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Operator: Hello, and welcome to the Gjensidige's Q3 2025 Results Presentation. My name is Serge and I'll be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to your host, Mitra Negård. Head of Investor Relations, to begin today's conference. Thank you. Mitra Negård: Thank you. Good morning, everyone, and welcome to our Third Quarter Presentation of Gjensidige. As always, my name is Mitra Negård, and I'm Head of Investor Relations. As always, we will start with our CEO, Geir Holmgren, who will give you the highlights of the quarter; followed by our CFO, Jostein Amdal, who will run through the numbers in further detail. And we have plenty of time for questions after that. Geir, please. Geir Holmgren: Thank you, Mitra, and good morning, everyone. The third quarter saw a relatively stable weather in our region. However, earlier this month, Storm Amy reminded us of the growing impact of climate change and extreme weather, affecting large parts of Norway and areas in Denmark. The storm caused significant property damage through strong winds, once again, testing our organization's resilience. In preparation for the event, cross-functional teams across the organization were mobilized to ensure customer safety and uphold the consistently high standards of service. Billion lessons from past events, we have streamlined our processes for faster, more effective support. According to the Norwegian Natural Perils Pool, over 11,000 claims have been registered in Norway with total industry-wide insurance losses from Natural Perils estimated at NOK 1.5 billion to NOK 2.1 billion. Additional claims for cars, boats and water-related incidents fall in a separate insurance schemes. You can see this total claims cost for Amy in Q4 2025 is estimated at approximately NOK 400 million net of reinsurance and including reinstatement premiums. With the emergency phase behind us, the focus is now on supporting our customers in repairing and replacing what has been damaged. Events like Amy highlight the need for continued climate risk preparedness, the insurance industry remains committed to prevention, collaboration with the municipalities and developing solutions that reflect the changing risk landscape. So now let us turn to Page 3 for comments on the third quarter results. We delivered our profit before tax of NOK 2,067 million. This result includes a nonrecurring expense of NOK 429 million related to the termination of the new core IT system in our pension business. We generated a general insurance service results of NOK 2,271 million, significantly up year-on-year. Our strong growth momentum continued in the quarter with 11.3% increase in insurance revenue when adjusted for the positive effect of the change in recognition of home seller insurance. The combined ratio declined to 79.7%, reflecting the improvements in both loss and cost ratios. The underlying frequency loss ratio improved by 1.4 percentage points and our investment generated returns of NOK 534 million, contributing to delivering a solid return on equity of 29.6%. We have a solid capital position and our solvency ratio was 191% at the end of the quarter. Jostein will revert with more detailed comments on the results for the quarter. Turning to Page 4. I will start with private property insurance in Norway, which sold lower profitability this quarter, reflecting the inherent natural volatility in claims. Claims frequency increased by 5%. Repair costs increased by 4%, in line with our expectation. We continue to implement price increases, although at a more moderate level, reflecting the outlook for inflation and frequency and the current profitability level. Average premiums increased by almost 16%, over the next 12 to 18 months, we expect the repair cost to remain within the range of 3% to 5%, and we will continue to price at least in line with expected claims inflation. Our current average rate of price increases of private property in Norway is 12.5%. So moving over to private motor insurance in Norway. Profitability for this product line improved over the same quarter last year, thanks to our targeted pricing measures. Claims frequency increased by 4%, reflecting an elevated claims level in July, likely as a consequence of the good weather and high traffic density in the vacation weeks. We estimate that the increase in the underlying claims frequency was in the range of 1% to 2%, repair costs increased by 4.4%, well within our estimated range. Average premium increased by 18.6%, although inflationary pressures are easing. The overall level is likely to remain within the 3% to 6% range for the next 12 to 18 months. We are monitoring the key drivers closely and acknowledge the uncertainty stemming from, among others, geopolitical risk and escalated trade tensions. Our current average rate of price increases of private motor in Norway is 13%. Moving on to Page 5. The strong performance in Norway continued this quarter, driven by sustained growth momentum and focus on efficient operations. We are very pleased to see that our retention rates for both the private and commercial portfolios, remain at a very high levels despite the necessary price increases. Sales activity has been strong, leading to an increase in both customer numbers and volumes for private in Norway. We continue to maintain strong competitiveness in the SME part of the commercial market with strong focus on profitability as we move closer to the January renewals. In Denmark, profitability improved for the private portfolio with solid revenue growth driven by both volume and pricing. Profitability for the commercial portfolio was lower, reflecting the inherent variability. We are satisfied with the underlying developments. The implementation of our new core IT system in Denmark is progressing steadily, supported through our testing and a strong focus on quality. Sales are being rolled out gradually, and we are preparing for the migration of the portfolio next year. We are seeing clear benefits from the experience gained during the implementation and use of the system in the private portfolio. And I'm pleased to see that our Swedish operation continued to build on positive momentum, showing sustained progress through solid growth and improved profitability. We are currently conducting a thorough assessment of the core IT system in Sweden, taking into account the specific characteristics of our operations in that market. Over to Page 6. We continue to actively pursue our strong sustainability ambitions. As shown on this slide, we have launched a number of innovative initiatives that are designed to create significant customer value, while reducing claims costs over time. So with that, I will leave the word to Jostein to present the third quarter results in more detail. Jostein Amdal: Thank you, Geir, and good morning, everybody. I will start on Page 8. We delivered a profit before tax of just over NOK 2 billion in the third quarter. The insurance service result increased significantly to NOK 2,271 million, driven by continued strong top line growth and a lower loss ratio. A further decrease in the cost ratio also contributed to higher results. Private delivered a higher result driven by both Norway and Denmark. The improvement in Norway mainly reflects revenue growth across all products, improved profitability for motor insurance and a lower cost ratio. And nonrecurring effect related to home seller reinsurance also added to the result. The positive development in Private Denmark was driven by a combination of revenue growth for all main products, higher profitability for property and motor insurance and a lower cost ratio. Decrease in results from commercial was driven by our Norwegian portfolio due to revenue growth for all products, improved profitability for Accident & Health, motor and property insurance and a lower cost ratio. Higher runoff gains also contributed positively. Our Danish commercial portfolio showed lower results, primarily driven by a higher number of fires impacting property insurance and lower run-off gains. In Sweden, the increase in insurance service result mainly reflected higher profitability for private and commercial property and private payment protection insurance. Our lower cost ratio also contributed to the improved results. The pension segment reported a loss of NOK 414 million, largely related to the nonrecurring expense of NOK 429 million related to the termination of the core IT system. The net result from our investment portfolios amounted to NOK 441 million in the quarter with positive returns from all asset classes. The negative development in the result under other items this quarter is attributable to profits from Natural Perils insurance transferred to the Natural Perils Pool and provisions related to the termination of cooperation agreements with 7 fire mutuals, effective from next year. We are taking proactive steps to secure our market position in the affected areas, and we expect only a limited impact on revenue. The result from our Baltic business is recorded as discontinued operations, pending regulatory approval for the sale. We expect to close the transaction in the beginning of next year. The higher result reflects the write-down of goodwill related to the sale of the company recognized in the third quarter last year. The insurance service result also contributed positively driven by an increase in runoff gains and lower loss and cost ratios. Turning over to Page 9. Our strong growth momentum continued in the third quarter with insurance revenues for the group increasing by more than 11% in local currency when adjusting for the nonrecurring effect in Private Norway. I'm very pleased with the increase, which was mainly driven by pricing measures across the private and commercial portfolios in all geographies, solid renewals in the commercial portfolios and higher volumes in Denmark and Sweden. The growth in our Private segment was driven by both Norway and Denmark. Private Norway showed a strong growth momentum even when excluding the home seller insurance product. This strong development was primarily driven by price increases in all main product lines. And I'm very pleased that we also saw increased volumes from motor, property, travel and accident and health insurance. The growth in Denmark was also strong, thanks to both price increases and higher volumes for all main products. Growth in commercial was also driven by both Norway and Denmark. In Norway, the growth was driven by price increases for all products and solid renewals. As in the previous quarters, this year, growth for some products within accident insurance was muted due to continued focus on profitability improvements. Growth in Commercial Denmark was good. Adjusting for an accrual last year, the growth rate was 6.4% in local currency, driven by price increases for all main products and higher volumes for property, accident & health and liability insurance. Growth in Sweden was negatively impacted by accruals. The underlying growth, however, was good, mainly reflecting higher volumes for leisure boat insurance in the private portfolio and higher volume and price increases for commercial motor and private property insurance. Turning over to Page 10. I'm very pleased with the development in the Group's loss ratio, which improved by 3.2 percentage points compared with the third quarter last year. Part of the improvement was due to lower large losses, which are random in nature. Another important driver was the improvement in the underlying frequency loss ratio of 1.4 percentage points. I'm very satisfied with the development in all the segments and particularly encouraged by seeing an improvement for Private Denmark. Let's turn to Page 11. Our commitment to operational efficiency remains strong. The group's cost ratio was 10.8% this quarter. The 1 percentage point improvement was driven by private in Norway and Denmark, commercially in Norway and the Swedish operations. We continue to strengthen our competitiveness, particularly in Denmark, and we're working to optimize our cost base across the group to create greater capacity for future investments in technology and growth. Over to Slide 12 for comments on our pension operations. Our pension business delivered a pretax loss of NOK 414 million this quarter, significantly impacted by the nonrecurring expenses from discontinuing the new core IT system project. For the time being, we will continue using the existing core system as recent improvements have enabled us to extend its operational life span. The underlying development in results for our pension business is good. Business volumes for the insurance products were high this quarter, which together with price increases lifted insurance revenue. Adjusted for the nonrecurring termination expense, the insurance service results improved year-on-year, but it was still in the red, due to asymmetric recognition of onerous contracts and expected future profits from new contracts. Net finance income contributed with just over NOK 1 million this quarter, reflecting running yield and higher interest rates. The unit-linked business continues to grow with a number of occupational pension members increasing by 5,500 to almost 335,000 at the end of the third quarter. Assets under management rose by NOK 4 billion to NOK 100 billion. This drove an increase in administration fees and management income, improving the net income from the unit linked business when excluding the nonrecurring item. Moving on to the investment portfolio on Page 13. Our investment portfolio generated positive returns for all asset classes, driven by running yields, lower credit spreads and positive equity and real estate markets. The match portfolio net of unwinding and the impact of changes in financial assumptions returned around 40 basis points, mainly reflecting lower credit spreads and the fact that the investments did not fully match the accounting-based technical provisions. The free portfolio returned 110 basis points, reflecting positive returns from all asset classes. The risk in our free portfolio remained low. A few words on the latest development of our operational targets on Slide 14. The customer satisfaction score is measured annually in the fourth quarter. We continue to identify measures and take steps to maintain a strong customer offering and high customer satisfaction. As Geir mentioned, retention in Norway remained high and stable. Retention outside Norway improved slightly during the quarter, with increases seen in Sweden and the private and commercial portfolios in Denmark. We are steadily progressing toward our 2026 target of achieving a retention rate above 85% outside Norway. The improvement in the digital distribution index this quarter reflects an increase in digital sales and digital customers, somewhat offset by a decline in digital service. Distribution efficiency is progressing well, primarily as a result of higher sales in Norway, but also in Denmark. Increased sales following the acquisition of Buysure contributed positively, improving this metric by 2 percentage points. Digital claims reporting increased during the quarter driven by Denmark and Sweden, and automated claims in Norway increased as well. Now over to Page 15 and a few words on our successful Tier 1 bond issue of NOK 1.2 billion in September. We aim to take advantage of what we viewed as attractive market condition, while also preparing for the first call of another Tier 1 bond in April next year. The issue was substantially oversubscribed, and we are very satisfied with the floating rate coupon of 3-month MBR plus 215 basis points. We also took the opportunity to buy back NOK 487 million of the Tier 1 bond with the upcoming call, resulting a net increase of NOK 713 million in outstanding Tier 1 capital. Over to Page 16. We had a solvency ratio of 191% this quarter, up from 182% in the second quarter. Solvency II operating earnings and returns from the free portfolio contributed positively total eligible own funds, while the formulaic dividend which corresponds to a payout rate of 80%, reduced eligible loan funds by NOK 1.3 billion this quarter. The net increase in Tier 1 capital, I just mentioned added NOK 713 million to the eligible own funds. The capital requirement increased slightly this quarter, primarily due to growth in our pension business. The non-life underwriting risks were stable, reflecting growth, offset by the effect of settlement of larger claims and changes in currency rates. And with that, I hand the word back to Geir. Geir Holmgren: Thank you. To sum up on Page 17, we are very pleased with the performance and continued progress across the private, commercial and Swedish segments this quarter. And our capital position is strong. We continue to implement measures and maintain a strong focus on operational efficiency, progressing well toward delivering on our financial targets this year and in 2026. So finally, on Page 18. Before we open for questions, I'm very happy to announce that we have set a date for our next Capital Markets Day, which will be held on the 26th of February next year in Oslo. We are looking forward to this opportunity to speak about our ambitions and plans. We will provide more details in a while. But in the meantime, please save the date. And with that, we will now open the Q&A session for this presentation. Operator: [Operator Instructions] Our first question is from Hans Rettedal from Danske Bank. Hans Rettedal Christiansen: So my question is around the claims frequency numbers that you gave in motor and property. And I guess there's a lot of sort of volatility, especially between Q2 last quarter and Q3 this quarter with quite a sizable effect on the overall claims outcome. So I was just wondering if you could give a little bit more color on your confidence that sort of frequency will come down and also perhaps just a bit more elaboration on what was driving the July pickup in motor and also in property? And just a very small question on the amounts recovered from reinsurance, which is lower than it typically is of only NOK 12 million this quarter. I know there's nothing typical about reinsurance, but still any help on why this is or sort of drivers behind it would be interesting to hear. Operator: We'll now move to our next question from Ulrik Zürcher from Nordea. Geir Holmgren: Operator, we'll try to answer the question first, please. Hans I can start with the claims frequency volatility. As you know, we are -- have an improvement when it comes to online compared this quarter to the third quarter last year. We see an improvement both on the group level and private and commercial and also in the Swedish operations. When it comes to volatility within the Norwegian part of the business, we see in the property side, more fires this quarter than you normally see. So it's also a kind of impact on some level of volatility, which is a part of our business from quarter-to-quarter. In addition, we saw a pickup, as you mentioned, on the motor side in the start of the third quarter. That's more due to higher frequency in July due to higher traffic density vacation weeks with this time tended to be more have a kind of an impact on the frequency side when it comes to motor. We do have quite high pricing measures, as mentioned in the October renewal. We see pricing measures, both for property and motor in Norway with renewables on 12.5% to 13% price increases on average, which is still above what we expect when it comes to frequency development and inflation going forward. Jostein Amdal: Yes. On the reinsurance recoveries, comment on specific claims. There is -- there has been a reduction of the estimates from some previous large claims, which have been above the retention limits. And that has then an effect that assumed the reinsurance recoveries will come down. So they're kind of -- if you have -- I try to explain it more clearly, if you have a reduction in a large claim estimate with no net effect because they have a reduction in gross claims and a reduction in assumed reinsurance recoveries. And that's the main reason why it's such a low number in the third quarter. Was that clear, Hans? Hans Rettedal Christiansen: Yes, very clear. Operator: Our next question is from Ulrik Zürcher from Nordea. Ulrik Zürcher: Just a short one. Jostein, when you say limited effects from the fire mutuals. Is it possible to -- like how much is that of premiums? And then secondly, just a technical one. You're trying to switch on profits to the Natural Perils Pool. I was just wondering, how will this work going forward? Jostein Amdal: Okay... Ulrik Zürcher: Is it like a quarterly thing or? Jostein Amdal: Yes. I get the question. The fire mutual there's a limited effect on the future development because there is -- this is -- first of all, this is a situation we also had 5 years ago when we had the termination of a number of fire mutuals as well. And it's then the fire mutuals have sold fire insurance in their own account, and then they have had been an agent on -- for all of the products for Gjensidige. And so we have both the fire mutuals and Gjensidige has had the customer relationship. And of course, we will be competing for the same customers. And we do expect a limited negative development on the premium development from this. So we will be strengthening our efforts within these geographical areas where these fire mutuals have operated. Yes. Geir Holmgren: If you talk about the impact on the profitability, I will also mention that because that's due to kind of agent distribution setup. We also definitely reduced expenses going forward regarding distribution. So we improved the distribution efficiency when it comes to existing customers through that channel. Jostein Amdal: The second question on Natural Perils technicalities is that when the line of business called Natural Perils has a surplus that surplus is transferred to the Natural Perils pool accounts in a way and that's then something we have to pay to this central Natural Perils Pool. Yes, and that's then on the negative on the others, other lines, other items. So it's a good year -- the positive will then be in the -- in a way where it's just a surplus or deficit. So if it's a surplus, it's a negative other. So there is no positive in a way. It's just a net negative. Ulrik Zürcher: Okay. So but will this be like done on a quarterly basis or annual? Jostein Amdal: In reality is every month, but then you, of course, get accounts every quarter. Operator: We'll now move to our next question from Derald Goh from Jefferies. Derald Goh: So my question is around the cost ratio. Now you're running at 12%. Is this the new base that is sustainable or would you -- and I guess, would you consider maybe reinvesting some of that into growth? Jostein Amdal: We are very happy to see reduced cost ratios. We have very strong cost discipline, and we have many cost efficiency measures going on in the organization and in our business. Our target at the moment is around 13% next year, but we are aiming for keeping the business still cost efficient, of course, and work every day to try to improve the cost efficiency. This, at the moment, as you mentioned, it could probably argue that it's some kind of room for doing other types of investments. But every type of investments we are doing have -- will have a good business case and will make -- improve the profit over time. So we are still focused on being a cost-efficient business and that's part of the core of our business and the way we are thinking. Derald Goh: But just to be clear, I guess, is it expected to assume that some of this 12% is a reasonable run rate for now? Jostein Amdal: I think we will not give any kind of guiding on our cost ratio going forward. The best thing to mention is our target for next year, which is around 13%. Operator: And we will now take our next question from Thomas Svendsen from SEB. Thomas Svendsen: Yes. So a question to the pension operation from my side. So can you just explain a little bit more why you scrap this system? Are there any changes in -- sorry, your market approach or something other? And also just remind us of the business plan for your business -- for your pension units? And also, could you sort of indicate sort of what to expect to be sort of normalized pretax profit level given the current asset base there? Geir Holmgren: Okay. the reason for terminating the core system within the pension business is due to our needs and requirements regarding the business we have today regarding pension business and pension-related products. Our assessment is that we are not getting the full benefit out of the existing core system, which was terminated and that has developed during the years we have doing the development, I would say. So this is a conclusion on something we -- the kind of assessment and consideration we have done in the past. And our assessment is that this is not the right system for Gjensidige going forward, taking care of our pension business in the Norwegian market with all the kind of requirements needed for doing that efficiently and with high quality. Our pension business in Norway is when it comes to a more strategic view on that. It's a very integrated part of our commercial business, especially in the SME areas, we see that we are running this business very cost efficient when it comes to distribution. It's capital efficient as well due to the types of products we have in the pension business. And I'm very happy to see the growth we have had within that business during the last couple of years, and it's a very motivated organization to keep that up on a high level going forward as well. So we are focusing on occupational pension and are happy to see that the market has a high level of growth, which we definitely take our earned part. So yes, I think that's probably on the business side. Jostein Amdal: I can add on the kind of financial guiding. I mean we don't guide us on much, but we have stated a return on equity target for the pension business back in the Capital Market Day in November '23, where we said that based on IFRS earnings, which is the company accounts for the pension business, we need to -- or target to return more than 15% return on equity. And if you exclude this nonrecurring item, year-to-date, the return on equity is 20.7%. So we are well ahead of our stated financial targets for the pension business as a company. Geir Holmgren: And if you look at the accounts for IFRS 4 in that business, it's -- actually we had a very good quarter when it comes to underlying profitability, good growth on the income side, revenue side, and it's run very cost efficient as well. Operator: We'll now take our next question from the next caller, please introduce yourself by your name and the affiliation after the automated prompt. Unknown Analyst: This is [indiscernible] from Autonomous Research. Can you hear me? Geir Holmgren: Yes. Unknown Analyst: I have just one question just on solvency given the very strong progress year-to-date. I was wondering whether you could comment on where your preferences in terms of capital deployment currently lies in terms of whether you see some good M&A opportunities on the horizon or whether you are more leaning towards passing your capital and potentially repatriate some in the form of special dividend or share buyback? And then secondly, look to the capital situation, if you could comment on any update, if any, on the approval process for your own partial internal model? Geir Holmgren: Okay. Yes. I'm very happy with the capital position. We have a strong solvency number, 191, which is above our target interval. We are -- the Board will do their assessment when it comes to dividend at year-end. We are not aiming for having any kind of surplus capital within the group. So this is definitely a part of the consideration when doing the assessment of ordinary and extraordinary dividends by year-end. Yes. Jostein Amdal: And -- yes, on the process, really no update at this point, really, we are still in the process with Norwegian FSA. Unknown Analyst: And so if I could follow up. And there's nothing interesting on the M&A profit you see at the moment? Geir Holmgren: No, we are focused on organic growth in the business. So we are not considering any structural way of growing the business. We are happy with the position we have in Norway and improving the business we're having in Denmark by many operational measures, and that's our focus now. And yes. Operator: [Operator Instructions] We'll now take our next question. Vinit Malhotra: This is Vinit from Mediobanca. So my one question would be just following up on your comment on the July weather effect driving the 1 to 2 points you mentioned on the underlying. I'm just curious, is there a similar explanation? Or is that the same explanation for commercial Denmark, which seems to have worsened about 4 points in the quarter when compared to 3Q '24, is there any comment on that you could share that also throw some light on what's happening there? Jostein Amdal: Thank you, Vinit. No, it's not related to the same cost. This is more just inherent quarterly volatility on our commercial book of business. So it's really specific explanation around it, we do see a somewhat increased level of both size and frequency of claims within that business, but nothing we regard as giving the indication of a future trend, so