bit on that opportunity? And what kind of contribution you expect to get from that? And then lastly, on Halo and the special items that you have specified. To my understanding, you don't do capitalization of your R&D. I'm just trying to understand what's specifically driving that? And to some extent, how big that cost is? Anders Lonning-Skovgaard: Jesper, let me take your questions. When we had the CMD back in September and described our Impact4 ambition also for the U.S., we also talked to an opportunity we are seeing in the U.S. for our bowel care business. So the good news are that we are now getting reimbursement for bowel care in the U.S. And that's why we are now initiating investments into this specific area. And that's what we have been planning for doing this year. In terms of your second question, the -- related to the Halo, yes, we have evaluated the value of Halo also as a consequence of the current sales in the U.K. and our plans not to launch in other markets. And therefore, we have included a quite significant amount in our special items. And it's related to the IT investments we have done, so to develop the solution and to develop the app and therefore, we have reassessed the -- basically the depreciation for the Halo solution, and that's what we have included in special items. Lars Rasmussen: Thank you very much, guys, and looking forward to seeing many of you over the next period. Thank you. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Operator: Good morning, and welcome to Verastem Oncology's Third Quarter 2025 Earnings Conference Call. My name is Liz, and I'll be your call operator for today. Please note, this event is being recorded. [Operator Instructions] I will now turn the call over to Julissa Viana, Vice President of Corporate Communications, Investor Relations and Patient Advocacy at Verastem Oncology. Please go ahead. Julissa Viana: Thank you, operator. Welcome, everyone, and thank you for joining us today to discuss Verastem's Third Quarter 2025 Financial Results and recent business updates. This morning, we issued a press release detailing our financial results for the quarter and year-to-date. This release, along with the slide presentation that we will reference during our call today, are available on our website. Before we begin, I would like to remind you that any statements made during this call are not historical and are considered to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these statements as a result of various important factors, including those discussed in the Risk Factors section in the company's most recent annual report on Form 10-K filed with the SEC on March 20, 2025, and the current report on Form 10-Q that will be filed later today as well as other reports filed with the SEC. Any forward-looking statements we make represent Verastem's views as of today, and we disclaim any obligations or responsibility to update. Joining me on today's call are Dan Paterson, President and Chief Executive Officer of Verastem, who will provide opening remarks and recap key highlights from the quarter. Matt Ros, Chief Operating Officer; and Mike Crowther, Chief Commercial Officer, who will walk through the continued progress of the AVMAPKI FAKZYNJA CO-PACK commercial launch; and Dan Calkins, Chief Financial Officer, who will provide an overview of our financial results. I will now turn the call over to Dan. Daniel Paterson: Thank you, Julissa. Good morning, and thank you for joining us today to discuss our third quarter financial results and business update. In Q2, we shared our excitement about achieving FDA approval for AVMAPKI FAKZYNJA CO-PACK in KRAS-mutated recurrent low-grade serous ovarian cancer, or LGSOC, and reported our first 6 weeks of commercial performance. Today, I'm pleased to share that the strength we saw in those initial weeks has accelerated. With a full quarter of commercial operations now complete, the fundamentals we put in place to guide our commercial launch are translating into meaningful results. Our third quarter net product revenue of $11.2 million surpassed our expectations and was driven by consistent adoption among both academic centers and community oncologists. We set 3 key objectives to support our commercial execution and drive sustainable growth. Physician engagement, patient initiation and retention and streamlined reimbursement, all 3 are trending positively. We're simultaneously advancing our broader strategic priorities, specifically expanding the opportunity set for AVMAPKI FAKZYNJA CO-PACK and accelerating the clinical path of VS-7375, our KRAS G12D (ON/OFF) inhibitor program. Let me highlight a few achievements. We completed the enrollment of our expansion cohort in RAMP-205, our first-line pancreatic cancer trial evaluating avutometinib plus defactinib and standard of care chemotherapy. We completed the planned enrollment of our confirmatory Phase III clinical trial, RAMP-301 in recurrent LGSOC, and we'll be making a modest increase in enrollment per the IDMC's recommendation. This does not have a meaningful impact on our expected time lines. We shared initial safety and tolerability data from our G12D program with VS-7375. We cleared 2 monotherapy doses with no dose-limiting toxicities. We reported that we did not observe