it's volatility. Operator: We'll move to our next question. Michele Ballatore: Yes. This is Michele Ballatore from KBW. So my question is related to the -- in general, the pricing regarding your comment earlier. So can you tell us what is the status of the -- your pricing, both in private and in commercial across Norway, Denmark and Sweden? Geir Holmgren: Starting with Norway. We have over time now, 2 years' time, we have had a quite heavily pricing measures going on, which also have increased the pricing level substantial -- substantially for both property and motor insurance. The average decrease within property was approximately 60% last year and promoter between 18% and 19%. The ongoing pricing measures are still having quite high price increases. But compared to what we have done in the past is a more moderate level, but we are talking about 12% to 13% price increases on average for property and motor insurance in Norway. That's above what we expect when it comes to inflation in the next 12 to 18 months, and it's about the frequency development. So -- but we have a very good and stable position in Norway, still high retention numbers and still I'm very happy to see our competitiveness in the Norwegian market, both on private and commercial side. When it comes to commercial, large parts of the portfolio have renewals at 1st of January. So we are preparing for that as well with quite high price increases due to what we have done in the types of considerations we are doing. In Denmark, we have price increases going on in the private segment. As I mentioned before, we have not been satisfied with the profitability in our private Danish business. We have had many, many quarters with red numbers. Happy to see that we have -- can pace of progress during second quarter and third quarter and cost profitability. But price increases are needed to improve that business in addition to cost measures and improving the cost efficiency of that business. On the commercial side, my opinion is that we have a very, very strong position in Denmark when it comes to our commercial business. We do have a good relationship with the main brokers. We have recognized brand name, a stable good portfolio. When it comes to results, it will be some kind of volatility from quarter-to-quarter, but our starting point going forward is at a very, very good level when it comes to our pricing power and our position in the commercial segment. And for Sweden yes, still ongoing pricing measures, I'm very happy to see that we have succeeded when it comes to improve our efficiency and to improve the way we are doing business with more digital solutions. And it's a small business, but we have -- but the business we have succeeded to improve profitability over time during the last couple of years, and I'm very happy to see that. Michele Ballatore: Sorry to follow up on Norway. If I understood correctly, you were talking about 12%, 13% price increases. I mean this is -- am I wrong in assuming I mean this is significantly above inflation. And you have, of course, quite sizable market share in Norway. But my point is, is this something -- I mean, is there the same level of discipline in the market? I'm just trying to understand what you're doing compared to what the market is doing in Norway, specifically? Geir Holmgren: Yes, good question. We started with repricing our private portfolio in Norway, third quarter 2 years ago. So it has been ongoing pricing measures above inflation now on -- during the last 2 years. My impression -- my view is that Gjensidige probably started that kind of price using pricing measures quite heavily, started that first in the Norwegian market. So we are actually a first mover when it comes to having the pricing measures. Yes. We still see that we have good pricing power. The retention rates are still high. We are prioritizing profitability before growth and used market situation, and you also see that our competitors are doing price increases that we are still continuing with quite high price increases as well. The pricing level you mentioned, that's correct. On average, 12.5% to 13% within motor property within private above inflation numbers as we see and frequency development, as we have seen in the past. So we also take care of the kind of claims mix which you will see from time to time when you get new cars in the market and different types of claims, and that would also change from quarter-to-quarter due to the weather conditions. Mitra Negård: Operator, are there any further questions? Operator: Yes, we have a question from Hans Rettedal. Hans Rettedal Christiansen: I guess it's a bit general, but I was just wondering sort of related to the previous question, do you see any effect from the price hikes that you've implemented now on customers, perhaps dropping coverage or changing coverage, changing terms of deductibles or any sort of movements on the customer side as an effect of kind of pricing having increased quite significantly over the past couple of years? Geir Holmgren: We spend more time with the customers now than we have done in the past due to everything that's happening in the market. But we also have a situation in Norway and in Denmark that we see quite high price increases due to what we have seen in the past. So the pricing discipline among our peers are at a high level as well. But this situation also makes the customer more -- doing more considerations regarding the insurance contracts, and they are checking prices more than had done in the past. But we don't see any negative impact on our business volume when it comes to that kind of activity. We still see that the retention numbers are still high. And I'm very satisfied with the level of customer satisfaction and customer loyalty. We do have in our -- especially our Norwegian portfolio. So my view is that we still have a very good pricing power when it comes to do all the necessary measures we have mentioned. Operator: And we have another follow-up question from Derald Goh from Jefferies. Derald Goh: The first one is a clarification. Could you say what are the rate increases that you're putting through in Denmark? Like what percentage is it? And how does it compete to the claims inflation in both private and commercial side of Denmark? And then could you maybe speak to how conservative you might be recognizing some of the margins? I think there are a few questions that has already being that the rate increases seem to be far outstripping the claims inflation number. Is it a case that maybe you are building up a bit of a reserve buffer? Jostein Amdal: I think on the first, what are the actual price or rate increases that we are putting through in Denmark, we haven't been as clear as we have been on the 2 main products in Private Norway, but we are looking at price increases that are well above our expected development in claims, which is a combination of claims inflation and number of claims, the claims frequency. So that's why what we're aiming for. And of course, as always, what we will get through will be a function also of the competitive situation there. And I remind you that our business is quite a lot larger in commercial than in private -- in Denmark, and we have very strong position within Commercial Denmark. We are looking at combined ventures at around 85%, 86%, depending on if you look at the quarter or year-to-date, which is a healthy profit. But we still continue to put through price increases above our expectations of the claims development. Operator: We have another follow-up question from Thomas Svendsen from SEB. Thomas Svendsen: Yes. This is Thomas again. So just on customer behavior in Private Norway. Is there -- this change in behavior by clients, do you see much more inbound call. Clients want to discuss the price? And also do you need to sort of get back to rescue clients that are leaving you? Is that an increased activity there within the net retention levels that you talk about? Geir Holmgren: We haven't seen any change this quarter compared to the last couple of quarters when it comes to that kind of activity. If you look at the number of customers, we are increasing the number of customers in our private portfolio in Norway compared to what we had year-end '24. So I'm very satisfied with the sales activity, distribution efficiency. But in all respect, we do talk more to customers during the last couple of quarters than we have done in the past due to all the high price increases, different types of customers meet across all insurance providers and for different insurance contracts. Jostein Amdal: I'll also remind you that the growth in Private Norway was although mainly price. We had an increase in the kind of the volume, the number of customers, as Geir mentioned, but also number of cars, houses, travel insurance policies and so on. So there's an underlying volume growth as well, although the main part of the growth is price driven. Operator: And we have another follow-up question from Mediobanca. Vinit Malhotra: Vinit from Mediobanca. The second question from me is on the inflation outlook, because I remember that we were all expecting you to provide an update on inflation in this quarter, and it appears to be unchanged versus Q2, whereas, obviously, in Q2, we heard you talk about reducing some of the price increases, and we see that in the numbers. So could you just comment that is this inflation being unchanged Q2 versus Q3, a surprise to you? And what are the drivers and are you still happy with lowering the price increase within Norway, even though inflation outlook is unchanged? Geir Holmgren: Starting with property in Norway, the actual inflation third quarter this year compared to -- or during the last 12 months was 4% and our expectation for the next 12 to 18 months is between 3% and 5%. That's a combination of repair cost and labor expenses in the property segment. We -- when it comes to motor, actual inflation in the last 12 months, around 4.4% expected. The next 12 to 18 months is quite big interval between 3% to 6% and the kind of uncertainties regarding trade barriers and what's happening in especially in the motor industry. And so it's a kind of a certainty, and that's the reason for having big interval as well when it comes to inflation, expected inflation going forward. But -- as mentioned, we are having pricing measures at the moment, which are definitely above the expected inflation, including also what you have seen on the frequency development in the past. Jostein Amdal: May I also add that remember that these are the what we tell you about are the price increases that are in place for policies that will be renewing now, whereas the accounting effect is a function also of all the price increases and the levels of price increase that we had over the last 12 months, which we have informed about every quarter, which have over the last 12 months, bit slightly higher than the ones we are currently putting through to the customers. So there's an overhang of kind of all the previous price increases now. And as Geir said, given that these price increases are higher than what we expect, at least as a future claims development, that should bode for a margin improvement also further down the road. Operator: And we have a new question from new caller, please introduce yourself and your affiliation. Unknown Analyst: It's Yulis from Autonomous Research. I was wondering if you could comment on the revenue growth dynamics in the near term. I mean, in the third quarter, your 13% year on growth was -- kind of helped by some one-off factors. At the same time, you're also -- because it can earn revenue, it's also benefiting and reflecting the higher rate increases that you implemented in the past year. So I was wondering whether that 13% is a sustainable level in the near term or whether it could potentially improve on the basis that it's reflecting the earned written premiums going forward? Jostein Amdal: First of all, I remind you that we talked about a onetime effect due to a change in principle on the home seller insurance. So the kind of current adjusted for currency, and that is 11.3%, which is kind of the level we report. And nonrecurring is, of course, not -- should not influence your forecast. So it's more like the 11%, which is based on the premiums that we have implemented over the last 12 months. And we've also given the growth numbers per segment. I think that is kind of the best way for you to try to predict what's going to happen. And we combined -- commented on the kind of effects on Commercial Denmark, which is 6.4%, rather than 4.4% in the currency, if you adjust for an accounting effect last year and also that the Swedish number due to the accruals is underlying a bit higher than what we have reported, which is 2.7%. So it's more in the 6%, 7% range as well. I think that is the building blocks you should probably use for your estimate of future revenue development. Operator: And we have another question, please caller introduce yourself. Qian Lu: It's Qian Lu, UBS. I just have one on the ongoing pricing measures in Norway, which slowed down quarter-on-quarter. I'm wondering if this is implying a more proactive strategy to enhance our competitiveness in the market and grow policy accounts? Or is it more of a reaction to increased competition in the market? And I guess related to this, given one of your peers has indicated that they plan to normalize price increases from next year onwards. I wonder how you are thinking about the time line for your price adjustments? Geir Holmgren: The price increases we are having at the moment and which are implemented as mentioned, it's above expected claims inflation and frequency development. The high level of price increases we have in the past is also a response on the frequency development we have seen during the last 2 years, especially on the motor side, but we have also seen some more volatility regarding property insurance, high number of fires in some quarters, more water-related claims and so on. So we have -- that's the reason in the past for doing quite heavily pricing measures and to improve the profitability, which was weaker going 2 years back. Going forward, I'm not in a position, where I can comment on future price increases due to antitrust and competition rules. But we are only commenting on what we're doing and have done at the moment, and we are still having price increases, which is above frequency development and inflation numbers. And we don't expect the frequency development we have seen in the past. We don't expect that to continue in the kind of way it has done during the last couple of years, but we have seen especially -- for instance, on the motor side, we have seen in the last quarter, underlying development on the frequency side is between 1% and 2%, and we still expect to have some kind of frequency development also for motor going forward, but not at certain levels we have seen during the last 2 years. Operator: And appears there are currently no further questions in the queue. With this, I will like to hand the call back over to Mitra for closing remarks. Over to you, ma'am. Mitra Negård: Thank you. Thank you, everyone, for good questions. We will be participating in roadshow meetings and a seminar during the next few weeks, starting with Oslo today and London next week. Please see our financial calendar on the website for more details. So with that, thank you for your attention, and have a nice day.
Linda Palsson: Good morning, everyone, and warm welcome to our presentation of Afry's Q3 results. I will begin with some of the highlights from the quarter, and then our CFO, Bo Sandstrom, will provide a more detailed overview of the financials. So in the third quarter, we delivered stable results and improved our EBITA margin to 6.4%. We also saw a positive development of the order backlog, which increased 3.6% compared to the same period last year, or 5.3% when adjusted for currency effects. We achieved this despite a decline in net sales with a total year-over-year growth of minus 5.1%. Similar to what we saw in the second quarter, currency effect had a significant negative impact on sales. For Q3, it amounted to minus SEK 118 million. Sales volumes were also impacted by a challenging market we experienced in parts of our business, mainly in our global division Industry. The third quarter was also the first within our new group structure and our three global divisions. Under the new group structure, we have intensified our efforts to improve utilization and to structurally address the cost base. As part of this, we have continued executing on the restructuring agenda that we initiated during the second quarter. And for the third quarter, we report restructuring costs of SEK 31 million related to this, and they are classified as item affecting comparability. So to summarize, I can conclude that we have been able to deliver stable results despite a decline in net sales, and we continue our efforts to pave the way for profitable growth. Moving on then to the market, and let's start with Energy. We see a continued strong long-term demand across segments and on a global scale. Market activity is particularly high in areas such as transmission and distribution, hydro, and nuclear. At the same time, we are seeing some short-term regional variations. This is evident in areas such as thermal, solar, and wind power, where, for example, demand in the Nordics is currently somewhat slower. With that said, this kind of variations are expected over time for a growing and dynamic sector like the energy sector. For Global Division Industry, the demand remains mixed. We see that persistent global uncertainty continues to impact the overall investment sentiment in several segments. For example, in the Pulp and Paper, where the demand for new large-scale projects remains at low level. The slowdown in the Nordic industrial market is also impacted in the automotive segment. At the same time, we see strong market opportunities in areas such as defense and also within mining and metals, which is encouraging to see. And finally, in Transportation and Places, public investments in transport infrastructure and water remains at good levels across the regions. The investments are driven by large-scale infrastructure programs and increasing focus on climate and defense-related projects. At the same time, we see that demand in the Nordic real estate market remains at low level and is mainly driven by refurbishments and public investments. So now let's dive a bit into our new global divisions and their performance in the quarter, starting with Energy. We continue to see high project activity in several of our segments, which reflects the overall market that we experience in Energy. We report negative total sales growth in the quarter, which is impacted by significant currency effects of minus SEK 45 million as well as short-term regional variations in some segments. We keep profitability at a solid level of 9.8%, which is slightly lower than last year. Moving on to our Global Division Industry, a challenging market reflects the net sales development in some of our segments. Despite this, profitability improved year-over-year, and this is due to the ongoing capacity adjustments and the improved utilization in the quarter. In the second quarter, we announced the acquisition of Reta Engineering, a Brazilian company specializing in project and construction management services with a strong foothold in the mining and metal sectors. And in the third quarter, we completed the acquisition, and the numbers are consolidated into the Industry division as of September 1st. And finally, Transportation and Places. Here, we saw some sales growth in the quarter, which was driven by high activity in projects as well as improved attendance rates. Also on the EBITDA side, we continue to see positive development, driven by the continuous efficiency measures that we do in the division. I would also like to highlight some of our key project wins in this quarter. In the Mining and Metals segments, we were selected by the British mining company, Anglo American, to lead the pre-feasibility study for the Sakatti mining project in Finland. The mine is planned as a highly automated underground operation with low carbon footprint. And once operational, the mine will supply critical minerals that are essential for Europe's green transition. And Afry's strong expertise in sustainable engineering makes this a great fit. On the Energy side, we have signed a strategic framework agreement with Svenska Kraftnät, Sweden's national grid operator. This is the second of two recently announced agreements and covers technical consultancy and design planning services within transmission and distribution, which will strengthen Sweden's energy system. Svenska Kraftnät is one of our key clients in the Swedish energy market, and we are pleased to strengthen our partnership with them through these agreements. In Denmark, we have won a contract in the Road and Rail segment, covering comprehensive advisory services in intelligent traffic systems, traffic management, and emergency preparedness. With Afry's extensive experience in traffic engineering, this project is a great opportunity to deliver innovative and effective solutions that improve road user safety and mobility. And with these great projects, I would like to hand over to you Bo. Bo Sandstrom: Thank you, Linda. So I will cover the financials for Q3 2025. Quarter three showed net sales of SEK 5.7 billion and EBITDA, excluding IAC of SEK 362 million. On rolling 12 months, we are now at SEK 26.2 billion on net sales and remain right below SEK 1.9 billion on EBITDA. On the rolling 12 months development compared to 12 months ago, we carry significant negative currency and calendar effects, explaining approximately SEK 600 million on net sales and SEK 240 million on EBITDA. In Q3, with a net sales of SEK 5.7 billion, adjusted organic growth came in at negative 3.7%, where volume continued to be pressured by capacity adjustments during the last quarters. As previously, the decline in volume was partially compensated by positive pricing. For Q3, we continue to see higher average fees, although at a somewhat lower level than the last number of quarters. Total growth is reported at minus 5.1%, affected also by FX movement from a strengthened SEK compared to last year. The negative adjusted organic growth in Q3 was sequentially lower, and global divisions, Energy and Industry, both saw lower growth levels. In particular, Industry experienced a challenging market and continued capacity adjustments pressure growth rates. In Q3, Industry also saw show lower sales of material than last year, affecting the quarterly growth. Transportation & Places showed sequential improvement, mainly driven from the Road and Rail segment. The order backlog continued to develop favorably and is reported at SEK 20.4 billion, improving to last year, but somewhat lower sequentially. Currency adjusted, the backlog has improved 5.3% to last year with improvements primarily from Global Division Industry. The Energy division maintained the largest order backlog in relation to net sales at a level in line with last year, but improving 3.7% adjusted for currency effects. EBITDA excluding IAC is reported at SEK 362 million, and the EBITA margin was at 6.4%. Calendar affects EBITA with plus SEK 15 million and the EBITA margin with plus 0.2% to last year, so that calendar adjusted margin was marginally better than last year. Currency movements have marginal impact on the EBITA margin, but on absolute terms, we estimate a negative currency impact of SEK 13 million on EBITA compared to last year. Global Divisions Industry and Transportation & Places support the calendar-adjusted margin development of the group, while Energy reports the highest margin of the global divisions, but somewhat lower than last year in this quarter. We reported utilization of 72% for Q3 in line with the rolling 12-month level. Looking at the year-over-year development by quarter, we see that Q3 '25 is again behind last year, but with a decline at a lower rate than seen last two years. Utilization is a clear focus for Afry, and we are determined to turn the negative trend. We report SEK 31 million restructuring costs as items affecting comparability in the quarter. The restructuring costs again primarily relate to redundancies across the group. In the new group structure, we will continue to address our cost base as well as making portfolio optimization in quarters to come. And we reiterate our estimate of restructuring cost of SEK 200 million to SEK 300 million in the quarters from Q3 '25 to Q2 '26. We have not guided on phasing, but given that the cost levels were slightly lower in Q3, it is fair to assume that they will, on average, be higher for the upcoming quarters. Cash flow from operating activities in Q3 was stronger than last year. Available liquidity remained at SEK 3.8 billion. Net debt remained at SEK 5.1 billion, where the positive operating cash flow compensates completion of the acquisition of Reta Engineering that was completed during the quarter. On net debt to EBITDA, we remain at 2.9x. Normal seasonality would provide significant deleveraging in the last quarter of the year and take us to around or below our financial target of 2.5x. With that, I leave back to you, Linda. Linda Palsson: Thank you for that, Bo. So I would also like to say a few words on our next chapter and what we've achieved in the third quarter. So as I mentioned in the start of today's session, we launched a new group structure in the third quarter. We now operate through three global divisions, representing 14 core segments, which all will drive global sales and delivery. This has been a key milestone, simplifying our operating model and paving the way for profitable growth. During the quarter, we also intensified our efforts to improve utilization and to structurally address our cost base. As a part of this, we continue to execute on our restructuring agenda, which remains on track and will proceed as planned through the second quarter of 2026. We have also reviewed our existing incentive structure, and we took action to align and harmonize them. This will reduce complexity and suboptimization and ultimately drive group performance. And finally, strategies for each global division and segment are now in place, which provides a strong foundation to deliver on our strategic ambitions going forward. And even if we are still in the initial stage of our strategy execution journey, it's encouraging to see the progress we are making. As we finalize our group strategy and have the organizational foundation in place, we are ready to fully move on to strategy execution. We will share more details about this at our upcoming Capital Markets Day. In parallel, we are progressing according to plan with the implementation of the fit-for-purpose operating model while continuously working to address operational efficiency and our cost base. And as mentioned, we are looking forward to welcoming you to our Capital Markets Day on November 4, where we will be presenting our new strategic direction and our plans ahead. I'm excited to meet many of you there and to good discussions and insights. And with that, let's open up for the Q&A session. Linda Palsson: [Operator Instructions] And let's start with Raymond Ke from Nordea. Raymond Ke: A couple of questions from me. I'll take them one by one. The short-term regional differences in energy, could you elaborate a bit in terms of whether it's due to market, certain customers being hesitant, or where you are in these projects? Any color to help us understand sort of how long this might persist would be helpful. Linda Palsson: They are related to wind, solar, and partly to thermal, and it's mostly related to the Nordic region. We don't expect it to be that long-term. We see it more as a temporary bump, but there are delays in some investment decisions from clients in the Nordic market. On the other hand, on the same segments, we see a strong growth in Asia in the same segment. Raymond Ke: And regarding your restructuring plans ahead then, which, of course, may impact personnel. How many FTEs or how should we think about this when we compare sort of consultants against back-office employees? What's the sort of share of headcount reduction distribution there? Bo Sandstrom: Well, I'll provide some light on it, and then hopefully, you get even more light when we come to CMD. We haven't provided guidance on that split. But like we elaborated last time, Raymond, you will have a split between different kind of redundancy costs coming out from this restructuring. There will be a part that is more on a managerial level. There will be a part that is more based on the support structure of the company, and then there will be an operational part as we move ahead into the restructuring efforts. We experienced that in Q2. We see it again in Q3, and we'll elaborate a bit further when we come to CMD. Raymond Ke: Looking forward to that. And just one final one. On the new incentive structure that you talked about there briefly, could you maybe just clarify how was it before and why you expect it maybe to make a major difference or where you expect it to make a difference this time around? Linda Palsson: As we talked about before, now when we have deep dived into our organization and the setup and our ambition to simplify, we actually saw that we had a lot of different incentive structure programs that were somewhat contradictory to each other. So, by harmonizing this, this will drive our efficiency, it will drive internal mobility. And ultimately, it will support the development of Afry. Then we'll open up for Johan Dahl from Danske Bank. Johan Dahl: Just on this -- interesting to hear that you finalized the plan for the new divisions here to sort of improve the margins. I presume that's some sort of multiyear progression to achieve financial targets. And the question is, you have been quite clear on cost-out actions in the near term, the coming 12 months. But what other buckets do you identify in this plan to sort of drive towards financial targets? If you could just broadly outline those. Linda Palsson: I can start. Yes, of course, we have the cost side, but we also have the revenue side. And here, I mean, our sales effort is paving the way for that. As you have heard over the last quarters, we have been quite successful in securing important contracts going forward, and we are building our order backlog. And this will continue. So we've continued to put a lot of efforts into our sales force and also to our structured key account approach. And this is evident that this is a way forward for us. So that's related, I would say, to the revenue side and our structure going forward. And then maybe you should comment, Bo, on the other initiatives. Bo Sandstrom: No, I can just add to it. I mean, ever since we started the work with the next chapter of Afry that we will present in just a couple of weeks, it has been clear that it's a multi-component effort that we're working on, kind of starting in sense with the clients and the commercial aspect of the business that we're doing, but also looking at what is actually the portfolio and how do we structure that and then leading into the operating model and the cost-out actions that you are referring to. So it is a multifaceted, and we'll do our best to explain that in better detail also on CMD. Johan Dahl: Do you see currently -- you talked about positive pricing in the operations. But can you see currently in the order book proof of concept that the sort of intense -- you start talking about improving the order book quality quite some time ago. Can you see that for a fact now that's having an effect? Or is that still something you expect going forward? Bo Sandstrom: Yes, I'll elaborate a bit. It is tricky. I mean the order book is, of course, a very long-term -- it's a very long-term order book, particularly given what we do and the length of many of our large projects. At the same time, the market is developing and the market is developing fairly short-term in that sense. So it's that combination. But of course, we're happy with the order book and the profitability margin in it, and the steps that we're taking towards a better profitability through the order book. But it's really difficult to see, in a sense, quarter-by-quarter, the development. But over time, we're happy with where we are also compared to 1 or 2 years ago when we started talking about these things. Johan Dahl: Final question. Just the increase, 5%, 6% FX adjusted on the order book, when will that translate to revenues, do you think? Or when would you see that inflection point on reported revenues? Linda Palsson: I start, yes. Yes. And that is exactly the tricky ones, as the order book contains of large projects over many years, and it's also very short-term. So of course, we see that continuously, we will improve, but it's difficult to say exactly what kind of revenue is converted from the order book in Q4, for instance. So -- but we see a slight improvement quarter-by-quarter. Next question is from Fredrik Lithell from Handelsbanken. Fredrik Lithell: Maybe a follow-up on Johan's question there. The order book, is it broad-based the development? Or is it sort of very narrow in certain pockets of exceptionally good demand? Or how does that look? Linda Palsson: No, I would say it's broad. We present the differences between our new 3 global divisions here. But you can see that there are some differences. And of course, that Energy, for instance, had relatively stronger order book than the others. But I would say with -- it is a broad base that we have in our order book. So it's no segment that is without orders. Fredrik Lithell: Another question is on sort of your support platforms. You have earlier, and we have talked at length many times before about your upgrades of CRM, HR, ERP, maybe billing systems, maybe something else. Where are you on that route? And how big of an impact have you had so far in better being able to follow your trends, offboarding, onboarding, billing rates, and what have you. So it would be interesting to hear you elaborate. Bo Sandstrom: Yes. It is a broad question, Fredrik. But we come quite a bit on that journey. It is a long-term journey because, like you said, it involves kind of several parts of the company. It's not just a one system, and then you can measure how far you are progressing. It's a combination of different things. I would say that we're more than halfway in that sense, but we still have a bit to go kind of to get to fully there. And successively, we're getting -- I would say that in the phase where we are right now, we're getting better and better transparency. We're shifting into the part where we can also translate the transparency to efficiency and improvements. But that is also kind of a gradual shift, if that is elaborating a bit on your wide question. Fredrik Lithell: Yes, yes, it's very helpful. And on that, just a follow-up, do you have any sort of heavy lifting? Are there any specific big steps in this project in any way? Or is it really just a gradual work every day? Bo Sandstrom: It is, to a large extent, from an overall perspective, it is a gradual work. Then, of course, we have internal milestones that we are kind of kicking off as we go. But from kind of from an investment and cost perspective, we're not expecting any significant effects kind of shifting upwards that will be material for the group as such. Linda Palsson: Thank you, Fredrik. Then we welcome Johan Sundén from DNB, Carnegie. Johan Sundén: A few questions from my side as well. I think, firstly, a little bit curious to hear some kind of high-level comments on the kind of sentiment within the organization. How has voluntary employee turnover developed over the summer? How is commitment among employees? Just curious to hear those kind of feedbacks. Linda Palsson: Thank you. That's a good question. I would start by saying it was a big shift for us of what we are doing. With that said, I think it's quite logical and well understood why we're doing it. So there's a lot of commitment within the organization towards our new strategic direction. But of course, when you are impacted directly, there will be some additional question marks. So it's not all sort of 18,000 super happy. But I would say the overall direction is good, and we have our employees with us on this journey. The second one was related to the employee turnover. Was that right? Yes. Actually, we haven't seen any sort of negative development on that. So it's in line with what we have seen the last quarters. So no change there. Healthy level. Johan Sundén: And also on the kind of more of an HR place, maybe the leadership within Transportation places, where are we in the process there? Linda Palsson: Yes. So Robert Larsson will do his last day here at AFRY, the 31st of October. And then from 1st of November, we have an acting solution in place, Tuukka Sormunen, who will take on the division as acting. And we are in the final stages of the recruitment process for the successor. Johan Sundén: And then maybe a little bit of a nitty-gritty question for Bo. Firstly, on the order backlog, and there's been pretty negative news flow regarding the forestry sector in the Nordics recently. Should we be worried for cancellation or those kind of things that could impact the order backlog going into Q4? Bo Sandstrom: No, I wouldn't be particularly concerned, Johan. I mean you're right. We're not floating a lot of positive news now, but we haven't really had that positive news flow over the last couple of years. So we're not necessarily looking at a large order backlog that is particularly exposed. So I don't see a big kind of downside risk on that from where we are right now. Johan Sundén: That's encouraging. And then 2 small nitty-gritty questions. Firstly, on working capital. If it's just possible, been a busy reporting day, I haven't had time to go into all the details, but can you please go through the dynamics between the kind of how you come with such good working capital release in this quarter? Bo Sandstrom: Yes. I mean you're right. We had a healthy working capital flow on an overall perspective, particularly if you look at a normal Q3 for us, it was a bit stronger this year than it was in a normal year. We don't have a big reason for it to present in that sense. You should expect that, that would be more seasonal swings also, then looking at how Q3 is normally then composed, then this could very well kind of have a contradicting effect in Q4. That's how it's normally played out. But it's nothing out of the ordinary in that sense, more referring to seasonal swings that we saw in a positive way, of course, in Q3. Johan Sundén: And on overhead cost, which has trended a little bit higher first quarter this year, I think you mentioned in Q1 that there was some intra-year phasing that pushed that up a little bit in Q1. Should we expect very low overhead cost in Q4 then? Or how should we think there? Bo Sandstrom: I mean we're clearly -- I mean, now we closed Q3, so we're pretty far into the year. So as been seen throughout the year, we will expect -- I mean, you should expect a higher full year than last year. That's pretty evident where we are kind of 3 quarters out. Looking at Q3 specifically, then the main rationale for the year-over-year is we have -- we carry a very high activity level currently, or particularly during this year. That's one side of it. And then we have some currency-related effects that sneak into the net group cost that we report as well. But in general, I would more look at the activity level that we are carrying at this moment. Johan Sundén: And when should we kind of be ramping down to more normal levels? Is it '26? Bo Sandstrom: Yes. No, I don't necessarily see that. I mean, over the next few quarters, we will be looking at more normalized levels. That is to be expected. Then whether it will happen in Q4 or going into '26, too early to say. But this is not -- it's not a permanent level, I would envision. Linda Palsson: Next question is from Dan Johansson from SEB. Dan Johansson: Two additional ones. Linda, I think you spoke briefly on the billing ratio declined slightly versus the quarter last year, but perhaps less so than previously. And connecting this to the restructuring program, how do you think it's progressing versus the initial plan you had when you introduced it? I know it's a short period. And I assume you did not see much now in Q3, it's a summer quarter. But you have taken out SEK 120 million of restructuring costs now. So for Q4, if we look into that, do you expect to see some first positive signs in terms of utilization? Or will it take a bit longer to see the effect from that? Just so I get it right from a run rate level here going forward. Linda Palsson: I start? Yes. Our important topic of utilization rate. And actually, as you saw on both slides, this was actually the -- it was still lower compared to Q3 last year, but not as much lower as we have seen before. So that's why we say we see some early positive signs within the quarter, and we also see the end of the quarter going better. So we will keep our focus on this question during Q4 for sure and during next year. In terms of the capacity adjustments, that is ongoing at the moment. And as Bo said, we can also expect relatively more in Q4 from that adaptation, our capacity towards our current workload, and see that we get that right, and by that, also improving our utilization rates going forward. Bo Sandstrom: Just to add a bit on it. I mean we are progressing according to our plan, and we're seeing the effects that we expect in a sense so far. But still, also with the guiding of the restructuring program that we launched right before the summer, I mean, you're completely right. We just passed a summer quarter. And then looking at the SEK 200 million to SEK 300 million that we guided, we have just stepped into that bucket, so to say, in terms of restructuring efforts. So where we are right now, a bit early days still, but we are seeing the effects that we anticipate, but more to come. Dan Johansson: And maybe a final one, if I may. In the industry, I'm still a little bit stuck in the past on your old segment structure here. So just to improve my understanding, the industry margin uptick, is that mainly an effect of your Process Industry business, the Pulp and Paper part, I guess? Or is it more like a -- the local broader industry part you have in Sweden that's a little bit better than last year, i.e., the Industrial Digital Solutions, we look at your previous segment structure. What sort of the improvement here in the quarter? Bo Sandstrom: If you're talking about the order backlog, it's more related to the Process Industries part. If you're looking at the net sales development and the negative growth, it's more related to the historical the IDS part. Linda Palsson: Thank you, Dan. And those are the questions we had today. Super. So then we say thank you for today, and we look forward to talking to you again at the Capital Markets Day. Have a nice weekend.
Operator: Good morning, ladies and gentlemen, and welcome to the Hilltop Holdings Third Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] Please be advised that this call is being recorded today, Friday, October 24, 2025. I would now like to turn the conference over to Matt Dunn. Please go ahead. Matthew Dunn: Thank you. Before we get started, please note that certain statements during today's presentation that are not statements of historical fact, including statements concerning such items as our outlook, business strategy, future plans, financial condition, credit risks and trends in credit allowance for credit losses, liquidity and sources of funding, funding costs, dividends, stock repurchases, subsequent events and impacts of interest rate changes as well as such other items referenced in the purpose of our presentation are forward-looking statements. These statements are based on management's current expectations concerning future events that, by their nature, are subject to risks and uncertainties. Our actual results, capital, liquidity and financial condition may differ materially from these statements due to a variety of factors, including the precautionary statements referenced in the preface of our presentation and those included in our most recent annual and quarterly reports filed with the SEC. Please note that the information presented is preliminary and based upon data available at this time. Except to the extent required by law, we expressly disclaim any obligation to update earlier statements as a result of new information. Additionally, this presentation includes certain non-GAAP measures, including tangible common equity and tangible book value per share. A reconciliation of these measures to the nearest GAAP measure may be found in the appendix to this presentation, which is posted on our website at ir.hilltop.com. I will now turn the presentation over to Jeremy Ford. Jeremy Ford: Thank you, Matt, and good morning. For the third quarter, Hilltop reported net income of approximately $46 million or $0.74 per diluted share. Return on average assets for the period was 1.2% and return on average equity was 8.35%. To summarize the quarter, PlainsCapital Bank realized a continued expansion in net interest margin, while generating strong growth in both core loan and deposit balances. PrimeLending's results reflect a dampened summer home buying markets where both volumes and margins remained under pressure, and HilltopSecurities produced a strong pretax margin from robust net revenue growth across all 4 of its business lines. Speaking to the results of each operating business in the third quarter. PlainsCapital Bank generated $55 million of pretax income on $12.6 billion of average assets, which resulted in a return on average assets of 1.34%. Net interest margin at the bank increased by 7 basis points as we continue to actively manage down the cost of interest-bearing deposits. Loan yields at the bank increased 4 basis points on a linked-quarter basis as the portfolio further repriced into a higher rate environment. Despite the highly competitive market in Texas, the bank produced strong core loan growth and saw a continued expansion within the loan pipeline. We expect competition to remain elevated in the coming quarters as we work to increase our market share and absorb modestly higher anticipated payoffs within the loan portfolio. Total core deposits within our markets at PlainsCapital increased by 6% on a linked-quarter basis. This growth was partially attributable to seasonal cash inflows from select large balance customers. Further, PlainsCapital did return $225 million of broker-dealer suite deposits during the quarter. Results in the quarter included a $2.6 million reversal of credit losses. This was primarily driven by improvement in asset quality and stronger underlying economic conditions on the collective portfolio. Will is going to provide further commentary on credit in his prepared remarks. Overall, the bank showed continued healthy trends in loan growth and pipeline development, core deposit growth and interest expense management and credit metrics that illustrate the quality of our loan portfolio. Moving to PrimeLending, where the company reported a pretax loss of $7 million during the quarter. The second quarter's subdued mortgage origination volumes persisted into the third quarter as the industry did not experience the increase in home buying activity that typically occurs during the summer months. Notably, existing home sales across the country reached their lowest level in over 30 years. While gain on sale margins did increase on a linked quarter basis, this was more than offset by a decline in origination fees. However, there were positive developments from the quarter as mortgage rates did modestly subside and home inventory saw a further reversion back towards more normalized levels. Homebuyers do continue to face affordability challenges, and we expect heightened competition for mortgage origination volume to keep margins and fee under pressure. As we enter the seasonally slower fourth and first quarters of the year, we will continue to focus on reducing fixed expenses, while recruiting talented mortgage originators in order to restore stand-alone profitability at PrimeLending. During the quarter, HilltopSecurities generated pretax income of $26.5 million on net revenues of $144.5 million for a pretax margin of 18%. Speaking to the business lines at HilltopSecurities. Public Finance Services produced a 28% year-over-year increase in net revenues as the business continued to realize strong annual increases in both advisory and underwriting fees. Structured finance net revenues increased by $4 million from the third quarter of 2024, primarily due to a decline in market rates, which increased buy-side appetite for call-protected mortgage product. In Wealth Management, net revenues increased by $7 million to $50 million, when compared to the third quarter of 2024. The strong year-over-year increase is due to higher advisory and transaction fee revenue within the Retail segment, and an increase in stock loan revenues due to wider spreads. Finally, the fixed income business showed a 13% increase in net revenues on a year-over-year basis as industry volumes remained robust within its municipal products segment. Overall, HilltopSecurities produced a very strong quarter for both the breadth and depth of offerings within the broker-dealer performed well. HilltopSecurities continues to invest in core areas of expertise as we leverage our national brand that is built on trust and a long-term focus on serving our clients. Moving to Page 4. We Hilltop maintained strong capital levels with a common equity Tier 1 capital ratio of 20%. Additionally, tangible book value per share increased over the prior quarter by $0.67 to $31.23. During the period, we returned $11 million to stockholders through dividends and repurchased $55 million in shares. Now I'd like to give a brief update on an important transition of the bank's leadership team. In November, PlainsCapital Bank's Chief Credit Officer, Darrell Adams, plans to retire. Darrell has been with the bank for over 37 years and his leadership has created the credit culture that we have today. I want to thank Darrell for his partnership and his friendship as well his incredible contribution. Fortunately, the bank has strong depth, so we promoted Brent Randall to become our new Chief Credit Officer. Brent has been with the bank for over 26 years, formerly serving as the Dallas region Chairman. Coinciding with this transition, Thomas Ricks, who has been with the bank for over 22 years, will become the new Dallas Region Chairman. This is an exciting time for PlainsCapital Bank as we elevate proven leaders from within. With a solid team in place, we believe that we are poised for continued growth and success, while staying true to the bank's legacy and credit culture. Thank you. I'll now turn the presentation over to Will to discuss our financials in more detail. William Furr: Thank you, Jeremy. I'll start on Page 5. As Jeremy noted, for the third quarter of 2025, Hilltop reported consolidated income attributable to common stockholders of $45.8 million, equating to $0.74 per diluted share. Quarter's results, including an increase in net interest income, supported by growth in commercial loans and the ongoing work to optimize our deposit cost as the Federal Reserve has continued lowering short-term interest rates. In addition, the quarter includes a $2.5 million reversal of provision for credit losses and a $1.3 million reduction in the allowance for unfunded reserves, which is reflected in other noninterest expenses. To discuss the allowance in more detail, I'm moving to Page 6. Hilltop's allowance for credit losses declined during the quarter by $2.8 million to $95 million, resulting in a coverage ratio of ACL to loans HFI of 1.16%. As is noted in the graph, specific reserves increased in the period by $4.7 million. This increase was offset by an improvement of $5.2 million in the collective reserves, reflecting ongoing upgrades in our portfolio, and a $2 million improvement in the economic scenario outlook, which reflects Moody's September baseline scenario. While we recognize there's been a flurry of recent credit news in the marketplace. We continue to monitor the portfolio closely, focusing on areas that we believe may pose future risks to the bank. While at any point, we could have an idiosyncratic event with an existing client, we do not anticipate any significant systemic risk across the portfolio at this time. In addition, we have evaluated our loans to nondepository financial institutions, and those totaled $195 million or approximately 2.4% of the outstanding loans HFI, excluding loans in our mortgage warehouse lending business at September 30. Lastly, as we've stated over time, the allowance for credit losses, estimates can be volatile as the computations and assessment include but are not limited to the following: assumptions related to economic activity, inflation, interest rates, employment levels and specific credit activities within our portfolio. All of these can be volatile from period-to-period. Turning to Page 7. We Net interest income in the third quarter equated to $112 million, including approximately $600,000 of purchase accounting accretion versus the prior year third quarter net interest income increased by $7.4 million or 7%, primarily driven by improving deposit costs resulting from our ability to realize higher deposit beta levels than previously estimated, coupled with the growth in new higher-yielding commercial loans. During the third quarter, net interest margin increased versus the second quarter of 2025 by 5 basis points to 306 basis points. The increase in NIM was largely driven by stability in deposit costs from period to period and improving loan yields, reflecting the positive impact of new business booked throughout the first 3 quarters of 2025 and improving margin lending yields at HilltopSecurities. Our current internal rate outlook anticipates 1 additional 25 basis point rate cut in 2025 and followed by 2 additional rate reductions in the first half of 2026. Under this rate scenario, we expect that NII levels will remain relatively stable over the coming quarters with modest downward pressure during the seasonally weaker mortgage reduction period that typically occurs in the first quarter of 2026. Additionally, we anticipate that interest-bearing deposit betas, which have averaged approximately 70% through the current rate cycle will gradually decline, but remain above 60% for the duration of the cycle assuming rate reductions align with our current projections. Turning to Page 8. Third quarter average total deposits are approximately $10.5 billion, stable with prior year levels. I would note that while average deposit balances are flat year-over-year, we have intentionally reduced broker-dealer sweep deposits held at the bank, as they can be deployed through HilltopSecurities broader suite program. These suite deposits do remain a valuable source of continued liquidity for Hilltop should the need arise. Over the last year, we have grown bank customer deposits, principally in the interest-bearing products by focusing on providing consistent and competitive prices. In addition, we're very pleased with the retention of our noninterest-bearing deposits over the last year, and the work in our treasury services team continues to do to serve our customers and support the growth in our customer deposit base each day. Related to deposit rates, both interest-bearing deposit costs and the cost of total deposits remained relatively stable versus the second quarter 2025 levels. We do expect the deposit rates will decline further as the timing of the most recent rate reduction caused the rate movements to be executed late in the third quarter. I'm moving to Page 9. Total noninterest income for the third quarter of 2025 equated to $218 million versus the same period in the prior year, mortgage revenues declined by $3.4 million as origination volumes were relatively stable with the prior year, and gain on sale margins for those loans sold to third parties improved by 8 basis points to 226 basis points. While we believe revenues and production from the Mortgage segment have begun to stabilize at this lower level, we also feel that it remains important to note the ongoing challenges in mortgage banking provide a combination of higher interest rates, home prices, insurance and taxes remain constructive to overall market demand. That said, even in the face of these challenges, we do believe that the overall mortgage market is slowly improving, and we expect that this improvement could continue into 2026. That in, the leadership team at PrimeLending is focused on continuing to optimize costs and productivity across the [indiscernible] back office functions, growing our client-facing sales team across the country and optimizing our pricing to support profitable growth in the future. Securities and investment advisory fees largely represented at HilltopSecurities experienced solid growth versus the prior year period. Driving the growth was significant improvement from public finance, whereby net revenues increased by $8.3 million and growth in Structured Finance and Wealth Management, in which each business grew net revenues by approximately $5 million versus the third quarter of 2024. Structured Finance benefited from improved secondary margins, while Wealth Management has experienced consistent AUM growth over the last year. Turning to Page 10. Noninterest expenses increased from the same period in the prior year by $7.6 million to $272 million. The increase in expenses versus the prior year third quarter was driven by increases in variable compensation, largely related to higher noninterest revenue production at the broker dealer. Looking forward, we expect that expenses other than variable compensation will remain relatively stable at current levels as we remain diligently focused on prudent growth of revenue producers, while continuing to gain efficiencies across our middle and back office functions. We are on the Page 11. Third quarter average HFI loans equated to $8.1 billion. On a period-ending basis, HFI loans increased versus the second quarter 2025 by $166 million, driven largely by new origination volume and the funding of prior commitments in commercial real estate. On an ending balance basis, loans have grown versus the third quarter of 2024 by $248 million or 3.1%, again, largely driven by growth across our