nausea, vomiting or diarrhea above Grade 1. Importantly, these dose levels included the Phase II go-forward dose that was chosen by our partner in China. We're now moving ahead of opening the combination cohort with cetuximab. These are exciting developments that add to our continued success. In the fourth quarter, we remain focused on our 3 key launch objectives and maintaining our execution discipline across all commercial, clinical and operational functions. Let me now turn the call over to Matt to review some specific highlights from the third quarter. Matthew Ros: Thank you, Dan. The strong AVMAPKI FAKZYNJA CO-PACK growth reflects the high unmet medical need and physician enthusiasm for this first-ever treatment option. The team has achieved significant results since our May approval, and we continue to execute well against all 3 strategic launch imperatives. Dan touched upon these, and they are: first, to effectively reach health care providers, remembering that the top 100 commercial health care organizations comprise about 50% of the sales opportunity. Second, to engage and support patients throughout their journey as we know that as patients progress through other therapies, many will be ready for a new treatment option. And third, to ensure seamless access so we can support patients and ensure any barriers to reimbursement are removed. Our approach is highly targeted, and we're utilizing a deliberate mix of one-on-one meetings, group discussions and conference engagements to maximize the impact of every interaction in this rare disease market. Thus far, each element of this approach has proven to be successful. As Dan shared, we generated $11.2 million in net product revenue in the third quarter, which was our first full quarter of launch. We've leveraged the momentum from the first 6 weeks of launch and uptake has been strong. With 133 prescribers of that AVMAPKI FAKZYNJA CO-PACK, physician excitement is palpable and our field teams continue to do an excellent job in engaging with health care providers to ensure they understand the unique benefits of the CO-PACK and how to administer. Consistent with Q2, we continue to see prescriptions generated by gynecological oncologists and medical oncologists. This well-rounded base of prescribers reinforces the touch points our teams are making across our top 100 organizations and Tier 1 and Tier 2 targets. We are experiencing high levels of engagement within community practices that are either large affiliated practices or are associated with group purchasing organizations. We are directly contracting with the GPOs and conducting educational programming. We are also having meaningful success in accounts that are typically closed to sales representatives. We continue to engage and support patients with outreach efforts to help educate them about the treatment and support their conversations with their doctors. And while we won't be speaking to future trends or prescriptions at this time, we are encouraged by specific insights following our first full quarter of launch. Approximately 65% of prescriptions written have been generated by our top 100 organizations. What's great about this is that we are making strong headway in our Tier 1 and Tier 2 accounts, but we are also seeing prescriptions coming from other accounts as well. We believe that speaks to the strength of the data and brand awareness. More than half of total prescriptions are coming from the academic setting, and we expect the split to be consistent between the community and academic setting providers over time. 60% of the prescriptions written are coming from GYN oncologists and 40% written from medical oncology. Our specialty distributors are now fully on board, and we see a good mix between the 2 specialty pharmacies onboarded in Q2 and the 4 specialty distributors we added this quarter. The initial orders across our specialty distributors were managed closely and have been consistent with the initial orders from our 2 specialty pharmacies at launch. For these reasons, we believe inventory stocking has been minimized, and we plan to continue to manage this closely through year-end. Lastly, reimbursement has not been a barrier to any access, and Mike will provide more specifics in that regard shortly. Looking at the fourth quarter, we aim to continue to build on our momentum while staying laser-focused on our strategic imperatives to ensure every appropriate patient benefits from this novel treatment. The key opinion leader community continues to reinforce our thesis that every KRAS-mutated LGSOC patient should not only receive this treatment, but should do so at their first recurrence. Given our early achievements, our team's effective execution and the high unmet need in this rare form of ovarian cancer, we believe we are well positioned for continued growth. Now I will turn the call over to Mike to speak further about the launch dynamics. Mike? Michael Crowther: Thanks, Matt. Let's get right into the specifics of our AVMAPKI FAKZYNJA CO-PACK launch. I'm extremely pleased with how well the launch is going as net product revenue growth accelerated in the third quarter. While we consider ourselves still in the early days of launch, the underpinning of success is built upon the breadth and reach of our field