commercial real estate products of 8% or $338 million. In addition, commercial lending pipelines continue to expand during the third quarter, increasing by over $750 million versus the second quarter of 2025. While this remains a positive trend, the market for funded loans remains intense with competitive pressures coming from both pricing and structure. In the face of this competition, our leadership team remains diligent in maintaining our conservative credit culture and adhering to our credit policies. Based on performance year-to-date, coupled with our current pipeline and expectation for payoffs during the fourth quarter, we expect full year average total loans to increase 0% to 2% from 2024 levels, excluding mortgage warehouse lending and any retained mortgages from PrimeLending. Turning to Page 12. Starting in the upper right chart, NPA levels have declined from the second quarter of 2025 by $5.3 million to $76.5 million and continues to reflect generally positive trends in our held-for-investment loan portfolio. Moving to the bottom left chart. Net charge-offs for the quarter equated to $282,000 or 1 basis point of the overall loan portfolio. As I remarked earlier, we do not anticipate any systemic exposures across our portfolio. We remain vigilant in our assessment of risk and negative credit migration and are focused on early detection and aggressive workout when necessary. As is shown in the graph at the bottom right of the page, the allowance for credit loss coverage at the bank ended the third quarter at 1.2%, including mortgage warehouse lending. I'm moving to Page 13. As we move into the fourth quarter of 2025, there continues to be a lot of uncertainty in the market regarding interest rates, inflation and the overall health of the economy. Given these uncertainties, we remain focused on controlling what we can, produce quality outcomes for our clients, associates and the communities we serve. As is noted in the table, our current outlook for 2025 reflects our current assessment of the economy and the markets where we participate. Further, as the market changes, and we adjust our business to respond, we will provide updates to our outlook on our future quarterly calls. Operator, that concludes our prepared comments, and we'll turn the call back to you for the Q&A section of the call. Operator: [Operator Instructions] Our first question is from Michael Rose, Raymond James. Michael Rose: Well, just wanted to start on the NII guide. I was a little surprised to see that it wasn't increased because it would imply, I think, a pretty decent step down in margin in the fourth quarter and maybe some earning asset contraction. Maybe if you could just kind of discuss the near-term puts and takes and if I'm missing anything? William Furr: Thanks for the question. A few things going on. We are and remain asset-sensitive on the balance sheet, certainly from an NII perspective and as we noted, we do have additional -- an additional rate cut in the fourth quarter expected. Also, we are -- we've kind of gone through our balanced outlook, and we didn't increase our overall loan growth profile, either largely based on, again, what we're seeing in terms of production, but also what we're expecting in terms of paydowns. So that's part of it. The other part that kind of comes into play there is when we do get a Federal Reserve rate reduction, we have the immediate step-down impact of both our cash level balances, which will remain well over $1 billion as well as the adjustable rate loan portfolio. So that step occurs almost immediately, while again, the deposit beta activity and reductions blend [indiscernible] in over time just as we saw here during the third quarter. So those are all the factors that we have in place. We also -- we're currently at an interesting spot from a loan yield perspective, where we've got a pool of loans that are resetting higher. We've got from -- that were originated at different points earlier years earlier. We also have loans that are -- that, as I just noted, would reset lower from a variable rate comp perspective given a rate reduction. And then we've got new business going on. Our new business, our commercial loans going on the books right now are at about 690 basis points overall total loans. And so we continue to feel good about that. But again, the guide really reflects a confluence of a series of inputs as we evaluate the portfolio going into the balance of the year. Michael Rose: Okay. That's helpful. I appreciate that color. And then maybe just as a follow-up. You guys bought back more stock this quarter than I think we've really seen outside of some of the accelerated programs you guys have -- some of the tender offers you guys have done in the past, and I know you raised the buyback potential. Are you trying to signal that buybacks are going to be more leaned into a little bit more here? I mean, it would make sense given where the stock is trading and how much capital you have. And then separately, Jeremy, if you can just discuss kind of the M&A outlook for you guys. We've seen a couple of deals here in Texas as of late. I know you guys look at a lot of things. So would just love an update on both those areas. Jeremy Ford: Okay. Thanks. So yes, I think that's correct. From where we're trading right now and given our excess capital position, we are trying to be more consistent with our share repurchases. And so that's why we have done what we've done this year, which we're happy about and also why we've asked for the increase in authorization. On the M&A front, we've really seen, as everybody knows, a lot of out-of-market entrants into Texas, which seems to be a targeted growth state for a lot of banks. And certainly, we're familiar with most of the targets. I would say that we're viewing this as where can we find the opportunity in this dislocation both in clients and bankers and how do we use this as a means for us to be able to grow. Michael Rose: Okay. Helpful. Maybe just one last one for me. I know your auto portfolio is in rundown mobile, we have seen some issues in that sector. So I just wanted to address that, and I believe you guys recently showed up in intercredit that was publicized as well as having some exposure. So I would just love any thoughts or color there. William Furr: Yes. I think your point is appropriate for the auto financing. We ended the year '21 and about $290 million of commitments. That's down to $77 million. So to your point, we've been working our way through that portfolio. As we've noted, really almost 18 months ago, we did have 2 auto note clients that we moved into nonaccrual and we've been aggressively working with those customers to kind of recoup and repay over time and again, continue that workout effort to today. So we feel like we saw some of the implications early, and we were able to kind of get on top of those. And so nothing else to report in kind of any additional incremental exposure there as it relates -- as it relates to the one -- the name you're referring to there were showed up in a press release there. I think we would say we've got no direct exposure lending exposure to that entity. Michael Rose: Okay. Great. Operator: Our next question comes from Woody Lay, KBW. Wood Lay: Just as a quick follow-up on the auto and maybe specifically those 2 relationships on nonaccrual. Is there any exposure to subprime auto there? William Furr: I mean they are -- yes, in the regard of kind of the nature of some of the notes that our loans [indiscernible] for certain there's certainly some subprime exposure there. But again, through our workout program and through our oversight, we're kind of monitoring that very closely. So we feel like we've got it appropriately reserved and appropriately being managed on a daily basis. Wood Lay: Got it. Okay. And then maybe shifting over to the broker dealer was a really good fee income quarter there. I think if you look at the broker dealer guidance, it implies those fees sort of taking a step back to the -- to the first quarter, second quarter level. So I could maybe just go into a little more detail on what drove those fees higher in the third quarter and maybe not -- maybe what was sort of a, a one-quarter benefit? William Furr: Yes. I mean I think we saw very solid activity in our public finance space year-on-year and have continued to see that. And we also are seeing some improvement in structured finance as well as wealth management. So there's -- I'd say there is some recurring nature, but also some episodic items in there that we wouldn't expect necessarily to continue. In addition with the rate reductions we're seeing, we've talked about this in the past. We are expecting to see over time, overall sweep revenues from those excess sweep deposits to kind of come down. So we're modeling that and monitoring that as well. as well as the pipelines and just business activity we're seeing in the portfolio. So nothing systemic there to say it's going to meaningfully decline. But the third quarter was a very strong quarter across really all portions of the broker-dealer, which as you've seen and as investors have seen over time. Generally, you have 1 or 2 of the business units there, perform well and then others maybe not quite as strong, but third quarter really reflected the strength of kind of the business hitting on all cylinders. Wood Lay: Yes. And then it looks like in that business, the efficiency ratio was lower than what it has been in the past couple of quarters. Are any of those expenses getting pushed out in the fourth quarter, or -- was it just lower efficiency businesses driving some of that fee growth? William Furr: Yes, largely mix. So the pretax margin was 18.3% in the quarter, that's up from 13.7% in the prior year. And again, the mix of where some of the business gets done and certainly Hilltop Securities can meaningfully impact pretax margin on a quarterly basis. And so again, all the businesses really had strong performance, but we can see and expect to see a reversion back to -- I think we've talked about low teens 12% to 13% kind of pretax margins is a more normal level for that business to operate. Jeremy Ford: And I agree with Will. I would just say the efficiency also is coming through with just higher revenue. So our noncomp expense was relatively flat, a little bit better. I feel really positive about our public finance business. That's the mainstay of HilltopSecurities and a lot of work, great team. They've had a really strong year in our municipal advisory business, which has been strong, and we think it will be strong into 2026. And we have a really comprehensive approach in public finance because they have a really strong underwriting team that did have a really good quarter. And then we have a lot of spoke products, including asset management, that was additive. So everything really came together there. Another point I'd make, and it's kind of been consistent is -- our Wealth Management business is much improved over several years. And really, the increase year-over-year is due to fees and advisory fees and the work we've done on advisory level and not just related to the sweep revenue. So we feel positive about that. Wood Lay: All right. That's really helpful color. Operator: Our next question comes from Jordan Ghent, Stephens. Jordan Ghent: I just had one question kind of about the broker-dealer. Could you maybe remind us about the primary and secondary effects from the government shutdown that it might have on broker-dealer and all the business line items? William Furr: Yes. Jeremy Ford: I think like as far as the broker-dealer is concerned, we haven't had any primary effects of the government shutdown and anything of that nature. As far as government shutdown just across the board, we were concerned about some of the SBA processing. But other than that, really, I don't know of anything else that's risen to -- our attention. William Furr: I think that's right. I mean we've got also in the mortgage space, USDA and some of the other agencies there, government agencies that are being impacted, whether it be lower staffing or no staffing at the point. So -- that's just a processing implication and slowing down and processing as it relates to kind of mortgages, SBA and some of those other groups. But to be clear, our public finance group really focuses on local municipalities not kind of the federal government in that regard. Operator: There are no further questions. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Hello, and welcome to the Flagstar Bank NA Third Quarter 2020 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Sal DiMartino, Director of Investor Relations. You may begin. Salvatore DiMartino: Thank you, Sarah, and good morning, everyone. Welcome to Flagstar Bank's Third Quarter 2025 Earnings Call. This morning, our Chairman, President and CEO, Joseph Otting; along with the company's Senior Executive Vice President and Chief Financial Officer, Lee Smith, who will discuss our results for the quarter and the outlook. During this call, we will be referring to a presentation which provides additional detail on our quarterly results and operating performance. Both the earnings presentation and the press release can be found on the Investor Relations section of our company website at irflagstar.com. Also, before we begin, I'd like to remind everyone that certain comments made today by the management team may include forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements we may make are subject to the safe harbor rules. Please refer to the forward-looking disclaimer and safe harbor language in today's press release and presentation for more information about risks and uncertainties, which may affect us. When discussing our results, we will reference certain non-GAAP measures, which exclude certain items from reported results. Please refer to today's earnings release for a reconciliation of these non-GAAP measures. And with that, I would now like to turn it to Mr. Otting. Joseph? Joseph Otting: Thank you, Sal, and good morning, everybody, and welcome to our first quarterly earnings as Flagstar NA. We are very pleased with the operating results this quarter. Our third quarter performance provides further tangible evidence that are successfully executing on all our strategic priorities. Our operating results improved significantly throughout the year and during the quarter as many of our key metrics continue to trend positively. From an earnings perspective, our adjusted net loss of $0.07 per diluted share narrowed substantially compared to the second quarter, while our pre-provision net revenue continues to trend higher, putting us on a path to profitability. In addition to the improvement in earnings, we had several other positives during the quarter, highlighted by this was a breakout quarter in our C&I business as we originated $1.7 million in new loan outstandings and realized overall net loan growth of $448 million in the C&I portfolio. Our net interest margin expanded for the third consecutive quarter, up 10 basis points to 1.91% compared to the second quarter. And our operating expenses remained well controlled and were down year-over-year $800 million on an annualized basis, significantly ahead of our plan. Criticized and classified assets continued to decline, down $600 million or 5% on a linked quarter basis and $2.8 billion or 20% year-to-date, while nonaccrual loans were relatively stable. We had another strong quarter of multifamily and CRA payoffs of $1.3 billion, and this has continued the trend over the last couple of quarters where we've been above our forecast on real estate payoffs. And our provision for loan losses decreased 41%, while our net charge-offs declined 38%. Now turning to Slide 3 of the presentation. We have highlighted the key management areas that we have focused on and how we have performed in each category. First, to improve our earnings, we have reported smaller net loss every quarter for the past year due to a combination of factors, including margin expansion and cost reductions. Lee has a slide later on that he'll cover this in detail, but the trend line on this lines up very well with what we've communicated about a return to profitability for the company. Second, we continue to implement our commercial lending and private banking strategy, which I will discuss in more detail shortly. And third, we proactively managed our multi-family and commercial real estate portfolio to continue to reduce our CRE concentration. And fourth, our credit quality profile, which has resulted in net charge-offs as we are starting to see signs of stabilization in the loan portfolio. The next several slides highlight the tremendous progress we've made in our C&I business. Starting on Slide 4, this was a breakout quarter for our C&I lending. Our strategy in the C&I space really began after the June 2024 strategy as we hired Rich Repetto to come in and lead our commercial, private banking and commercial banking strategy. This strategy focuses on 2 primary businesses, specialized industries and corporate and regional commercial banking. Both of those gained momentum in the third quarter, driving C&I loan growth up nearly $450 million or 3% versus the second quarter. This was the first positive growth quarter since early last year. Our 2 strategic focus areas led the growth with total loan growth of $1.1 billion, up 28% compared to the prior quarter. On the next slide, you will see the positive trends in new commitments and new loan originations over the past 5 quarters. Compared to the second quarter, new commitments increased 26% to $2.4 billion, while originations grew 41% to $1.7 billion. More importantly, you can see that the contribution to this growth was from our 2 strategic focus areas was quite impressive. Specialized Industries and corporate and regional commercial banking experienced a 57% or almost a $750 million increase in commitments to $2.1 billion versus the prior quarter. Originations in these 2 areas increased 73% or nearly $600 million to $1.4 billion. Both areas have seen a consistent upward trend since the third quarter of last year, reflecting steady pipeline growth and a high success rate in converting opportunities. Just as important as our C&I pipeline, which currently stands at $1.8 billion on commitments, up 51% compared to the $1.2 billion at this time last quarter, providing strong momentum for the fourth quarter C&I loan growth. Also important is the number of new relationships we've added. Year-to-date, we've added 99 relationships to the bank, including 41 just in the third quarter. I believe these 2 data points reflect the industries we chose to focus on and the talented individuals we brought into the company, most who are mid-career bankers with 25 to 35 years of experience in their respective industries and have impressive Rolodexes. So far in 2025, we have doubled the number of relationship bankers and support staff in our 2 main focus areas to 124 and plan to add another 20 in the fourth quarter. Turning to Slide 6. This provides an overview of our specialized industry business and the growth trends both in commitments and originations over the past 5 quarters. You can see they had strong growth in both commitments and originations during the third quarter. Slide 7 provides a similar overview of the corporate and regional banking business. This business also had a very strong quarter in both total commitments and originations. We believe it has reached an inflection point after successfully building out 4 new segments and reinvigorating legacy businesses, showing that our relationship-based strategy is yielding positive results. We expect to see further growth in the C&I business as existing bankers continue to deepen their banking relationship and the addition of new bankers. Additionally, we see potential opportunities from recent merger activity. Many of these are right in our core markets to selectively add talented bankers as well as winning new business relationships. The next slide lays out the road map we employed to solidifying the balance sheet and reposition the bank for growth. This is a little bit of a down history lane, but we have increased our CET1 capital ratio by nearly 350 basis points, ranking us among the highest, best capitalized regional bank amongst our peers. We also fortified our ECL through a rigorous credit review process where we reviewed virtually every single multi-family and commercial real estate loan. We significantly enhanced our liquidity position and we reduced our reliance on wholesale funding, including flub advances and brokered deposits nearly $20 billion year-over-year, lowering our cost of funds and boosting our net interest margin. And in addition to what the items are identified on this slide, there could be many more. Obviously, our expenses, our deposit costs and our risk governance are other areas that we're heavily focused on. Now turning to Slide 9. You can see the impact on our adjusted EPS from the balance sheet improvements I just talked about on the previous slide. Our adjusted diluted loss per share has consistently and significantly narrowed over the past 5 quarters, including a 50% quarter-over-quarter reduction in the third quarter loss to $0.07. Now with that, I'd like to turn it over to Lee to review our financials. Lee Smith: Thank you, Joseph, and good morning, everyone. During the third quarter, we continued to execute on our strategic vision to make Flagstar 1 of the best-performing regional banks in the country. We achieved net interest margin expansion of 10 basis points quarter-over-quarter, paid off another $2 billion of high-cost brokered deposits as we further reduced our funding costs and continued to demonstrate excellent cost controls, continuing the surgical approach to cost optimization of the last 9 months. Our unadjusted pre-provision net revenue improved by $14 million quarter-over-quarter, while our adjusted pre-provision net revenues improved $6 million versus the second quarter. On the credit side, multi-family and CRE payoffs were again elevated at $1.3 billion, of which 42% was substandard. And criticized and classified loans declined about $600 million or 5% during the quarter and 19% or $2.8 billion on a year-to-date basis. Net charge-offs decreased $44 million and the provision decreased $24 million, both compared to the second quarter. And we ended Q3 with a CET1 capital ratio of 12.45%. As Joseph previously mentioned, we had net C&I loan growth during Q3 of approximately $450 million following the origination of $2.4 billion of new C&I commitments, of which $1.7 billion was funded. We're very pleased with the performance of our C&I businesses. We've surpassed our target of $1.5 billion of funded C&I loans per quarter and believe we can fund $1.75 billion to $2 billion per quarter going forward assuming no change in market conditions. We will also start originating new CRE loans in the fourth quarter that are of high credit quality and geographically diverse. We've also started to experience growth in our health investment residential portfolio, which increased $100 million on a net basis. We're doing exactly what we said we would do, and I want to complement the entire Flagstar team on another successful quarter. Now turning to the slides and specifically Slide 10. This morning, we reported a net loss attributable to common stockholders of $0.11 per diluted share. We had the following notable items in the third quarter. First, we had a $21 million fair value gain on a legacy investment in Figure Technologies following its September IPO. Second, we recorded a $14 million increase in litigation reserves related to the settlement of 2 legacy cyber matters dating back to 2021 and 2022, 1 of which involved a third-party vendor. And third, we had $8 million in severance costs related to FTE reductions. Therefore, on an adjusted basis, after also excluding merger expenses, we reported a net loss of $0.07 per diluted share, significantly better than last quarter and in line with consensus. On Slide 11, we provide our updated forecast through 2027. We tweaked our 2025 noninterest income assumptions resulting in full year 2025 adjusted diluted EPS and in a range of minus $0.36 to minus $0.41 per diluted share. Our guidance for both 2026 and 2027 remains unchanged. One of the highlights this quarter was the double-digit increase in net interest margin. Slide 12 shows the trends in our NIM over the past several quarters which expanded 10 basis points quarter-over-quarter to 1.91% and has now increased for 3 consecutive quarters. In September, our NIM was 1.94% compared to 1.91% for the third quarter, and we expect to see margin improvement going forward, driven by a lower cost of funds as we manage our cost of funding lower lower-yielding multifamily loans paying off a path or if they remain with Flagstar resetting at higher rates, ongoing growth in the C&I and other portfolios and a reduction in nonaccrual loans. Turning to Slide 13. Another highlight this quarter was the decline in noninterest expenses. Our noninterest expenses remained well controlled as they declined another $3 million in the third quarter and are down 30% year-over-year or approximately $800 million on an annualized basis. Slide 14 shows the growth in our capital over the past 5 quarters and the strength of our CET1 ratio. At 12.45%, our CET1 ratio ranks amongst the best relative to our regional bank peers. We will continue to prioritize reinvesting our capital into growing the C&I and other portfolios as we remain focused on diversifying the balance sheet and growing earnings. Slide 15 is our deposit overview. Similar to last quarter, we further deleveraged the balance sheet by paying down $2 billion of brokered deposits at a weighted average cost of 5.08%. Going back to the third quarter of 2024, we have now paid down almost $20 billion of flub advances and brokered deposits. In addition, approximately $5.6 billion of retail CDs matured during the quarter at a weighted average cost of 4.50%. We retained approximately 85% of these CDs and they moved into other CD products that were approximately 30 to 35 basis points lower than the maturing product. In the fourth quarter, we have another $5.4 billion in retail CDs maturing with a weighted average cost of 4.30%. These deleveraging actions, CD maturities and other deposit management strategies have allowed us to reduce deposit costs by 13 basis points quarter-over-quarter and liability costs by 10 basis points. We also saw an increase in interest-bearing deposits of $1.5 billion as a result of increased commercial, private bank and mortgage escrow balances. We continue to actively manage our cost of deposits and are targeting a 55% to 60% deposit beta on all interest-bearing deposits with the Fed rate cuts. Slide 16 shows our multi-family and CRE par payoffs for the quarter, we continued to witness significant par payoffs of approximately $1.3 billion, of which 42% or about $540 million were rated substandard. Approximately $195 million of this quarter's payoffs were multi-family greater than 50% rent regulated. We continue to witness strong market interest for these loans from other banks and from the GSEs. The par payoffs are also leading to a substantial reduction in overall CRE balances and in our CRE concentration ratio. Total CRE balances have declined $9.5 billion or 20% since year-end 2023 to about $38 billion, aiding our strategy to diversify the loan portfolio to a mix of 1/3 CRE, 1/3 C&I and 1/3 consumer. In addition, the payoffs have led to a 95 percentage point decline in the CRE concentration ratio to 407% since year-end 2023. The next slide is an overview of our multi-family portfolio, which has declined 13% or $4.3 billion on a year-over-year basis. Our reserve coverage on the overall multi-family portfolio of 1.83% remains strong and is the highest relative to other multifamily focused lenders in the Northeast. Furthermore, the reserve coverage on those multifamily loans where 50% or more of the units are regulated is 3.05%. Currently, we have about $14.3 billion of multi-family loans that are either resetting or contractually maturing between now and year-end '27, with a weighted average coupon of less than 3.70%. If these loans pay off, we will reinvest the proceeds in our C&I or other portfolios or pay down wholesale borrowings. And if they stay with Flagstar, the reset rate is significantly higher than the existing rate, which provides a NIM benefit. On Slide 18, we've once again provided significant additional information on our New York City multi-family loans where 50% or more units are rent regulated. This tranche of the multi-family portfolio totals $9.6 billion compared to $10 billion last quarter with an occupancy rate of 99% and a current LTV ratio of 70%. Approximately 55% or $5.3 billion of the $9.6 billion are pass rated and the remaining 45% or $4.3 billion are criticized or classified, meaning they are either special mention, substandard or nonaccrual. Of the $4.3 billion, $2 billion are nonaccrual and have already been charged off to 90% of appraisal value, meaning $370 million or 16% has been charged off against these nonaccrual loans. Furthermore, we also have an additional $40 million or 2% of ACL reserves against this nonaccrual population. Of the remaining $2.3 billion that are special mention and substandard loans between reserves and charge-offs, we have 7% or $165 million of loan loss coverage. We believe we're adequately reserved for charged these loans off to the appropriate levels and with excess capital of $1.7 billion before tax we think we're more than covered were there to be any further degradation in this portion of the portfolio. Slide 19 details the ACL coverage by category. The ACL declined $34 million compared to the second quarter to $1.128 billion, a result of lower HFI loan balances and stabilization in property values and borrower financials. The overall ACL coverage ratio, including unfunded commitments was 1.80%, broadly in line with last quarter at 1.81%. On Slide 20, we provide additional details around our asset quality trends. Criticized and classified loans continued to decline, down approximately $600 million compared to the second quarter. On a year-to-date basis, we have made tremendous progress in reducing these loans as they are down $2.8 billion or 19% since the beginning of the year. Our net charge-offs decreased $44 million or 38% compared to the prior quarter to $73 million, and the net charge-off ratio improved 26 basis points to 0.46%. Nonaccrual loans, including those held for sale, were $3.2 billion, relatively stable compared to the prior quarter. I would add that approximately 41% or $1.3 billion of nonaccrual loans are performing. The 1 borrower we moved to nonaccrual status in the first quarter who subsequently filed for bankruptcy remains in the bankruptcy process, but there is an auction in progress that we hope conclude sometime in early 2026, which will allow us to resolve our position sometime during the first half of next year. With respect to the 30- to 89-day delinquencies at quarter end, approximately $274 million of the $535 million were driven by 1 borrower who typically pay subsequent to month end and has done so again. As of October 20, $166 million of their delinquent loans have been brought current. More importantly, after quarter end, we sold approximately $254 million of these borrowers' loans above our book value, thereby reducing our exposure to this borrower. Finally, we continue to review the 2024 annual financial statements for all borrowers. And today, we've completed the review on the majority of them. I'm pleased to report that the vast majority have stayed consistent compared to the prior year, indicating an overall stable trend for our borrowers. We continue to deliver on our strategic plan and are excited about the journey we are on and the value we will create over the next 2 years. With that, I will now turn the call back to Joseph. Joseph Otting: Thanks, Lee. Before moving to Q&A, I'm also happy to share that last Friday, we closed on our holding company reorganization after receiving all necessary regulatory and shareholder approvals. As a result of this reorganization, Flagstar Financial, Inc. was ultimately merged with Flagstar Bank NA, with Flagstar Bank NA as the surviving entity. As I mentioned on last quarter's call, this reorganization simplifies our corporate structure, reduces our regulatory burden and lowers operating expenses by approximately $15 million. As always, we remain extremely focused on executing our strategic plan, including transforming Flagstar into a top-performing regional bank, creating a more customer-centric relationship-based culture and effectively managing risk to drive long-term value. Now we would be happy to answer your questions. Operator, please open the line for questions. Operator: [Operator Instructions] Your first question comes from Manan Gosalia of Morgan Stanley. Manan Gosalia: So I wanted to focus on the NII guide for the year. If I take the guide for the full year, relative to the progress year-to-date, it implies that NII should be up about 5% to 15% Q-on-Q next quarter. You're making good progress on the C&I loan growth side, NIM has been rising consistently and you should benefit from additional rate cuts from here. But at the same time, earning assets have also been shrinking as you pay down some of those broker deposits. So can you talk about how we should think of each of these spots next quarter and into the first half of next year? Lee Smith: Yes, absolutely, Manan. So first of all, what I would say is in terms of the balance sheet, you'll have noticed that it only declined $500 million in despite us paying off another $2 billion of brokered deposits. And so we think at the end of this year, Q4 will probably be the low point. So the balance sheet will be -- and this is total assets $90 billion to $91 billion. And then we expect the balance sheet to start to grow as we move through 2026. So I think that kind of level sets everything first and foremost. We do expect to see continued NIM expansion as we move forward. And we have multiple levers to do that, as you know. So I mentioned in my prepared remarks, as the multi-family loans continue to pay off or as they continue to hit their reset dates, they have a weighted average coupon that is less than 3.7%. So if they stay with Flagstar, with our sort of pricing reset is 5-year flub plus 300 or prime plus 2.75, and we're staying sort of firm to that. So we get a benefit if they reset and stay with Black Star. If they pay off then we're taking those proceeds and investing them into the C&I growth, or we use them to pay down high-cost either broker deposits or we can pay down flub advances. So that's sort of 1 area. We continue to show excellent growth on the C&I side. What we didn't mention is of the new loan originations in the third quarter, the average spread to sofa on all of those was 242 basis points. So a very, very healthy spread on the new C&I loans that we're bringing on to the balance sheet. And we -- you heard Joseph talk about the pipeline. We think that we continue those growth trajectories going forward. We're also going to start originating new CRE loans going forward. And this won't be rent-regulated New York City loans, we're looking for high quality, geographically diversified CRE loans in other parts of that footprint, the Midwest, California, South Florida, and we're starting to see the mortgage health investment portfolio increase, and we think that will increase further in a lower rate environment. I think we've done a tremendous job managing the cost of our fundings down through paying off those high-cost brokered deposits and flub advances, but we've also reduced core deposit costs without Fed cuts. And with Fed cuts, I mentioned, we expect a 55 to 60 beta, and so that's a focus area on the liability side. And then finally, as we reduce our nonaccrual loans, and we do expect to see a reduction in the fourth quarter, that will also help our NIM. So I know that was a long answer, Manan, but there are a lot of moving parts, as you can see. Manan Gosalia: That was great. That was the detail of that. was looking for. Maybe just a follow-up to your comments on the C&I side. I mean, the originations were clearly really strong this quarter. Can you talk about is this a new -- is this a good run rate for the next few quarters? Should it accelerate from here? And maybe talk about how you're managing risk as you do this because it's a rapid build-out and there is some macro uncertainty out there. Joseph Otting: Yes, sure. Thank you. So actually, our viewpoint is that we will continue to see additional growth beyond what we saw this quarter. We do see somewhere between $1.7 billion billion to $2.2 billion is kind of our run rate going forward per quarter. And I'll recall that a number of the people who have joined the company haven't been here for much over 3 or 6 months. And so most of these people are really getting settled into the bank and generating opportunities for the company. So we kind of think we're an engine that's firing on 3 of the 6 cylinders today and have really an opportunity to get really the whole franchise performing at a higher level in the next couple of quarters. That's in addition to we will add 20 people in the fourth quarter, and we'll add probably somewhere around 100 people in 2026. So we'll continue to add. The strategy there really is to -- we highlighted in the slides, we have a specialized industry strategy where we have 12 verticals. Virtually all the people who are leading those verticals and the people that have joined us are 20- to 35-year bankers. So they come to our company with lots of depth and knowledge in those particular verticals from an expertise perspective. And then from a risk underwriting perspective, we have the line unit embedded in the line is what we call the first line of defense and there are credit products people who sit in the first line who will underwrite and do the due diligence on the company independent of the relationship managers. And then those credits that are recommended based from the first line of defense to the actual credit approvals in the bank. That is a separate function that reports up to our Chief Credit Officer, and then who actually directly reports to me. So we think there are good checks and balances in our process to make sure that we're adhering to our credit standards without significant deviations from underwriting policies. Lee Smith: And Manan, 1 thing I would add, again, just looking at Q3, if you look at the average loan size of the new originations, it was just over $30 million. So as we've said before, we are not taking outsized positions in any 1 name or industry. We're diversified in terms of the size of the positions we're taking. We've said before, our sweet spot is maybe $50 million to $75 million. But in Q3, the average new loan commitment size was a little over $30 million, and that gives us comfort as well. Joseph Otting: And I will leave at a good point. On Slide 4, it does highlight the other businesses like Flagstar Financial and leasing and the MSR lending and a couple of others where actually, we thought the exposures to a number of individual borrowers were too high. And so we brought down in those portfolios significant amounts of high individual company exposure, and that's resulted in some of the declines year-to-date in those portfolios. We do think that will start to stabilize now as we've made our way through those portfolios in 2025. Manan Gosalia: That's great. And just a clarification, the $1.7 billion to $2.2 billion that you mentioned, that's originations, correct? Joseph Otting: That is correct. Operator: The next question comes from Dave Rochester with Cantor. Unknown Analyst: On the $1.7 billion to $2.2 billion that you just talked about in C&I production, when do you think you ultimately hit that? Is that a 1Q timing on that or further into next year? And then given that and the restart of the CRE originations and what you're doing on the resi production front, at what point do you expect total loans will start to grow again next year. And then with the 100 people or so that you're planning on hiring for next year, are there any new verticals contemplated in that? Lee Smith: Yes, so I'll take the first part of your question. So as I mentioned to Manan, we think the low point for the balance sheet will be the fourth quarter and will be sort of between $90 billion and $91 billion. And our expectation is we'll see -- we'll start to see a little bit of balance sheet growth in Q1 of 2026, not a lot, but a little bit. And then it will really start to sort of trend upwards in Q2, Q3 and Q4 of next year. So that's kind of how we think about the balance sheet growth and the inflection point. Unknown Analyst: Got it. So you're also thinking not just assets, but total loans actually stabilizes next quarter. Or no, that's the [indiscernible] and then you go from there stabilization. Lee Smith: That's right. That's exactly right. Yes. Joseph Otting: And then regarding your question on the $2.4 billion and the $1.7 billion, we do expect growth on those numbers both this quarter and going forward. So I mean that number clearly can get north of $2 billion on a pretty consistent basis. Unknown Analyst: That's great. And then just on the elimination of the holding company, I know that, that exempts you from annual stress tests whenever you cross over $100 billion or whatever that threshold is at that point. Any other regulatory relief you get from that as well? I know you save on the cost front, but anything else that you'd point to? Joseph Otting: Yes. I mean in a lot of instances, you have examinations that cover the same thing from the OCC to the Fed. So you eliminate that, you also eliminate a lot of staff interaction with the Fed. So there's also caution you can't exactly quantify but frees up resources in time. So we obviously think it's the right thing to do. And for us, we do not do today nor do -- plan to do non-admitted activities. So it was a logical step for us as an organization. Operator: The next question comes from Ebrahim Poonawala with Bank of America. Ebrahim Poonawala: So I guess, maybe a question around, from an expense standpoint. So you talked about all the hiring over the coming year. When you look at the adjusted expenses, about $450 million in your outlook for next year. It seems like expenses are kind of flatlining at this run rate. Just talk to us in terms of incrementally like what's the cost save opportunity left within the expense base to invest and like the puts and takes around why they could be higher versus lower than what you have forecasted? Lee Smith: Yes. No problem at all, Ebrahim. First of all, again, I want to take the opportunity to complement the entire Flagstar team because as both Joseph and I noted. If you look at the Q3 '24 run rate and the Q3 '25 run rate, that's an $800 million reduction in noninterest expense. And that's a lot of work. It's blood, sweat and tears. But the team has just done an unbelievable job taking that amount of expenses out. As we look forward, you're exactly right. If you look at our sort of existing or current run rate, it's right around $450 million a quarter, which if you look at our guidance, is the top end of the 2026 expense guidance [indiscernible] $1.8 billion. And as we think about further opportunities moving forward, I think they're in 3 sort of areas. One, we think we can continue to reduce FDIC expenses. There's a lot of components to that. We've done a nice job of optimizing the liquidity component with reducing wholesale borrowings and broker deposits, and we'll continue to do that. But there are other measures that come into play as it relates to profitability, asset quality, regulatory relationship. And so we think that on an ongoing basis, we can continue to drive those FDIC expenses down. We also believe we can continue to drive the vendor costs lower. I think we've done a nice job looking at vendor costs over the last 9 months, but I think there's more we can accomplish. And then I think we've got some pretty significant technology projects that are in the works that will be coming to fruition as we move into 2016 and beyond, and that's going to allow us to drive more efficiencies and cost reductions out as well. Joseph Otting: Just to note to Lee's question or comment about technology, we talked about -- we had 6 data centers in the company, 2 for each legacy organization. During last quarter, we reduced that down to 4, and we will ultimately get down to 2 sites. So if you think about running 6 data centers, legacy somewhat outdated old technology and moving towards a new platform that allows us to take out significant costs in that process. Ebrahim Poonawala: Got it. Got it. That's helpful. And I guess maybe just a separate question around all things sort of noninterest-bearing deposits, the balances, seems like they might be stabilizing, and I get it takes time for loan relationships to transfer into core deposits coming on. Just -- but give us a sense of NIB deposit growth from here and just either from a dollar balance or from a percentage of overall mix, how you see that trending? And what's the time line you think between lending relationships coming over from the bankers you brought on to that translating into core depot growth? Lee Smith: Yes, yes. So it does take a little bit of time, and we're seeing some traction. But obviously, as we move forward, we think we'll see a lot more traction. And so as we think of the noninterest-bearing deposit growth, I think it really comes from 3 areas, and you've touched on one. As we bring on all of these new C&I relationships, we certainly want to leverage those relationships to bring on more deposits, including operating accounts ultimately and those noninterest-bearing deposits. We also see growth on the noninterest-bearing deposit side coming from our private bank. As we mentioned on the last call, we've hired Mark [indiscernible] to run the private bank. He has done a nice job of reorganizing the private bank and making sure that all the right product sets are in place. So we look like a real sort of private wealth bank. And so we think that we'll be able to leverage the private bank and those products to drive noninterest-bearing deposits as we move forward. And then obviously, our 360 bank branches, they play an important role in continuing to grow noninterest-bearing deposits with our existing customer base and bringing in new customers as well. So that's how we see the noninterest bearing deposit growth, where it's coming from. Operator: The next question comes from Jared Shaw with Barclays. Jared David Shaw: Maybe starting on the credit side. Should we think that as we move forward and as you see the runoff in multi-family and CRE, maybe the loans that don't run off tend to have the weaker characteristics. So should we expect to see maybe a continued growth in CRE NPLs, but not corresponding growth in provision like we saw this quarter that you feel like those marks are adequate and sufficient? Alessandro DiNello: Yes. I think this -- first of all, we had a really strong reduction of nonperforming loans in the second quarter. This was a little bit more of a flat and we were working, as Lee referenced, on a large portfolio sale. But in the fourth quarter, we currently have -- we have line of sight on reductions of about $400 million of nonperforming loans. That could be as high as $500 million in the fourth quarter. We've also really like dedicated a team now that's focused on our nonperforming loans where they are still paying and that represents roughly 42% to 43% of our nonperforming loans. So we have a high percentage of the nonperforming loans that continue to pay and per the terms and conditions of the note, it's just our analysis of their cash flows that come off of those single source or repayment properties are insufficient. So those borrowers are drawing on cash flow or liquidity to continue to maintain those loans current. So we're really focused, and we do see a downward trend in those NPAs. Just our classifieds were down, our NPAs were virtually flat this quarter, but we do see a trend line of those going down. Lee Smith: Yes. And again, Jared, as you know, when we did the credit review in '24, we were deliberately punitive on ourselves. And the other point I would add to what Joseph mentioned, and I mentioned this in my prepared remarks, you've got 1 borrower that is in bankruptcy that is $500 million of those nonaccrual loans. And as I said, that's moving into an auction process. And so once that moves through the process and concludes, we feel that we'd be able to deal with a large chunk of those nonaccruals in the early part of 2026. That's in addition to the $400 million pipeline that Joseph mentioned. Jared David Shaw: Okay. Okay. Great. So that's -- those are 2 separate components. That's good color. And then as we look at guidance and your comments around assets being the low point in the fourth quarter, what's your -- what should we be thinking about in terms of either total asset growth or total loan growth as we look out for year-end '26 and '27 to tie in to that guidance? Lee Smith: Yes. No problem. So as I mentioned, at the end of '25, we think the balance sheet will be sort of $90 billion to $91 billion. We think that at the end of '26, our balance sheet will be around high $96 billion to sort of high $97 billion, right around that range. And then in '27, we think we get it to about $108 billion, $108 billion, $109 billion. Operator: The next question comes from Mark Fitzgibbon with Piper Sandler. Mark Fitzgibbon: I wondered if you could share with us of the $1.7 billion of C&I originations you had in the third quarter, what percentage was participations? And also curious if you had any tricolor or first brand exposure because I did see a little uptick in nonaccruals in the C&I bucket? Joseph Otting: Yes, that was 1 credit. But yes, we're running -- 50% to 60% of our loans are participations. But the difference, I would say, Mark, is the people that are joining the company that are bringing those opportunities, they have direct relationships with management. We have not purchased participations where we are not directly interacting with the management of the company, which is a little bit different than basically have a trading desk and somebody buying loan participations. These are all active relationships that have been ongoing in any of those in our document, we require the relationship manager to do a relationship model of what we expect to get in both fee income and deposits by coming into that relationship. So we have a pretty high standard of what our expectations are, if we're going to get involved in a credit. Lee Smith: Just to confirm, we had no exposure to first brands or Tricolor or any of the other names that have been mentioned this quarter and obviously, we're pleased about that. We've looked at that. We do have a very, very small MDF book. A big portion of that is our MSR lending. So we feel good about that and no exposure to any of the names that have been disclosed previously. Mark Fitzgibbon: Okay. And then just 1 separate question. What is -- I guess I'm curious, what does the note sale market look like today on sort of modestly challenged New York multifamily loans? Is there much depth to that? And where can kind of notes be sold today? Can you give us any kind of sense on that? Lee Smith: I mean, I would -- the way I look at it is, if you -- the noise that has been sort of emerging over the last 3 or 4 months regarding New York City rent regulated, we still had $1.3 billion of par payoffs in Q3, 42% of which was substandard. So rather than looking at no payoffs, I think there's still a lot of demand for this asset class from other lenders and the GSEs as I pointed out earlier. And I think that's good. And I think in a declining interest rate environment, I think you're probably going to see -- for us, you're going to see more par payoffs as well as we move forward. So that's just going to help us get to that diversified balance sheet of 1/3, 1/3, 1/3, even more quickly. Operator: The next question comes from Bernard Von Gizycki with Deutsche Bank. Bernard Von Gizycki: Lee, in your prepared remarks, I believe you mentioned that $195 million of the par payoffs of the $1.3 million were regulated over 50%. And I think that total portfolio declined almost $1 billion. Just wondering, were there any asset sales in that particular portfolio? And any updates you can provide on how we should think about the size of this book going forward in the next 6, 12 months? Lee Smith: Yes. Well, I think number one, I think you'll continue to see decline, mainly as a result of the par payoffs that we're seeing each quarter. Joseph mentioned, from a nonaccrual point of view, we do have an active pipeline that is $400 million that we have a line of sight into and hope to close in the fourth quarter. And so that's how I sort of look at the sort of movement in that rent regulated book going forward. And again, the reason we disclose these numbers, Bernie, is we're not seeing any adverse selection. We're seeing par payoffs across the board in every CRE asset class, whether they be market, rent-regulated less than 50% or rent regulated more than 50%. So -- and that is our expectation going forward. We'll continue to see the par payoffs and reductions across all of those multifamily asset classes. Bernard Von Gizycki: Okay. And then maybe tying the payoffs with loan yields. I know they increased 3 basis points second quarter. We've seen that tick up. But just given the paydowns of the nonaccruals that mix shift from multifamily to C&I and now the growth in C&I that should be coming through nicely over the next several quarters, why not -- are you expecting a higher change in the yields? Or are these par payoffs that are coming at higher yields, holding that back a bit? Just want to get a little bit of sense of the expansion on loan yields from here. Lee Smith: Yes. The par payoffs, it's not every -- the par payoffs are not everything below 3.7%. Some are loans that have already reset. So if you look at the blended weighted average coupon of the $1.3 billion that paid off in Q3, it was 5.7%. So it's a blend of low coupon, but also loans that have already reset. And so that's the phenomenon that you're talking about or you see. Joseph Otting: And some of the some of the payoffs also were coming out of some of the legacy C&I businesses, where we're reducing the exposures down in those credits where they're in the LIBOR plus, on average, [ 240 ] range. So some of those payoffs that does have some impact on that. Operator: The next question comes from David Chiaverini with Jefferies. David Chiaverini: So your paydown activity has been very strong past couple of quarters. Any line of sight -- you mentioned about the $400 million in NPLs for the fourth quarter. Any line of sight on total paydown activity anticipated for the fourth quarter? And how much of that could be substandard? Joseph Otting: I think we have expectations for a similar range of $1 billion to $1.3 billion in the fourth quarter. So I would say that's been somewhat unabated, so to speak, of especially in the market of the regulated New York multi-family. Surprisingly, as Lee commented, that continues to be a robust refinance out by the agencies and a couple of the large banks who continue to add to their portfolios. So we don't see any material change. We had originally modeled at the start of the year, somewhere between $700 million and $800 million a quarter, and that just continued to accelerate in the second quarter. Obviously, the third quarter was the strongest at $1.5 billion. But I think those numbers paying somewhere in that range of $1 billion to $1.5 billion in the fourth quarter. David Chiaverini: Great. And then could you refresh us with thoughts on Mamdani and the impact his potential election win could have on provisioning looking out to next year? Joseph Otting: Yes. So his -- one of his stated items was that he would freeze the rent regulated rate increases for 4 years. The first impact of that is the decision would be made mid-next year by the commission on those freezes. So it's probably a little bit delayed. But the way we look at it is we go through that entire portfolio, we received 97% of the financials on that portfolio. And we go through property by property analysis, both of the cash flows and then if the cash flows are insufficient, we do an appraisal on the properties. So we feel like we have a pretty good handle on. It would take -- this year, as Lee commented, we're pretty much through that portfolio. We did not see material changes to it. And that's because I think the really big items that impacted those properties, which was -- a lot of insurance was up 30%, 40%, 50% they had increased labor rates, increased HVAC, we did not see that carry through for continued increases into this year. So I think the way you model that out as you just make the assumption they're going to be flat revenues, and you really need just to understand the expense side because that will make the difference whether these properties are positive on a cash flow basis. Lee Smith: I think a couple of other things I would just add to what Joseph said, I mean rent increases for the next 12 months have just gone into effect. So the 3% for 1 year, 4.50% for 2 years. that runs through September of 2026. But I think what will have a bigger impact on these owners are reductions in interest rates. I think that's going to be a big advantage for them. And again, we said this previously, a lot of these owners have benefited from the 1031 tax rules. So they have low tax basis in these properties as well. Operator: The next question comes from Chris McGratty with KBW. Christopher McGratty: The margin improvement on Slide 11 over the next 2 years roughly 90 to 100 basis points. How much of it is the resolution of credit? Like how much is the margin being suppressed from nonaccruals right now, give a ballpark? Lee Smith: Well, not an example -- but what I would say just to sort of level set is if you sort of -- those nonaccrual loans are obviously doing nothing from an earnings or a capital point of view because they're 150% risk weighted. So you get a release of capital as we reduce them. Even if we put them into a 100% risk-weighted assets, you're going to free up those 50 basis points. But they're not doing anything from an earnings point of view. So if we were to reduce $1 of nonaccruals, even if we were just to put it in cash, you're going to earn, let's just say, 