engagement to raise awareness of the availability of the first-ever treatment, specifically for people living with KRAS-mutated recurrent LGSOC. These impressive results are driven by a few key factors: high unmet need, increased engagement with both academic and community oncology practices, expanding reach and removing barriers to access through specialty distributors and their GPO partners and continued efforts to ensure seamless access. From an engagement standpoint in the third quarter, we have had high engagement among our top 100 organizations and top 100 offices, which includes a mix of academics and community providers. These efforts have resulted in approximately 65% of prescriptions coming from them and specifically within our Tier 1 and Tier 2 accounts. We continue to see both repeat prescriptions from physicians prescribing to multiple patients and refill for patients given the CO-PACK's favorable safety profile. An important insight we have gained is that HCPs treating LGSOC have a good understanding of where their patients are in the treatment journey and are keeping CO-PACK top of mind for when the patient's current therapy fails due to either intolerability or clinical progression. Doctors continue to share that they are actively assessing and identifying patients that may become appropriate candidates for this targeted combination therapy, demonstrating that our efforts with HCPs are creating visibility into new patients becoming available for treatment. Additionally, the awareness about AVMAPKI FAKZYNJA CO-PACK is high. Our medical science liaisons and oncology nurse educators have engaged in 800 scientific exchanges and well over 100 educational forums with health care providers within this quarter alone. We believe payers are acknowledging the unmet need that can now be addressed by the CO-PACK as well as the clinical value of the combination therapy. The payer coverage continues to be broad and the time to fill prescriptions has been fast within approximately 12 to 14 days. We can also confidently share that covered lives has now exceeded 80% and that the payer mix for our combination therapy is about half commercial and half Medicare. From a patient perspective, we continue to see high engagement in our branded website. Our digital campaign is effectively driving traffic to this resource and patients are downloading our patient brochure and opting in to receive more details associated with how the CO-PACK can be appropriate for them. To close, we strongly believe that the AVMAPKI FAKZYNJA CO-PACK combination therapy has the potential to make a significant impact on the lives of patients who previously had no treatment options specific to their disease. With several months now under our belt, the team is executing well against all our launch objectives. We continue to believe a steady adoption will occur over time, and our early observations post approval support this perspective. I look forward to sharing more in the coming quarters as we progress through the launch and gain more experience and insights. With that, I'll turn the call over to Dan Calkins to provide an update on our financials. Daniel Calkins: Thank you, Mike. We issued a press release before the call today with the full financial results so I'll focus on the highlights for the third quarter. In our first full quarter of launch, I'm also pleased to report $11.2 million of net product revenue for the third quarter. Cost of sales were $1.7 million for the third quarter of 2025 and did not include a significant amount of product costs as inventory produced prior to FDA approval was fully expensed at the time of production. Currently, we're not providing guidance on gross to net other than to say that expectations should be consistent with other oncology small molecule therapeutics. Turning to research and development expenses. They were $29.0 million for the third quarter of 2025. R&D expenses were driven by both the ongoing global confirmatory Phase III RAMP-301 clinical trial and the ongoing BS-7375 Phase I/IIa clinical trial as well as higher costs associated with drug substance production activities related to BS-7375. SG&A expenses were $21.0 million for the third quarter. The expenses were driven by commercial activities and operations, which included personnel-related costs to support the ongoing CO-PACK launch. We continue to be prudent in our expense management, making the right investments at the right time to support the ongoing commercial launch efforts while simultaneously advancing our pipeline. For the third quarter of 2025, non-GAAP adjusted net loss was $39.4 million or $0.54 per share diluted compared to non-GAAP adjusted net loss of $35.3 million or $0.88 per share diluted for the 2024 quarter. Please refer to our press release for a reconciliation of GAAP to non-GAAP measures. Moving to the balance sheet. We ended the third quarter of 2025 with cash, cash equivalents and investments of $137.7 million. We believe our current cash, combined with future revenues from AVMAPKI FAKZYNJA CO-PACK sales and the exercise of the outstanding cash warrants provides runway into the second half of 2026. We had a solid first full quarter as a commercial company. We have sufficient capital to fund our ongoing commercial launch in the