4% on that. And so if we can then use that to invest in C&I and the spreads, as I mentioned earlier, we've got SOFR plus 242 basis points, that will lead to an even bigger improvement. So reducing those nonaccruals is a key part of the strategy. What I would say to you is as we look at 2026, we think we can reduce those nonaccruals by up to $1 billion and $500 million of that, as I say, is tied up in the 1 borrower that's in bankruptcy, and we hope to resolve that in the first part of '26. And then we think we can do another $500 million on top of that throughout the remainder of the year. So that's obviously going to have a big impact on the NIM improvement. But along with all the other points that I pointed out at the beginning of the Q&A, I mean, it's not just nonaccruals. It's the continued resetting of those low coupon multifamily loans. It's growing the C&I book. It's growing other portfolios on the balance sheet. We're starting to originate new CRE loans the mortgage and residential book securities portfolio is an opportunity and then also managing our core deposits and paying off wholesale borrowings. So it all plays a part in that NIM expansion. Christopher McGratty: That's helpful. And then, Joseph, for you, the last 1.5 years have been really about optimizing the balance sheet, capital, liquidity and you're on a great track with expenses, too. What's the conversation going to be like a year from now? Like is it going to shift -- I assume it's going to shift in terms of strategic uses of capital. But any thoughts on capital between growth, buybacks, other strategic options? Joseph Otting: Chris, we really haven't spent time at the Board in discussing that. I think as we get into 2026 and we show significant progress against the nonperforming loans in the overall portfolio, and we get assessment -- a better assessment of how much growth we can create through our business activities, I think that will give the Board the opportunity to sit down midyear and make that assessment of what to do if there is excess capital. But this is a very friendly -- shareholder-friendly board, very focused on earnings and growing the bank and using capital in the most efficient manner. Christopher McGratty: Perfect. And then, Lee, if I could, on the earning asset, the asset discussion. What's the embedded thoughts on the cash levels and the security balances in the next 1 to 2 years? Lee Smith: Yes. So what I would say, Chris, is you're probably going to see an increase in securities in the fourth quarter. We have some excess cash. And I think you'll see our securities balances increase about $1 billion in the fourth quarter of this year. Then I think we probably hold that level of securities as we move through 2026. So -- and then I would imagine that cash is probably in the sort of $7 billion to $8 billion range as we move through 2026. Christopher McGratty: Okay. So to get to those asset totals, its contingent really on the loan growth, continuing the momentum Got it. Lee Smith: That's exactly what's driving the growth on the balance sheet, correct? Operator: The next question comes from Christopher Marinac with Janney. Christopher Marinac: Lee and Joseph, I just want to circle back on deposits from the commercial C&I growth that you obviously had a great quarter. Are there any goals on deposits these next several quarters? I'm thinking more next year than next quarter, but just curious to flesh that out further. Joseph Otting: Yes. So we kind of have -- coming out of the C&I group is roughly about $6 billion of new deposits that will be originated both from the lending relationships, and we also have established a deposit-only group to focus on certain sectors, title, HOA, escrow, some of the conventional insurance industry. We have a group that really focuses on those high deposit categories. So we feel pretty good that we're going to start to see some real strong momentum in the deposit side. Lee Smith: Yes. And I would just add, as well as the $6 billion that Joseph mentioned, we do have sort of $2.5 billion that's tied to the CRE book. And so as we start originating new CRE loans, again, our strategy is about relationship banking. It's not us just giving the balance sheet away. We want to establish much deeper relationships, whether that be through deposits or being able to create fee income opportunities. And so that's the model that we're deploying across all businesses within the bank, not just the C&I piece, but with the private bank and the loans that they're originating, particularly the mortgages. Christopher Marinac: Great. And this is a component again of how an interest margin steps up in the next several quarters, and this is, I guess, a key piece. Lee Smith: Correct because we would expect a lot of these deposits to be noninterest-bearing or low interest deposits because they are tied to the loan. Operator: The next question comes from Anthony Elian with JPMorgan. Anthony Elian: The reduction in nonaccruals you expect in 4Q and through '26, is all of that occurring organically outside of the 1 in auction? Or does that include any asset sales as well? Joseph Otting: Most of it will be organic. Anthony Elian: Okay. And that includes... Go ahead. Go ahead, Lee. Lee Smith: Yes. It's organic, but we deploy a number of strategies. Joseph mentioned but there's work out, some could be through sales. So it's organic, but it's us working the various options and strategies that we can deploy against that nonaccrual book. Joseph Otting: Yes. Our approach in what I think we found is you can sell those pools, you, in today's market, take a sizable discount to move that. And who we sell those to are going to do the same things that we would do, which is pick up the phone and see if we can work something out with the borrower. I'll remind you, in a lot of instances, low 40% of those borrowers have never missed a payment with us. So in their mind, they're performing at the terms and conditions of the loan. So we also have a pretty good track record that when we've sold assets or negotiated our way out of those loans, we've generally had a slight gain on the resolutions of those credits, which I think reflects that for the most part, we have those loans marked pretty close to where we're exiting the transactions. Anthony Elian: And then on credit quality more broadly. I know you mentioned in the prepared remarks you don't have exposure to tricolor or any of the other names that have come up, but I'm curious if you've done any reviews on procedures or policies, particularly on the asset-based lending vertical within specialized industries after the recent credit events that have surfaced over the past several weeks. Lee Smith: Yes. Great question. We have. Obviously, we made sure all -- like I said earlier, all the names that have been in the press recently, we have no exposure. We reviewed our NDFI book, which is about $2.3 billion, $1.1 billion of that is MSR lending, and we lend to the biggest mortgage REITs and originators in the country. We feel good about that. And then on the sort of lender finance side, we're at about $1 billion of commitments, $600 million of which is drawn, and we went through that book, and we feel very good about it as well. So yes, we did a detailed review just given recent events in other parts of the industry. Operator: The next question comes from Matthew Breese with Stephens Inc. Matthew Breese: I wanted to go back to the NIM. What percentage of loans today are pure floating rate? And then second, if you have it, what was the spot cost of deposits either today or at quarter end? Lee Smith: Yes. So the vast -- I would say that when you look at our balance sheet today, the C&I loans are floating. You've got -- I mean, the residential loans that we have are typically 5- or 7- or 10-year arms. So they flow, but only after sort of 5, 7 or 10 years. So you've got a little bit of floating there. So those are kind of the -- obviously, you got cash, you got some of the securities as well. So that's what I would sort of say as it relates to the asset side of the balance sheet. As it relates to our spot rate, we were at -- and I'm just looking at our daily report. So we were at [ $2.82 ] a couple of days ago, Matt. Matthew Breese: Great. I appreciate that. And then the second one, within the updated guidance, there was a change in the tangible book value outlook. It now includes the warrants. What drove that change? And could you help us out with the average diluted versus common share outstanding expectations for the fourth quarter and early 2026? I also think there was some thinking, and I was curious on this as well that you'll be profitable in the fourth quarter. I was curious if that holds up as well? Lee Smith: So that is what's driving it. It's the warrants. So the warrants kick in, in Q4, the share count goes from about 416 million to 480 million and then that carries through in '26 and '27. We've also adjusted the total book value on the guidance slide for the warrants as well. So that's what you see, Matt, exactly right. Matthew Breese: And that will impact average diluted as well as common shares outstanding? Lee Smith: Yes, that's correct. Matthew Breese: Okay. And then on profitability, is the expectation still that you'll be profitable in 4Q? Lee Smith: We expect to be, but there's a lot of moving parts. And I think, again, I'll just point to the progress that we've made quarter-over-quarter for the last few quarters. Operator: The next question comes from David Smith with Truth Securities. David Smith: Technical 1 on capital. After the holdco got consolidated down to the bank, I think there were some preferreds that got moved down. Is there any difference in how those are going to qualify for Tier 1 treatment now? Lee Smith: No. No change at all in how they will qualify. Operator: The next question comes from Jon Arfstrom with RBC Capital Markets. Jon Arfstrom: On the CRE pricing, you mentioned earlier, Lee, is that market or acceptable pricing on renewals? Just curious if you're losing deals on pricing? Or is that not really the case? Lee Smith: So I would say, and this is why we're seeing a significant amount of par payoffs that borrowers are able to get better deals at other institutions or the agency. So we've been very rigid in not moving off the 5-year flub plus 300 or prime plus 375. The reason being, as you know, we are overly concentrated in CRE, and we are looking to reduce that concentration. And so I think the reason that you've seen the heightened payoffs that we've experienced is we're being very rigid and sticking to that sort of knitting. And I think other lenders are leaning into the space and those borrowers are able to get better deals than what I just mentioned, and that's what's driving the par payoffs. And we're okay with that because, again, we're trying to reduce our exposure to CRE and multifamily and get to that diversified balance sheet structure. Jon Arfstrom: Okay. Good. I appreciate that. And then, Joseph, for you, maybe kind of a simple question. But when I look at the credit stats, they're kind of flat to down. And I know it's not linear, but in your mind, is there anything new in the legacy credit book relative to a quarter ago? Or is it basically you know where the issues are and it's just timing for these numbers to fall? Joseph Otting: Yes. There's nothing new. We obviously went through the entire multi-family portfolio again. And we laid out on Slide 18, really where the perceived risk is in the bank, which is in that greater than 50% regulated. So I think this is more -- the train is on the tracks. It's our responsibility to clean up the credit problems, and I think we're on a really structured path to get that done. Operator: This concludes the question-and-answer session. I'll turn the call to Mr. Otting for closing remarks. Joseph Otting: Well, thank you, everybody, and I'd like to personally thank our Board and especially our Lead Director, Secretary Steven Mnuchin. The work and commitment has been really important. And the leadership team at the bank has really valued the Board I think maybe over the last 12 to 15 months, we probably set a record for Board and committee meetings and in a bank. And it really shows in the results. I'd also like to thank the executive leadership team of the bank and the women and men of the company. We really are focused on building a great company. And I thank you for all your work, dedication to the bank and very much important to our customers. And then as a final note, I'd like to thank the Federal Reserve and especially Mona Johnson and her team. While we no longer be regulated by the Fed, she was a source of knowledge and assistance as we navigated our challenges. So thank very much appreciate Mona and the Fed team who helped us. So thank you again for taking the time to join us this morning and your interest in Flagstar Bank. Operator: This concludes today's call. Thank you for joining. You may now disconnect.
Operator: Good morning, and thank you for standing by. Welcome to Booz Allen Hamilton's earnings call covering Second Quarter Fiscal Year 2026 Results. [Operator Instructions] I'd now like to turn the call over to the Head of Investor Relations, Dustin Darensbourg. Dustin Darensbourg: Thank you. Good morning, and thank you for joining us for Booz Allen's Second Quarter Fiscal Year 2026 Earnings Call. We hope you've had an opportunity to read the press release we issued earlier this morning. We have also provided presentation slides on our website and are now on Slide 2. With me today to talk about our business and financial results are Horacio Rozanski, our Chairman, Chief Executive Officer and President; Matt Calderone, Executive Vice President and Chief Financial Officer; and Kristine Martin Anderson, Executive Vice President and Chief Operating Officer. As shown on the disclaimer on Slide 3, please note that we may make forward-looking statements on today's call which involve known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from forecasted results discussed in our SEC filings and on this call. All forward-looking statements are expressly qualified in their entirety by the foregoing cautionary statements and speak only as of the date made. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements. During today's call, we will also discuss some non-GAAP financial measures and other metrics, which we believe provide useful information for investors. We include an explanation of adjustments and other reconciliations of our non-GAAP measures to the most comparable GAAP measures in our second quarter fiscal year 2026 earnings release and slides. Numbers presented may be rounded and as such, may vary slightly from those in our public disclosure. It is now my pleasure to turn the call over to our Chairman, CEO and President, Horacio Rozanski. We are now on Slide 4. Horacio Rozanski: Thank you, Dustin. Welcome, everyone, and thank you for joining today's call. This morning, Kristine, Matt and I will share our financial results for the second quarter of fiscal year 2026. The headline for our call today is that the reacceleration of our business will take longer than we expected when we spoke last quarter. As a result, we are lowering top and bottom line guidance for the year. As I will describe in a moment, this is based on continuing friction in the overall procurement environment and fundamentally different dynamics within our civil and national security portfolios. By national security, I mean the combination of our increasingly integrated defense and intel businesses. At the same time, and despite these near-term headwinds, we continue to see strong performance in our most exciting growth vectors. This success fuels our optimism for the medium term. In a few moments, Matt will take you through our quarterly results in depth and cover how they differ from our original expectations. Before that, I would like to describe the market and how it impacts our business differentially, where we see growth coming from in the near and medium term and the actions we are taking to compete and win in the current environment and to set us up for long-term strategic and financial success. Beginning with the market. This is the most bifurcated environment I have seen in my decades with Booz Allen. Our civil and national security portfolios are experiencing completely different dynamics, and we believe both face different prospects over the coming quarters. Our civil business is operating in the most challenging market in a generation. Over the past 9 months, the pace of change in civil agencies focus on funding has moved at extraordinary speed. As we shared in May, this resulted in run rate cuts in some of our large technology contracts. Since then, the business base has stabilized and we have seen some growth in pockets. However, the procurement environment and our near-term pipeline in civil have not recovered. Our second quarter is typically the most active as it coincides with the end of the government's fiscal year. This year, we saw no major procurement actions nor plus ups or cuts on any existing contracts. And we also did not see nearly the typical pace of tactical selling. Given this environment, we expect our return to growth in civil to be delayed by several quarters. When exactly that happens, will depend on how funding and contract activity evolves. For our part, across all levels of government, we're discussing potential opportunities that align to the administration's highest priorities, from critical minerals to border security. These are excellent and very promising conversations. There are also several large RFPs in our growing medium-term business pipeline including new work and recompetes. Looking ahead, our focus in the civil business is to maximize our AI capabilities and commercial technology partnerships to revolutionize delivery and reignite growth. The dynamics across our defense and intelligence markets, broadly speaking, our national security portfolio, are fundamentally different from civil and are much stronger. There remains some friction in the funding process, characterized by shorter funding increments and slower ramp-ups in new contract wins. Despite this friction, the pace of awards in international security portfolio has been encouraging. Of our $7.2 billion of gross bookings in the quarter about 90% were in national security. This includes the almost $1.2 billion [indiscernible] task order, where Booz Allen will help the Air Force Research Laboratory to increase for fighting lethality through adoption of advanced technologies. We also won 3 other notable awards valued at over $800 million each, including a competitive takeaway win with the United States Army National Guard, Intelligence and Security Directorate and 2 wins at the Defense Intelligence Agency, where we will modernize military intelligence and deliver new AI/ML capabilities in global no fail missions. Booz Allen continues to win in national security because we bring our unparalleled technology and our depth of mission expertise to the fight. Looking more broadly across our national security work, our leading positions in cyber, AI and war fighting tech are highly relevant to the Trump administration's technology and mission priorities. Our cyber business is increasingly differentiated. Our Thunder Dome product is becoming the standard for Zero Trust. We met all the government's milestones 2 years ahead of schedule. And just last month, it won the 2025 Cybersecurity Breakthrough Award. We also continue to be the largest provider of AI to the federal government as [ Deltek ] recently reaffirmed. And cyber, AI, a new hardware and software [indiscernible] converge, we are building the tech that makes Booz Allen unbeatable at the edge. Some of you actually had the opportunity to see our edge technology at AUSA and our recent investor event. From our modular detachment kit or MDK, to attack [indiscernible] solution, and our exquisite tactical gear, we are combining our own tech with the best commercial products to empower and protect our nation's war fighters. As we look at this year and beyond, we continue to see top line growth in our national security portfolio and the potential for expanded margins as the transition to fixed price and outcome-based products and solutions takes hold. Now reaggregating our portfolio and looking across the entire company, we did not see the normalization of the procurement and funding environment that we originally assumed. I am disappointed in our results this quarter and that we are lowering guidance across all key metrics. Simply put, the strength in our national security portfolio cannot offset the current year decline in our Civil business. This has led us to reassess our market assumptions and to take bold and significant action immediately. We are well prepared to operate in a highly fluid and dynamic environment for the foreseeable future. There are significant opportunities ahead. For example, in the funding of priorities from the One Big Beautiful Bill, the prioritization of AI adoption across all aspects of the federal government and the increased pace of converting contracts to [indiscernible]. But there are also headwinds like the government shutdown, the decrease in the acquisition workforce and the continued reevaluation of civil agency priorities. Booz Allen's goal is to remain focused and nimble in this environment so we can accelerate into the more clear and proving growth vectors in our portfolio, areas where we have clear technology and mission leadership. And to do so, our strategy is threefold. First, we are reducing costs by accelerating the use of AI in our internal operations and simplifying our operating model. We're also making the difficult decision to reduce layers and numbers in our senior ranks. These actions will allow us to continue to invest in our priority growth areas and accelerate decision-making. Matt will describe the impact and timing of this program shortly. Second, we are focusing our investments by doubling down on our strengths. This means flowing investment and talent to a few key areas where we are currently experiencing strong growth and that we believe can be accelerated further. Our primary areas of focus for the near term include cyber, both in the government and commercial markets; artificial intelligence, including growing areas like Agentic, physical and adversarial AI; war fighting tech, especially in edge technologies and mission systems; critical national security programs, specifically scaling our work in ongoing missions supporting the war fighter both at home and abroad; tech ecosystem partnerships, including existing partnerships like NVIDIA, AWS and Shield AI, our own venture portfolio; and new concepts and ideas with the best companies in Silicon Valley. And of course, continued emphasis on new tech from Quantum to AI-native 6G. Booz Allen will lead in the next waves of technology as well. And third, as the administration accelerates the transition to outcome-based contracting and commercial solutions, Booz Allen is leading the way. We are working with our customers to convert existing contracts and procure new work using these models. We are working diligently to productize more of our including our breakthrough ground systems and fire control solutions proposed for Golden Dome. These approaches will provide greater cost savings and certainty for our customers and provide us with margin expansion opportunities as we gain greater flexibility in how we deliver. I believe that these steps, taken in combination, we'll expand our market leadership in key areas, accelerate the implementation of VoLT and importantly, strengthen our financial performance. In short, we are making bold moves in the areas we can control. Every period of adversity has made us stronger, and this one is no exception. We are transforming ourselves at breakneck speed. And I am deeply committed to ensuring Booz Allen is an essential player in driving America's technological superiority. Thus, I remain very optimistic about the future of our company. And with that, Matt, over to you. Matthew Calderone: Good morning, and thank you for joining us today. As Horacio noted, our business performance remains bifurcated. Our second quarter performance and revised guidance for the full fiscal year reflect this dynamic. In large portions of our business, we have real momentum, and we have a number of reasons for optimism about our medium-term financial performance. Most important, significant portions of our business are growing, and are positioned for continued growth. We anticipate that for the full fiscal year, our national security portfolio, inclusive of our Defense and Intelligence businesses will grow revenue in the mid-single-digit range. We won $7.2 billion of new work in the quarter, including 4 programs of over $800 million in our national security portfolio. We continue to build the technology that our nation needs and are rapidly expanding the network of commercial tech partners with whom we innovate. We have the ability to adjust our cost structure to meet near-term demand patterns, ensure we are cost competitive and create capacity to invest for the future. And finally, our balance sheet remains strong, and we continue to generate significant cash flow. This is a real strategic and financial asset. That said, we clearly experienced more disruption in the first half of our fiscal year than we anticipated, particularly in our civil portfolio. This is due to a number of factors. First, with the amount of change we are seeing in government, procurement cycles are stretching. New initiatives are seeing longer lead times and funding is coming in smaller increments. While the pace of contract funding improved over the course of our second quarter, it still lagged the prior year by 3%. And as a result, our funded backlog was down 6% year-over-year. Second, while our civil business has stabilized, and we have not experienced any negative contract actions beyond those discussed in the first quarter, there has been a substantial gap in procurements in the broader civilian space. We expect to see pricing pressures on large procurements, including a few notable recompetes. As a result, we now anticipate that our Civil business revenue will decline in the low 20% range for the year. Third, as stated previously, our Civil business has a proportionally larger share of fixed-price contracts and therefore, has historically generated higher profit margins than Booz Allen on the whole. Thus, our overall mix shift away from Civil is putting downward pressure on our margins in the near to medium term. And finally, the duration of the government shutdown has introduced an additional layer of friction into the system. We expect this will have a modest negative impact on our revenue and profitability for the full fiscal year. Echoing Horacio's earlier remarks, we previously stated that our FY '26 guidance was predicated on a normalization of the funding environment, particularly in our second quarter. While funding did pick up over the course of the quarter. In fact, September funding was consistent with the year prior. The overall pace of funding was meaningfully slower than the prior years. As a result, our business did not reaccelerate as we had forecast, and we now anticipate that our return to growth in the business overall, will require a few quarters. Due to these factors, we have revised our fiscal year 2026 guidance down across all key metrics. In our revised outlook, we assume that current funding and procurement trends persist through fiscal year-end, and therefore, they're on contract and new award growth relative to bookings will remain slower than in years past. Make no mistake, this is not the year that Booz Allen wanted to deliver, and we are taking significant actions in response. As Horacio stated, our focus going forward will be on 3 areas: doubling down on areas of our business where we see significant growth potential, working with our customers to convert how the solutions we build are bought in a more commercially oriented outcomes-based approach and restructuring our business to take out a net incremental $150 million of cost on an annualized basis. We have identified where this cost will come from and have already begun to take action. This will provide a modest benefit to our bottom line financial results this fiscal year. The full impact will be felt next fiscal year. We expect that these actions will support our margins returning closer to historical levels in fiscal year 2027, while having a modestly negative impact to revenue on our cost-plus contracts. Critically, these actions will also create room for continued investment in core technology and talent, allow us to be more competitive and increase our speed and agility to match the pace of the market. These are meaningful actions and are taking real effort. Some have long been in the works, some are painful, but necessary in a time of rapid change. Collectively, they support our VoLT strategy and our long-term vision for Booz Allen. And ultimately, they will position Booz Allen for an exciting new wave of growth and to deliver superior value for our shareholders. With that context, let's take a deeper dive into our second quarter results. For the quarter, gross revenue was $2.9 billion, an 8% decline over the prior year period, roughly a 