U.S. and continue advancing our current clinical development plans. With that, I'll turn the call back over to Dan. Daniel Paterson: Thanks, Dan. Before we open the call to Q&A, I'll share a few final remarks to close out today's presentation. We've seen another strong quarter of execution at Verastem as we continue to deliver on all our strategic priorities, meeting our key milestones and delivering a strong commercial launch. As we're in the final quarter of 2025 and look to 2026, I want to reaffirm our strong confidence in our growth trajectory and the significant value creation opportunities ahead for our company and shareholders. Commercial execution remains a top priority. The fundamentals are driving AVMAPKI FAKZYNJA CO-PACK adoption and the launch is progressing as planned. Our clinical pipeline continues to advance on multiple fronts. We expect several important data readouts in the first half of 2026 that will further demonstrate the breadth of our RAS/MAPK pathway-driven approach. We expect to share safety and efficacy results from our RAMP-205 expansion cohort in first-line advanced pancreatic cancer in the first half of 2026. We also plan to share initial results from our Phase I/IIa trial evaluating VS-7375 and advanced G12D mutant solid tumors in the first half of 2026. We'll continue to advance our trial of VS-7375 in both monotherapy and combination expansion cohorts in pancreatic, lung and colorectal cancers. Importantly, we believe VS-7375 has demonstrated significant and best-in-class potential among KRAS G12D inhibitors to date in both advanced pancreatic cancer and lung cancer. And we're committed to moving quickly to registration-enabling studies in these and other high potential priority indications. This is an active area of focus for the company, and we plan to engage with the FDA in the first half of 2026 to discuss our path forward. This would include seeking their input on how to harmonize the abundance of existing data generated by our partner in China to advance the program efficiently on behalf of patients who currently have no FDA-approved treatments for their KRAS G12D mutated cancers. We now have a commercial product generating growing revenue and a robust clinical pipeline with multiple near-term catalysts that will determine the future development plans. We are building a sustainable multi-asset oncology company to address important unmet needs in RAS/MAPK Pathway-Driven cancers. With that, we'll open up the call for questions. Operator? Operator: [Operator Instructions] Your first question comes from the line of Michael Schmidt with Guggenheim Securities. Michael Schmidt: On the LGSOC launch, yes, just wondering if you could provide a few more comments on how the product is being used in the market in terms of patients having had prior lines of therapy. I'm just thinking about some of the market dynamics around incidence of new patients that relapse versus that sort of existing prevalence pool. How is the product being utilized in that context? And what are you seeing in terms of KRAS mutant versus wild-type use? Daniel Paterson: Yes. I mean we're early in the launch. So you do end up seeing some patients with later lines of therapy, but we're also seeing patients that are first recurrence, and it is a mix of wild-type and mutant as well as some just off-label totally. We don't have exact numbers on that. Again, we don't see total visibility of that through the distribution channel that goes through the distributors as opposed to specialty pharmacy. And we don't always have a good view in the total number of lines of therapy. I don't know, Mike, if you wanted to give a little more color. Michael Crowther: Sure, Dan. I mean, consistent with what you've said, we've seen a variety of patients across a range of lines of therapy. We're not always giving the information about what prior therapies they've been on, but obviously, they've seen most of the classical mix of chemotherapy, AI, bevacizumab plus or minus a MEK inhibitor. Since we're promoting just on label, the vast majority of our patients that we've seen so far are KRAS mutant LGSOC. Michael Schmidt: Great. And then a question on the RAMP-301 study update. Just curious if you could comment on what type of analysis the IDMC did? Was this just looking at event rates and adjusting for event rates? Or did they perhaps look at additional information in terms of effect size? Any comments there would be helpful. Daniel Paterson: Yes, great question. I mean, to be clear, we're blinded by what the IDMC did. And we had put this interim analysis in place because -- and we've mentioned this before, there wasn't perfect information on the comparators. There weren't prior studies with prospectively broken out KRAS mutant and wild-type. And we tried to keep the sample size as low as possible, but also have the ability to be able to upsize that if needed. I'm optimistic because the number of recommended additional patients was relatively small, about 30. It was across both wild-type and mutant, which, again, I think speaks to them being within the range. And what I was told is because the study accrued faster than we had projected, there were less events than one normally would have had. And I think part of the reason for adding a couple more patients is there just aren't enough events yet really to draw any definitive conclusion, and we want to make sure we're -- we have enough patients to be in the range. Michael Schmidt: And congrats again on a great quarter. Operator: Your next question comes from the line of Justin Zelin with BTIG. Justin Zelin: Congrats on the strong quarter. I wanted to ask about the NCCN committee review in October, if you had heard back on a recommendation for the labels to be expanded to include KRAS wild-type patients? And I have some follow-ups. Daniel Paterson: Yes, that's a great question. And to be clear, had we heard, we would have told people, we don't know. We know the committee met. We don't know the outcome of that yet. Justin Zelin: Got it. Do you have an expectation on any time lines on when you might expect to hear back? Daniel Paterson: We actually don't. We've heard it can be as long as early next year, could be earlier. I think different committees operate differently. We've not been given a lot of guidance. It's a relatively opaque and what I would say, secret process, and they've all signed NDAs and things. And so as much as I would love to know the outcome of the meeting, we just don't know yet. Justin Zelin: Understood. And maybe just one additional question just on the commercial launch. Do you have any color on new patient starts versus patients who are refilling prescriptions as far as contribution to your strong quarter? Daniel Paterson: Matt, do you want to take that one? Matthew Ros: Yes, sure. Great question. We aren't providing that level of detail or specificity on new to Rx refills. However, we are continuing to see significant new prescriptions come in for patients and patients that have started on therapy, particularly in the beginning of the third quarter have continued to receive refills. So we are seeing the dynamic in the marketplace, but providing that level of granularity at this point is a bit too premature for us. We wanted to see another full quarter or 2 underneath our belts before we provide that level of detail. Operator: [Operator Instructions] your next question comes from the line of Sean Lee with H.C. Wainwright. Xun Lee: Congrats on a good quarter. I just have 2 quick ones. First, on the LGSOC market. I was wondering whether you could provide some details on what are you seeing in terms of patient retention. Correct me if I'm wrong, I think on the clinical study, the average treatment duration was about 10 months. So it's still a little bit early for that. Maybe if you can provide some color on the patient dropout rates, has that been in line with what you expect? Daniel Paterson: Yes. I would say it's really early to tell. And actually, average duration was about 18 months in the clinical trial. I don't know, Matt or Mike, if you want to provide any more color. It is really too early to tell. Matthew Ros: Yes. I mean it's a great question. Dan is right. The performance of the CO-PACK in the clinical program, the DOR was around 18 months. We're seeing patients that are coming in at first recurrence. And so we would expect if they're coming in, in an earlier line of treatment that the benefit would be prolonged, but it is still fairly early to provide specific commentary. Xun Lee: I see. My second question is on the VS-7375 study. I was wondering whether there are any significant differences between how you're treating the patients compared to the study that your partners running in China? Because I think I recall that you were discussing some prophylactic antiemetics and such. Are there any notable differences? Daniel Paterson: Yes. Thanks, Sean. That was a great question. Yes, one of the things that we've said we were doing differently is -- and this was based on experience with the G12C inhibitors being developed and a number of our investigators participated in those studies is really the differences where the patients in China were fasted. This first couple of cohorts we treated in the U.S. were fed. They were also mandated to have prophylactic antiemetics, which is not a part of the protocol in China. And part of the reason we released the information on the first 2 cohorts is, a, we thought it was important that we cleared those first 2 cohorts, which included the recommended Phase II dose in China without any DLTs. But also the early data that we're seeing is that those interventions are making a difference. And as we said earlier, we didn't see any GI toxicities, nausea, vomiting, diarrhea that were greater than grade 1, which we were very happy to see, and we hope that carries forward. Operator: Your next question comes from the line of Yuan Zhi with B. Riley Securities. Yuan Zhi: Congratulations on the commercial launch. And maybe my first question is for your confirmatory trial, can you remind us what was the enrollment plan for the KRAS mutant patient population and the KRAS wild-type patient population separately? Daniel Paterson: So the total enrollment was planned for 270, and there were guardrails to set up to keep the amount somewhere between 1/2 and 1/3 KRAS mutant to mirror the population. And so this accrual has come out that way. And as I mentioned, the data monitoring committee recommended that we put a couple more patients on both of those groups. And so we were