9% decline on a revenue ex billable basis. Adjusting for the onetime reduction to our provision for claim costs in the second quarter last year, gross revenue was down about 5% year-over-year. Inside of these overall numbers, our market performance was not uniform. Our national security portfolio of defense and intelligence programs continues to grow. For the quarter, this portfolio was up 5% year-over-year, exclusive of the discrete items from the prior fiscal year. And we anticipate this portfolio will grow in mid-single digit range for the full fiscal year. In contrast, revenue in our Civil business was down 22% year-over-year, exclusive of the prior year discrete item. We anticipate that our Civil business revenue will decline in the low 20% range for the full fiscal year. Moving to demand. We had a solid sales quarter, both in volume and in quality, particularly in the context of a complex macro environment. Gross bookings totaled $7.2 billion in the quarter, including 4 awards in our national security portfolio with a value of greater than $800 million. These were partially offset by 2 distinct items: one, a typical in nature and the other consistent with seasonal patterns. In the quarter, we recorded about $1.1 billion in contract ceiling reductions, the majority of which pertained to fiscal year 2028 and beyond. These stemmed from our engagement with the new administration to identify out-year cost reduction opportunities, particularly as we shift to more outcome-based contracting. We believe this is a nonrecurring event, and it has had minimal impact on our run rate on these contracts. Second, about $1.3 billion of backlog expired during the quarter. This reflects the routine expiration of contract ceilings and is in line with historic Q2 levels. As a result, our net bookings for the second quarter were $4.8 billion. This translated to a quarterly book-to-bill ratio of 1.7x and a trailing 12-month book-to-bill of 1.1x. Excluding the out-year ceiling removal, book-to-bill was slightly greater than 2.0x for the quarter and 1.2x for the trailing 12 months. Total backlog at the end of the quarter reached $40 billion, up 3% year-over-year. Funded backlog grew about 34% sequentially to roughly $5 billion but was down 6% year-over-year. At the end of the second quarter, our qualified pipeline for the remainder of FY '26 stood at nearly $25 billion. This is roughly on par with the prior 2 fiscal years. In summary, we continue to see solid demand signals in a market that is bifurcated in the short term. We remain confident that as the macro environment stabilizes and we lean into our proven growth vectors, Booz Allen will be well positioned to return to growth. Pivoting now to headcount. Booz Allen ended the first half with roughly 33,000 employees. Our customer-facing staff was down about 3% sequentially in the quarter and is now down 10% year-over-year. These declines largely reflect lingering effects from contract run rate reductions in our civil business as well as deliberate actions to improve utilization of existing staff. We are running the business efficiently. Our customer-facing staff utilization in the second quarter was meaningfully above the prior year period. Operationally, we continue to align our workforce with our key growth vectors, including accelerating hiring in critical mission and technology areas. We continue to hire aggressively in meaningful portions of our business to support new wins and other growth opportunities. I will now turn to profitability. During the second quarter, we delivered $324 million in adjusted EBITDA, down 11% from the prior year period. This translated to an adjusted EBITDA margin of 11.2%, 40 basis points lower than the same period a year ago. Through the first half of the fiscal year, our adjusted EBITDA margin was 10.9%. We expect margins to decline in the second half of the year due to 3 factors: the timing of contract write-ups and award fees, seasonal spending patterns, and continued mix shift away from [indiscernible]. This will be offset to some degree by the part year impact of our cost restructuring actions as well as our shift to outcome-based sales. Moving down the P&L. Second quarter net income was $175 million, down 55% year-over-year. Adjusted net income was $183 million, down 21% versus the prior year. Diluted earnings per share was down 53% year-over-year to $1.42 per share, and adjusted diluted earnings per share decreased 18% year-over-year to $1.49 per share. The year-over-year declines in diluted earnings per share and ADEPS were driven by 4 factors: lower overall profitability with an unrealized investment gain and tax planning initiatives that benefited the prior year quarter and higher interest expense. These were partially offset by a reduction in share count compared to the prior year period. Transitioning now to the balance sheet. Our balance sheet remains strong and allows us to be proactive and opportunistic in how we allocate capital to create shareholder value. We ended the second quarter with $816 million of cash on hand, net debt of $3.1 billion and a net leverage ratio of 2.5x adjusted EBITDA for the trailing 12 months. Free cash flow for the quarter was $395 million, the result of $421 million of cash from operations plus $26 million of CapEx. Turning to capital deployment. In the quarter, we deployed a total of $279 million to generate value for shareholders. This included $208 million in share repurchases at an average price of $107.15 per share. We repurchased nearly 2% of outstanding shares in the quarter, $68 million in quarterly dividends and $3 million in strategic investments made through Booz Allen ventures. Today, we are pleased to announce that our Board of Directors has approved a quarterly dividend of $0.55 per share, which will be payable on December 2 to stockholders of record as of November 14. Our Board has also approved an increase of $500 million to our share repurchase authorization, bringing our available capacity to approximately $880 million as of September 30. Finally, please turn to Slide 7 for our forward outlook. As we have discussed, our original FY '26 guidance is predicated on a normalization of the funding environment. While funding and awards picked up over the course of the quarter, this pace remained meaningfully slower than in prior years. As a result, our top line and bottom line performance for the second quarter was below our forecast and we are reducing our fiscal year 2026 guidance across all key metrics. We now expect to deliver revenue between $11.3 billion and $11.5 billion. We now expect adjusted EBITDA margins in the mid-10% range. This translates to an adjusted EBITDA dollar range of between $1.19 billion and $1.22 billion. We now expect ADEPS of between $5.45 and $5.65 per share. Lastly, we expect free cash flow to be between $850 million and $950 million. As we forecast our growth cadence for the second half, we now assume that current funding trends will persist through fiscal year-end, and therefore, the on contract and new award growth relative to bookings will remain slower than in years past. Also, at the midpoint, our revised guidance range incorporates the loss of approximately $30 million in revenue and $15 million in profit related to the government shutdown. These estimates assume the shutdown extends through October 31. Although not contemplated in our guidance, if the shutdown does continue for the month of November, we estimate the impact would be roughly within the same range, assuming no material changes in government scope or Booz Allen policy. So to sum up, our market remains bifurcated and funding levels have not normalized as we had hoped. We are disappointed in our results this quarter and that we are lowering guidance across the board. We are winning significant new programs particularly in our national security portfolio, where we are pleased with our growth trajectory. We are taking significant actions immediately to adjust our cost structure and prepare us to reaccelerate growth and profitability. We are doubling down on the key growth sectors where we have real traction in the near term, primarily our differentiated positions in cyber, artificial intelligence, war fighter tech, and critical national security programs. Our focus is on positioning Booz Allen to accelerate performance into next fiscal year and beyond, and we are confident that we will be able to do so. Operator, please open the line for questions. Operator: [Operator Instructions] Our first question comes from the line of Louie DiPalma with William Blair. Louie Dipalma: given the shutdown in your high exposure to the federal civilian agency. Many investors were anticipating a guidance reduction. Horacio and Matt, you both used the term bifurcation several times and you also mentioned how funding in the month of September was actually consistent with last year's September. I'm drilling into that, are you receiving signs and indications that the funding environment for the defense and intel business is actually improving and getting back to normal? Or is this funding environment expected to be strained for your defense and intel business even after the government restarts and the shutdown? Horacio Rozanski: Louis, why don't I start? Thank you for the question. I think the notion of bifurcation is an important one as we look at the business, as we understand the business, I hope you will understand it as well. As I said in the prepared remarks, we see our Civil business operating in the most challenging market in the generation. To give you a sense of what Matt described as a gap in funding, we saw essentially every procurement slide to the right in lockstep and that's not something I have ever seen before. And as we look forward, we're not trying to predict the future as much as react and anticipate what's right in front of us. And so that's how we're thinking about it. By contrast, in our national security business, it's a much stronger environment. There's still friction though. The government shutdown certainly backs things up. If we end up in the continuing resolution environment, how the CR is written will have an impact on this. But as we think about it, we have these very significant wins. We're very happy to share with you this morning about we are not anticipating a very fast ramp-up on those wins. We're anticipating the ramp-up on those, in fact, to be below historical levels. It will ramp up but simply more slowly. And I think that's everything that we are talking to about this morning is predicated on the notion that there's -- that this friction is going to continue, not impede our growth, but continue. Now having said that, I think the key for us, as we're trying to describe this morning is to stay very nimble and to stay very focused. Staying nimble means not trying to predict long term but really trying to anticipate the short -- medium term and react as quickly as we can. Part of the cost actions that Matt described to you are a part of that in both to secure our financials and give us more capacity to both invest and react to pricing more nimbly but also to streamline our operating model so we can make the issues faster and move faster. And the second part is to be very focused. I am personally very excited about what I'm seeing in our cyber business, both in government and commercial our AI capabilities are in greater and greater demand. I think you saw, and hopefully, we're impressed by the war fighting tech day that we hosted last week, which is really becoming a crown jewel in our portfolio, some of this critical national security contracts -- or we support such important missions and do such great work there. And then the partnerships with the tech ecosystem which are really both giving us access to new opportunities that are more commercially focused and enhancing our go-to-market and our capabilities because we can move faster when we build on top of their tech. So when we take it all, obviously, we're not pleased with the results or the near-term guidance lowering, but that's how we see the environment. Louie Dipalma: And for the rest of the year for the civilian guidance of, I think, negative 21%. What is assumed year -- what is assumed there in terms of the government shutdown and further cuts to existing programs? Are you assuming that other programs are throttled or what is baked in the assumptions because investors are -- they want to know whether there's going to be another cut to the federal civilian business and if this is going to be in a perpetual cycle. So what gives you confidence that this is the last guidance reduction for the [indiscernible] civilian business? Matthew Calderone: Yes, I'll start, and then Kristine may want to provide some color as to what's happening in the Civil business. As we said in the prepared remarks, we didn't actually see any actions positive or negative in civil last quarter. So we didn't see any additional cuts. We also didn't see any plus-ups or new awards and new procurements and what have you. So if you look at our civil portfolio, outside of a number of large programs that we've talked about, that portfolio is going to be essentially flat, both at the top and the bottom for the year. I think which just sort of indicates sort of the state of where we are in many of those agencies. But those large programs matter, and that's why we're guiding down to in the low 20% range at the top. So we aren't anticipating any further cuts. We are anticipating a very competitive procurement environment with some pricing pressure, particularly on the large program side. We also are having great conversations with folks in the administration about some of our key priorities. So we've used the word stabilized in civil, and that's what it feels like, but stabilized after a fairly significant run rate on our pretty large programs in an environment where things just aren't moving very quickly. But Kristine, I'm sure you want to chime in there. Kristine Anderson: Thanks, Matt. Yes, the business is stable, as Matt said. The environment itself still continues to be very slow with very few new large bids and not much ramp-up in funding. But I think that reflects the administration's rethinking how they want to prosecute some of those missions. And the work that we do in civil is impressive technically, and it is aligned to the administrative priorities. For example, we have one of the largest Agentic AI software implementations in the world and it's in civil and we're leading in Agentic AI. And we do expect work to grow there again. And we are having lots of productive conversations with the administration leaders on some of -- some new approaches to the core missions where we're bringing commercial solutions and combining it with our IP and IC, their outcome-based commercial offerings that we're talking through. But again, it's just hard to predict exactly when those will launch -- and so as Matt said, we're just assuming the status where we are now continues through the rest of the year, but we do see growth over the medium term. Louie Dipalma: Thanks, Kristine. So was there stabilization in the Civil business from the -- in the September quarter relative to the June quarter? Kristine Anderson: I'd say, yes. Yes, it's been pretty steady since the reductions that we had a while back in the year. Matthew Calderone: Yes. But stable, it means we didn't -- again, there were no new decrements, but we also didn't see some of the on-contract growth in plus ups and typical velocity of tactical selling in Q2 that we would -- that we'd anticipated. Horacio Rozanski: Yes. Louie, when we talk about bifurcation, another way to think about it is if there's upside and downside in -- across all of our business, there always is. I would say, as we sit here right now, maybe a little more downside potential in the civil business, a little more upside potential in the national security business. But as I said before, I mean, the things change very quickly. And we could -- what we're trying to do is, like I said, it's flow of resources, flow investment to where we see the opportunities and not be married to a particular outlook, but rather just ensure that when there is an opportunity to grow, we double down on it. Operator: Our next question come from the line of Sheila Kahyaoglu with Jefferies. Sheila Kahyaoglu: Maybe 2 questions. The first one, a bit shorter term and bigger picture for this next one. So first, I guess, I think you guys have previously talked about the civil portfolio being 13% margins or so, which implies defense and intel is in the 8% to 10% range. Is that still the right way to think about the profitability for [indiscernible] customers? Matthew Calderone: Yes, that's in range, Sheila. We never quantified it that way, but we've talked about how Civil has a significantly higher proportion of fixed-price contracts. So that's roughly in range. Sheila Kahyaoglu: Okay. Got it. And then maybe a bigger picture question, Horacio, for you. How do we think about the business model for Booz longer term, just given pendulums clearly shift and maybe 3 years from now, it will shift back where we're scrubbing our models for national security exposure and saying Civil will grow again double digits? So how do you think about aligning the sales force and the workforce and your management team as you restructure the business a bit? Horacio Rozanski: One of the hallmarks of our operating model is the notion that we operate in a single P&L, and that gives us the ability to respond to the market across any arbitrary lines really fast. We always have. We -- every time, as you point out, an administration transitions, they refocus their priorities. As I said before, this is perhaps one of the most significant or the most significant refocusing that I've seen. But we're going to continue to make sure that we are taking advantage of our broad footprint to go where the opportunities are. The other piece of it is I do believe that because of the way technology has evolved more broadly, this idea of injecting commercial technology into missions, moving to outcome-based as opposed to input base models, and those big trends are going to continue well into the future. They were somewhat underway before. I think there's an accelerant right now as the Trump administration doubles down on a lot of this. But I don't see us going back. And so that's why we've invested so much time, so much effort and resources on building partnerships from the very largest tech companies to small startups with promising technology and everything in between. I think our position in this tech ecosystem I think gives us a long-term edge that we're just beginning to see realized just beginning to exploit. There's a couple of opportunities right here right now that we are chasing. One in civil and a couple of national security, that would be impossible without the strong partnership that we have with some of these companies. And the more people see Booz Allen as somebody who builds tech but also leverages tech that others build to create the right answer, I think the more power we're going to have in the market. Operator: [Operator Instructions] It comes from the line of Colin Canfield with Cantor Fitzgerald. Colin Canfield: So it sounds like the [indiscernible] reduction, Matt suggests there may be a little bit of downside in terms of the cost plus nature of the business. So as we do the building blocks on '27, if we assume Civil's down another, call it, 10% and Defense and Intelligence is accelerated to call it mid-single digit. We think the building blocks probably suggest something like 0% to 2% organic that should notionally accelerate and '28 off of that base. So, a, does that math make sense at a high level; b, fundamentally can you grow next year; and then, c, if not, when do you expect this business to return to growth? Matthew Calderone: Yes. Thanks, Colin. Look, I think a couple of things. One, as we talked about, we had a lot of momentum in our national security portfolio. Two, the Civil business is stable, right? And unfortunately, we saw a significant decline in the first half of this year. But obviously, our comps will get proportionately easier given where we are. I'm not going to get into next year. We got a lot of medium-term optimism. There are some significant building blocks. As Horacio said, the nature of this market is such where things are happening fast. And we've got some exciting opportunities in the fire. So I would not necessarily straight line the math exactly how you did, Colin, but I'm sure we have in this conversation over the next couple of quarters. Horacio Rozanski: The only thing I would add to that is, as we described the growth vectors that we're talking to you about, clearly, the national security market is more robust. And so we'll see those growth vectors play more strongly there. But the number of things we're talking about around cyber, around AI, around some of the tech that we're developing that is highly applicable to border security, to large event security to the upcoming World Cup and so forth, we are looking for opportunities to leverage and grow in the parts of our civil business that are most aligned with the administration's priorities and we're -- we will continue to do that pretty aggressively. Matthew Calderone: Colin, if I could just jump back in here. Two other thoughts for you. One is we are seeing an increasing pace of contract conversion to outcomes based. While small, the portion of our -- our natural security portfolio at fixed price did increase quarter-over-quarter, and that's certainly the direction of travel and in part because of that, but also other dynamics. I do think going forward, our growth will be not as linearly connected to head count growth for a handful of reasons. If I can just give you a couple. The vast majority of our FTE loss this year was in Civil, and that's where we have more of our fixed price contracts. And that revenue is not as "headcount" dependent. Second, we're driving up utilization. And then third, the mix shift that I just described. So I understand we've had a fairly stable business model and that's relatively easy to model for you externally. Those dynamics are changing, consistent with the kind of pace of change that Horacio was talking about, and we'll continue to engage with you over the coming quarters. Colin Canfield: Got it. Got it. So margin trough this year gets better over time and then growth is [indiscernible] is kind of my takeaway. I appreciate that the businesses have managed on a quarter-to-quarter basis, but putting an investor hat on for a bit. As we think about the next quarter, what would you fundamentally tell an investor that wanted to go short again next quarter? And then kind of why are the reasons would you expect that to be a bad idea? Matthew Calderone: [indiscernible] business is giving investment advice Collin. Operator: Our next question is from Mariana Perez Mora with Bank of America. Mariana Perez Mora: When you guys think about the new guidance, I'd appreciate some color around like how much is already in backlog, how much you have to go and like win and is still depending on like some contracts that could be delayed? Like could you give us some kind of like measure of how strong is that backlog coverage and also the pipeline and like if you have like any amount of like how that pipeline appears to a year ago or something? Matthew Calderone: Yes. Mariana, I think we're in the main anticipating that the current sort of burn rates and trends largely persist, that head count remains essentially flat obviously absent the cost reduction initiative that we described. And it's not really based on any significant new wins. But that does require some on-contract growth, do wins to ramp up and a handful of other factors. So we've -- in this current guidance, attempted -- there's not any material things that need to happen for us to land in this range, but it is a volatile situation. Mariana Perez Mora: And you mentioned on contract growth. How is your conversation with your customers right now about like certainty about like them needing that kind of growth or still like there is a lot of uncertainty if that's going to happen or where it's going to trend? Horacio Rozanski: I mean I'll start and I'm sure my colleagues are going to want to add. But we're having very productive conversations, especially in the national security side and especially in these growth vector areas that are talking about. So if you take cyber, for example, we expect ThunderDome, as an example, to continue to grow ThunderDome become really both a standard and a product that everybody wants, and we expect to see some level of growth there. A number of other areas in the national security space are -- we are seeing significant pickup. As Matt pointed out, we have not made any heroic assumptions about that happening in the back half of the year in recognition of the fact that our there is friction in the environment that we're still in the middle of a shutdown and all of that, and we've tried to incorporate that into the way that we're thinking -- on the one hand, on the other hand, we are as aggressive as we've ever been in terms of trying to accelerate past that. So that's sort of the thought process right now. Kristine Anderson: I would add that the administration really wants to push speed in some areas. So those conversations are extremely productive. And so that continues as well. Mariana Perez Mora: So you mentioned cyber, and the expectations were for that portfolio to actually grow like at speed. How large is that right now? And what do you expect for that portfolio? Again, like the near term has been volatile, but in the next like 2 to 3 years? Horacio Rozanski: I am as bullish about our cyber business as I've ever been for a couple of reasons. First of all, we do occupy a unique position in cyber in the national security space, that is both well recognized internally in the government, and it's a real strength of ours. Second, I always talk about convergence. If you think about what's happening in terms of AI and Agentic and how it affects cyber, 3 ways just to name a couple, right? I mean the attack surface has grown because the AI models themselves have grown -- are now becoming in their own attack surface. Second, adversaries are using cyber much more effectively by leveraging AI into it, and therefore, defense needs to move in that direction. And third, we are seeing across the board, interest in us bringing these capabilities, including in our commercial customers that are both under siege by a number of cyber actors and see us and what we do as being a key player in helping them move past that. So I think, unfortunately, cyber risks are everywhere, cyber risks continue to grow. And Booz Allen, I believe, has, in essence, the most powerful -- one of the most powerful cyber businesses in the world. Operator: Our next question comes from Gavin Parsons with UBS. Gavin Parsons: I just wanted to unpack the disconnect between awards and funding a little further, if we could. Is total backlog still a good leading indicator of demand and growth? Horacio Rozanski: Yes. Long term, but I think, obviously, short-term funded backlog matters, right? And our funded backlog -- our funding was down in Q1, 9% year-over-year, in Q2, 3% year-over-year, which nets out to 6% for the first half. So I think it shows the direction of travel, the funding environment has improved, but in no way normalized over the first half. Now there's a lot of noise in there, particularly in the current environment, as Kristine said, we're seeing shorter funding come in shorter increments. It's a little more episodic. So it's not a linear relationship as it used to be. But obviously, 4 words of scale, that's going to drive growth. I think one is a pure recompete, one was a recompete with increased ceiling, one was a new award and one was a takeaway. So again, we are less comfortable that it's going to ramp as quickly as we've seen in the past, and we built that into our guidance, but backlog absolutely matters. Operator: And our last question comes from the line of Tobey Sommer with Truist. Tobey Sommer: Could you discuss your process for determining how much growth investment to allocate and how you balance that against where you were targeting near-term profitability and head count cuts that's sort of a tight rope and there's tension there? And maybe you could discuss how you arrived at your decisions? Horacio Rozanski: I guess I'll start. Look, I mean, as somebody pointed out earlier, we do not manage this company for the quarter. We managed the company for the medium and long term. And we are making the investments that we believe are both prudent in terms of long -- short-term profitability, but important and exciting in terms of long-term growth at both the top and the bottom line. And look, that's always been the case. It is the case now. We're undertaking a difficult decision of doing some significant cost reduction in some ways to ensure that we can both deliver in the short term, really more focused on our FY '27, given where we are in the year, but also so that we have the capacity to stay nimble and invest in the areas where we see the most opportunity. And I think that, that is what's exciting about Booz Allen Hamilton. I mean I can talk to you about things that are growing now. I can talk to you about things that are -- we believe have significant growth potential in the short term, and I can talk to you about the things we are doing like Quantum and like AI-based 6G that I believe will fuel growth in sort of in the third horizon. And so that needs to continue, while at the same time, recognizing that we have work to do in order to drive the short-term financials to where we want it to be. Matthew Calderone: [indiscernible] I mean, we're an interesting spot because obviously, we're disappointed with our performance and our guidance. And as I look inside of our portfolio, there are actually more demand and more opportunities to invest to drive medium- and long-term growth than I remember in a long time because as Kristine and Horacio said, it's an incredibly dynamic environment. This administration wants change. We're seeing significant opportunities, not just in the U.S. government, but even in commercial and with similar allies. And so part of the internal dialogue and part of the reason we're taking these painful actions to free up $150 million worth of cost is precisely because we see these investment opportunities. So we're prioritizing the growth vectors that we've all described, but there's real opportunity here. And that's, in many ways, more of a driver of us taking these cost actions than hitting short-term set of financial results. Tobey Sommer: If I could ask another question on SIML. Amita once in a generation change to the top line and demand. Do you assume that the margin holds because it's relatively unusual for significant sort of TAM changes not to be accompanied by margin compression? Kristine Anderson: Yes, that's a great question. I mean, overall, yes, but there is competition for price that we're expecting because there'll be fewer bids, there will be more bidders, there will be much more aggressive pricing. But that's at the same time that we are able to use a lot more technology to innovate how we deliver, which would still preserve margin. Operator: Thank you. And this concludes our Q&A session for today. I will pass the call back to Horacio Rozanski for concluding comments. Horacio Rozanski: Thank you, everyone, for joining us today. I hope this discussion gave you a deeper understanding of the factors that underlie our performance, how we see the market, how quickly we are responding and our reasons for optimism about the future of Booz Allen, which include both our leading position in advanced technologies by how we apply them to critical missions in a way that we build things that work, our agility, our willingness to move fast and our capacity to invest and accelerate our growth vectors. And really, most importantly, the people of Booz Allen and the quality of our team, which continues to be extraordinary and it's a source of optimism for all of us. And so together, we are moving forward, and we want to accelerate both our mission impact and our financial performance, and we are focused on doing so. Thank you again, and have a great day. Operator: And thank you. And this concludes our conference. Thank you for participating, and you may now disconnect.