glad to see, a, that it was a small number of patients that actually could have gone up quite a bit and that it was both arms, which tells us that we're in play with both of them. Yuan Zhi: Got it. My second question is, what is your next step or priority in the commercial launch? Do you plan to target more prescribers or just make sure a higher number of prescription per doctor? Daniel Paterson: I would say both. We're not going to change what we're doing. We feel that between our direct calling on individual doctors, the programmatic work we're doing with the organizations and our digital work as well as reaching out to patients that we're covering the waterfront. So we're not planning on changing what we're doing, but it's really a matter of making sure existing prescribers continue to prescribe. New prescribers come on because in any launch, you've got early adopters, mid-adopters, late adopters, and we're working through that chain. And then importantly, that when patients go on, they stay on. Yuan Zhi: Got it. Maybe before I jump back to the queue, my last question is on the patient's journey. So let's say a patient got their prescription, how long do they have to refill? And how often do they have to visit the doctors to check either symptoms or any side effects? Additional color will be very helpful. Daniel Paterson: Yes, Mike, do you want to take that one? Michael Crowther: Sure. So prescription is for a month supply, 3 weeks out of 4. And in terms of doctors' visits, there is a small amount of visits to begin with just to make sure they're being monitored closely for early toxicities, but that rapidly goes down to every 3 to 6 months. Operator: Your next question comes from the line of Eric Schmidt with Cantor Fitzgerald. Eric Schmidt: Apologies, I hopped on a little bit late. But with regard to the RAMP-301 IDMC recommendation to moderately upsize the study, can you talk about what the potential outcomes could have been through that look and what data the committee had access to in order to make the decision? Daniel Paterson: Yes. So the committee had the full data set and the outcomes could have ranged from everything from futility adding, I believe, up to 100 patients to they could have added none. Again, we're blinded to the actual results, but our understanding was there were less events than one would have anticipated given the rapid accrual and that may have led to the small number of patients being added on, but they are being added on to both KRAS wild-type and mutant and it's about 30 across the 2 groups. Eric Schmidt: So that's helpful. There wasn't any prespecified criteria for adding the 30-ish, 27 patients -- sorry, 29 patients. It was just what the IDMC chose to do, that number? Daniel Paterson: My understanding is it was within their purview and they made a recommendation to us and we followed it. And again, we don't have full transparency into exactly what they were doing. Eric Schmidt: And then maybe switching to the 7675, the G12D in your ongoing study. We're very clear that GI tolerability was good in the first dose with no more than grade 1 cases of GI issues. Were there any other side effects to report in that initial cohort? Anything at all of grade 2 or 3? Daniel Paterson: Well, I believe there were some grade 2 or 3 in very, very small numbers, but nothing -- no signal that we had not expected based on the Chinese data. I think the only thing that was really different was the level of GI tox. And we'll give a more full release of the full efficacy once we've got a few more patients on. I think we've guided early next year, we'll give an update on both efficacy and safety. Operator: Your next question comes from the line of James Molloy with Alliance Global Partners. James Molloy: I was wondering, could you share any sort of anecdotal updates from the launch, talking to the usage and potential off-label usage on the wild-type versus mutant and sort of any feedback you're getting early stages of the launch? And then I have a couple of other questions as well. Daniel Paterson: Sure. Mike, Matt, you guys want to give a little more color? Michael Crowther: Sure. I mean I think as we shared in our scripted remarks and an earlier question, we're promoting obviously, our labeled indication. So the vast majority of use we've seen thus far has been within the KRAS mutant LGSOC population. That doesn't mean there haven't been wild-type patients because they have, and those have also been seeing coverage through the payers as well thus far. James Molloy: Okay. Great. Then maybe a follow-up, looks like there's been some M&A in the oncology space recently. You guys are obviously off to an excellent launch here. Any thoughts -- care to discuss any inbound interest you may or may not have from other partners? Daniel Paterson: I mean obviously, we wouldn't talk about any specifics. But given the launch trajectory to date, and I'd say even more so the excitement around G12D and how the molecules perform both preclinically and clinically. We do get a fair amount of inbound interest and entertain those discussions all the time. We've got some very exciting plans to take these forward, but we're always evaluating could we do more with more resources. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.