Operator: Good morning, and welcome to the NatWest Group Q3 Results 2025 Management Presentation. Today's presentation will be hosted by CEO, Paul Thwaite; and CFO, Katie Murray. After the presentation, we will take questions. Paul Thwaite: Good morning, and thanks for joining us today. I'll start with a short introduction before I hand over to Katie to take you through the numbers. We have delivered another strong quarter as we continue to execute on our priorities of disciplined growth, bank wide simplification, together with managing our balance sheet and risk well. Though inflation is above the Bank of England's 2% target, the economy is growing, unemployment is low, wage growth is above the rate of inflation and businesses and households have relatively high levels of savings and liquidity. This is reflected in the levels of customer activity we're seeing across the bank. So let me start with the headlines for the first 9 months. Lending has grown 4.4% since the year-end to GBP 388 billion, in line with our annual growth rate of more than 4% over the past 6 years. Growth has been broad-based across our 3 businesses and we attracted a further 70,000 new customers in the quarter. Mortgage lending was up by more than GBP 5 billion for the first 9 months as we broadened our customer proposition with new offers for first-time buyers and family backed mortgages, and issued mortgages to landlords in collaboration with buy-to-let specialists, [indiscernible]. Unsecured lending grew GBP 2.9 billion or 17.3%, and we made good progress integrating our recently acquired Sainsbury's customers. They're now able to view their credit card, link their Nectar card and view their Nectar points from credit card spending via the NatWest app. In commercial and institutional, we delivered lending growth of GBP 7.9 billion or 5.5% across both our large corporate and institutional and commercial mid-market businesses. in areas such as infrastructure, social housing and sustainable finance. As the #1 lender to infrastructure, we are supporting many large-scale programs up and down the country. And we have delivered GBP 7.6 billion towards our 2030 group climate and transition finance target of GBP 200 billion announced in July. Deposits grew 0.8% to GBP 435 billion as we balance volume with value in a competitive market and as customers manage their savings across cash deposits and investments. And there's more customers across the bank chose to invest with us assets under management and administration have grown 14.5% to GBP 56 billion. This has contributed to growth in noninterest income, along with higher fees from payments, cards and good performance in our currencies and capital markets business. This customer activity has resulted in a strong financial performance. Income grew to GBP 12.1 billion, 12.5% higher than the first 9 months last year. Costs were up 2.5% at GBP 5.9 billion resulting in operating profit of GBP 5.8 billion and attributable profit of GBP 4.1 billion. Our return on tangible equity was 19.5%. Given the strength of our performance, we are revising our full year guidance for income to around GBP 16.3 billion and for returns to greater than 18%. We continue to make good progress on both simplification and capital management. We have reduced the cost/income ratio by 5 percentage points to 47.8%. And and we generated 202 basis points of capital for the 9 months and ended the third quarter with a CET1 ratio of 14.2%. This strong capital generation allows us not just to support customers but to invest in the business and deliver attractive returns to shareholders. As you know, we announced a new share buyback of GBP 750 million at the half year, of which 50% has now been carried out. and we expect to complete the buyback by our full year results. Earnings per share have grown 32.4% year-on-year and TNAV per share is at 14.6% at 362p. So a strong performance for the first 9 months. I'll hand over to Katie to take you through the numbers for the third quarter. Katie Murray: Thank you, Paul. I'll talk about the third quarter using the second quarter as a comparator. Income, excluding all notable items, was up 3.9% at GBP 4.2 billion. Total income was up 8.2%, including GBP 166 million of notable income items. Operating expenses were 2.1% more at [indiscernible] due to lower litigation and conduct charges. And the impairment charge was GBP 153 million or 15 basis points of loans. Taken together, this delivered operating profit before tax of GBP 2.2 billion for the quarter and profit attributable to ordinary shareholders of GBP 1.6 billion. Our return on tangible equity was 22.3%. Turning now to income. Overall income, excluding notable items, grew 3.9% to GBP 4.2 billion. Across our 3 businesses, income increased by 2.5% or GBP 101 million. Net interest income grew 3% or GBP 94 million to GBP 3.3 billion. This was driven by further lending growth and margin expansion as tailwinds from the structural hedge and the benefit from the Sainsbury's portfolios for a full quarter more than offset the impact of the base rate cut in August. Net interest margin was up 9 basis points to 237, mainly due to deposit margin expansion and funding and other treasury activity. Noninterest income across the 3 businesses was up 0.8% compared with a strong second quarter. This was due to increased card fees in retail banking, higher investment management fees in private banking and wealth management. and a good performance in currencies and capital markets with heightened volatility. Given continued positive momentum and a clearer line of sight to the year-end, we have refined our income guidance and now expect full year total income, excluding notable items, to be around GBP 16.3 billion. We continue to assume 1 further base rate cut this year with rates reaching 3.75% by the year-end. This improved guidance alongside strong Q3 returns means we now expect return on tangible equity for the full year to be greater than 18%. Moving now to lending, where we have delivered another strong quarter of growth. Gross loans to customers across our 3 businesses increased by GBP 4.4 billion to GBP 388. 1 billion. with growth well balanced between personal and corporate customers across retail banking and private banking and wealth management, mortgage balance grew by GBP 1.7 billion, and our stock share remained stable at 12.6%. Unsecured balances increased by a further GBP 100 million, mainly in credit cards. In commercial and institutional, gross customer loans, excluding government schemes were up by GBP 3 billion. This includes GBP 1.6 billion across our commercial mid-market customers, in particular, in project finance, social housing and residential, commercial real estate as well as GBP 1.5 billion in corporate and institutions, mainly driven by infrastructure and funds lending. I'll now turn to deposits. These were broadly stable across our 3 businesses at GBP 435 billion. Retail banking deposit balances were down GBP 0.8 billion, with growth of GBP 0.6 billion in current accounts, more than offset by lower fixed-term saving balances following large maturities. Private banking balances that reduced by GBP 0.7 billion with flows into investments as customers diversify and manage their savings as well as tax payments made in July. We saw a small increase in commercial and institutional of GBP 0.4 billion, with higher balances in both commercial, mid-market and business banking. Deposit mix across the 3 businesses were broadly stable. Turning now to costs. We are pleased with our delivery of savings this year, which allows us to invest and accelerate our program of bank-wide simplification. Costs grew 1% to GBP 2 billion, including GBP 34 million of our guided onetime integration costs. This brings integration costs for the first 9 months to GBP 68 million. We remain on track for other operating expenses to be around GBP 8 billion for the full year. plus around GBP 100 million of onetime integration costs. This means you should expect expenses to be higher in the fourth quarter, driven by the annual bank levy and the timing of investment spend. I'd like to turn now to impairments. Our prime loan book is well diversified and continues to perform well. We are reporting a net impairment charge of GBP 153 million for the third quarter. equivalent to 15 basis points of loans on an annualized basis. Our post model adjustments for economic uncertainty of GBP 233 million are broadly unchanged. And following our usual review, our economic assumptions also remain unchanged. Overall, we are comfortable with our provisions and coverage, and we have no significant concerns about the credit portfolio at this time. Given the current performance of the book and the 17 basis points of impairments year-to-date, we continue to expect a lower impairment rate below 20 basis points for the full year. Turning now to capital. We ended the third quarter with a common equity Tier 1 ratio of 14.2%, up 60 basis points on the second. We generated 101 basis points of capital before distributions, taking the 9-month total to 202 basis points. Strong third quarter earnings added 84 basis points and the reduction in risk-weighted assets contributed another 8 basis points. Risk-weighted assets decreased by GBP 1 billion to GBP 189.1 billion. GBP 0.9 billion of business movements which broadly reflects our lending growth and GBP 0.3 billion from CRD 4 model inflation were more than offset by a GBP 2.2 billion reduction as a result of RWA management. This brings our CET1 ratio before distributions to 14.6%. We accrued 50% of attributable profits for the ordinary dividend as usual, equivalent to 42 basis points of capital. We continue to expect RWAs of GBP 190 billion to GBP 195 billion at the year-end, with a greater impact from CRD4 expected in the fourth quarter. Turning now to guidance for 2025. We now expect income excluding notable items, to be around GBP 16.3 billion and return on tangible equity to be greater than 18%. Our cost impairment and RWA guidance remains unchanged. And with that, I'll hand back to Paul. Thank you. Paul Thwaite: Thank you, Katie. So to conclude, we're pleased to report another very strong quarter of income growth, profits, returns and capital generation. This has been driven by customer activity across all 3 of our businesses, leading to strong broad-based lending growth and robust fee income. Our continued focus on cost discipline has delivered meaningful operating leverage. And as we actively manage both our balance sheet and risk, the business remains well positioned to deliver strong shareholder returns. As you've heard, we have upgraded our full year income and returns guidance today. And we'll update you on our guidance for 2026 and share our new targets for 2028 at the full year in February. Many thanks. We'll now open it up for questions. Operator: [Operator Instructions] Our first question comes from Benjamin Caven-Roberts of Goldman Sachs. Benjamin Caven-Roberts: So 2 for me, please. First on deposits and second, on noninterest income. So on deposits, could you talk a bit about deposit momentum in the business? And in particular, you mentioned the retail fixed term outflows over the quarter. Could you talk a bit more about how much of that is reflecting conscious pricing decisions? And then looking ahead, the sort of trajectory for deposits going forward? And then on noninterest income, very strong even when adjusting out the notable items related to derivatives. Could you talk about momentum in that franchise and what business drivers you're particularly focused on looking ahead? Paul Thwaite: Thanks, Ben. Good to hear from you. So let's take them 1 by one. So on deposits, so big picture is up around GBP 3.5 billion, around 1% year-to-date. Different stories within the different businesses. I guess, we talked at the half year around the kind of ISA season and some of the -- get the confluence of debate around the future of ISA and how that led and some of the movements in the swap curves on the back of tariffs and how that led to different pricing. That period is behind us. There's been more normalized pricing since the kind of April, May. If you look at our 3 businesses, I'd say slightly different trends. I'll finish with retail because there's more to unpack there. On the commercial side, deposits are up, encouragingly, that's in kind of the business bank and commercial mid-market. That's good. Private bank cash deposits are down. A combination of things, July, we saw some tax payments -- but also we see more funds shift from cash deposits into securities and investments, which is a net positive trend. In retail, if you look at current account balances, they are up. So kind of operational balances, salary accounts, you can see that the numbers are up there. I think the details are in the disclosures. Instant Access is flat. -- where we've seen some reductions is in fixed term accounts. And that reflects a number of mature -- large maturities that we had during the quarter. We're pleased with our retention rates. They're running about 80%, 85%. But as you alluded to, given our LDR at 88%, LCR at 148% we're finding a right balance between value and volume. So we've been pretty dynamic, and we're focusing on where we see funding and customer value. So that's that's unpacking the deposit story for you. So different stories in different businesses, relatively stable given our overall funding profile, very focused on managing appropriately for value. On the second question, which is non-NII, yes, as you alluded to, we're pleased with the quarter, and we're pleased with the year-to-date. Good momentum in the areas that we've been focusing on. I mean it's quite broad-based actually, when you unpack it, cards, payments, but obviously good contribution within C&I from our markets business driven by the strong FX franchise and by the capital markets business. So we've had a strong quarter 3 there, probably slightly stronger than we expected when we spoke to you at the half year. We feel as if our focus on those areas, whether it's the market part of commercial institutional, whether it's our payments business. But also, as you can see in our wealth business, the fees from assets under management are increasing as well. So it feels like we've got good progress and good momentum on fees and it remains a strategic area of focus for us. Thanks, Ben. Operator: Our next question comes from Sheel Shah of JPMorgan. Sheel Shah: Great. Firstly, on the costs. You've reiterated your cost guidance for the year despite the strong third quarter performance. How should we think about cost growth going forward, given we have CPI going back towards 4%. You're clearly simplifying the bank internally. Do you think a 3% cost growth number is the right level for the bank? Or do you think that maybe understates your ability to manage the cost base? And then secondly, on capital, could you give us a steer on the CRD impact that we expect for the fourth quarter? And maybe thinking about the fourth quarter capital level, how are you thinking about operating in that 13% to 14% range? Is there anything preventing you from moving down towards the 13%? Or are you managing maybe for M&A or anything else maybe in the horizon that you're thinking about? Because this is clearly the strongest capital print we've had for the last maybe 3, 4 years or maybe 2 to 3 years for the bank overall. Paul Thwaite: Thanks, Sheel. Katie, I'll take the cost and then turn it over to you on the capital piece of that okay. Katie Murray: Yes. Paul Thwaite: On cost, Sheel, so as you say, it's a -- it's a strong year-to-date picture if you look at year-on-year comparisons. And obviously, we have the one-off in terms of the integration costs as well of Sainsbury's. I am pleased with the momentum we're getting on the simplification agenda. I think that's -- you can see that starting to bear fruit. It's also I think most pleasingly, it's a bit of a flywheel because it creates investment capacity to drive further transformation in the business. And it's not only cost out it's also improving customer experience and colleague experience as well. So as you alluded to, we're holding with the current year guidance, GBP 8 billion plus the GBP 100 million of integration costs, but we are pleased with the momentum on the agenda -- on the simplification agenda. I'm not going to be drawn on kind of 26 costs or future costs. We'll talk to you in February around '26 guidance and new '28 targets. But what I would say thematically is we still have a very significant focus on cost management, and we're a very high conviction on the simplification agenda. And to help put that in context a little bit for you to deliver the cost print that we are doing this year requires us to take more than 4% out of the kind of the underlying business. so that we can support the investment, the inflation-related changes, be they wages or tech contracts. So we've got good momentum in kind of taking that, driving that efficiency out. been able to invest, but also delivering good cost control. So that's the ethos going forward. And the levers that we're pulling those levers can still be pulled moving forward, whether that's continued acceleration of our digitization, streamlizing and modernizing the tech estate. Just by way of example, we decommission 24 platforms in retail so far this year, which is great. You've seen we've done a lot of work simplifying our operating model, whether it's in our wealth business, moving some of the support areas in Switzerland to the U.K. and India rationalizing our European footprint, legal entity footprint. and just some of the good organizational health measures. So it feels as though those levers that we've been pulling can continue to be pulled -- and then obviously, you lay over that some of the productivity benefits we're seeing from AI and those activities around customer contact, software engineering. So net-net, I'm not giving you a number for '26, but hopefully giving you a sense of how we're thinking about it and where the momentum is coming from, and therefore, our confidence in maintaining a good healthy cost profile going forward. Katie? Katie Murray: Perfect. Sure. So Sheel, I'll just start off talking a little bit with CRD for the interest on capital as well. So look, as you look at it, you're absolutely right. In the quarter, limited CRD4 impact. We are expecting the majority of that in Q4 and a little bit of that may even bleed into 2026. So when you think of our kind of RWAs from here, it's very much about the loan growth, the management actions as well as that more material impact of CRD4 coming in, in the fourth quarter. And then going forward, you're familiar with Basel 3.1 coming in in 2026. That is always important to remember that comes with a bit of a Pillar 2 reduction when it comes through in terms of capital. But when I think of kind of the RWAs is to kind of think of the absolute growth that we're talking about in the book, importantly, the mix of that growth, but also the kind of risk density that you see once we pass the CRD for and the Basel 3.1. And of course, obviously, the continuing strength of our management action program that we have. And then if you turn to kind of capital, clearly, a really strong print today, very pleased with the 101 basis points we did in the third quarter, 202 bps for the first 9 months. I mean a great result by any measure. We've always said that we're happy to operate down to that 13%. We do think about capital generation and when we think of it in terms of dividends and where we're going to land and things like's that, we do debate the sort of next sort of 6, 12 months as well because you've got to think about we really try to manage a consistent program of capital return back to the market, but also it mindful of that RWA generation that's coming, whether it be from regulatory change or the growth the growth within the book. And so as you -- I would kind of as you consider where we might land and what we might think about is think on those various points. Thanks very much, Sheel. Paul Thwaite: Thanks Sheel. Operator: Our next question comes from Aman Rakkar of Barclays. Aman Rakkar: I had 2 questions, please. I guess we're all probably singularly focused on 2026 at this stage. So particularly on income, love to kind of get your take on how we should think about the various drivers from here across I guess margin developments, clearly, loan growth continues to surprise positively, but any color you can provide on kind of the drivers of fee income from here would be really helpful. And I guess the second question was around your longer-term targets that hopefully you're going to present to the market in the new year. And to me, it looks like there is the underpinning of pretty decent operating leverage for a number of years here, not least because of the structural tailwind to '28 that you guys flagged. So I guess one for Paul really in terms of your view on structural operating leverage in your business on a multiyear view from here, how confident you are in that in terms of some of the levers you might want to pull -- and I guess, I'm ultimately interested in the RoTE output. For me, you're doing 18% this year, and there's no reason to think in my mind why you don't accrete quite nicely over and above that level as you realize that operating leverage. So any kind of color you can give on that basis would be really helpful. Paul Thwaite: Katie, do you want to take '26 and I'll talk about. Katie Murray: Perfect. That's great. Thanks, good to hear your voice. Look, we do continue to expect the income growth that we've seen throughout our guidance period, and we do remain confident in that growth trajectory beyond 2025. So as I look at 2026, there's probably a few things I would kind of guide you to. One, growth. I mean, we've talked about this a lot, but we've got a strong multiyear track record of growth across all 3 of our businesses. We outpaced the wider sector on that. if we look at the breadth of our business, we know that we're well placed to capture demand as it comes through, and we'll continue to deploy capital throughout 2026, and we do expect that growth to continue. Obviously, there's a mix of growth across both sides of the balance sheet, and that's very much a function of customer and competitor behavior. The hedge, I think you're all very familiar with the hedge these days. We've talked about it such a lot over this last year, but certainly, strong growth into 2026, over GBP 1 billion higher in absolute terms in 2025. I think that's well understood by all of you. Rate cuts, we do expect one further rate cut in Q1 after our plans still have a rate cut in November. So we get to a kind of terminal rate of 3.5%. And then you'll see the kind of averaging impact of the rates we've had this year coming through into 2026. Paul has already spoken on noninterest income and our confidence in that business, very much the strength of the kind of customer franchise, always dependent on customer volatility and -- sorry, customer activity and volatility, but it served us very well this year. But if I think of all of those trends together, Aman, they will continue beyond next year as well, obviously, with the exception of rate cuts as we believe we'll get to that terminal rate in 2026. But I'd agree with you, we feel quite well placed at the moment. Paul? Paul Thwaite: Thanks, Katie, and thanks, Aman. And yes, A, we've announced today that we'll share targets for '28 in February. So we've been very explicit on that. So we look forward to that session. But as you say, it's obvious we've got good momentum in the business, and that's predicated on strong operating leverage. If you look at today's numbers, we've got a 5% cost/income ratio improvement, and we've guided to over 9% jaws for the year. So a very strong proof point of the operating leverage that we've got in the current business model and business mix, which we have talked about previously. But as I said, I'm just very pleased that it's bearing fruit as the -- both the income growth and the simplification agenda comes through. as I said to Sheel's question, we are high conviction on the simplification agenda. The levers we are pulling are working, and we can see a path to continue to pull those levers, which should further support the operating leverage to link it to Katie's answer as we see the top line growth through the different aspects. It's our seventh year of growth above 4% on the lending side. So that gives us confidence there that we've got customer businesses that will capture demand and have grown above market growth levels over a multiyear track record. So that's what's going to inform our thinking as we go through. But the underlying thesis here is very tight management of costs that creates capacity to invest, growing the customer franchises, strong jaws, generates a lot of capital, over 100 basis points in the quarter, over 200 for the year, and that gives us confidence about the outlook. So hopefully, that gives you a sense how we're thinking about it. And obviously, we'll talk specific numbers in February. Thanks Aman. Operator: Our next question comes from Alvaro Serrano from Morgan Stanley. Alvaro de Tejada: Hopefully, you can hear me okay. I guess the 2 bit follow-ups, but I'm interested. NatWest Markets continues to do very well and hold up very well. And I know there's a history there, and I suspect part of the cautious guidance has been on the limited visibility of the nature -- because of the nature of the business. But given it continues to perform pretty steadily, consensus has it down the contribution in 2026, and there's not a lot of growth medium term in noninterest income. Given the performance the last few years, can you sort of share your reflections on that business? How much is being cyclical versus what you changed in the business? And is that right to assume a normalization down medium term and next year in particular? And second, around loan growth, it continues to do very well. in corporate, I'm thinking now it was lumpy to start with in corporate and institutional, but it does look like it's much more spread out in mid-market now. Again, as we think about the next few quarters, how do you see that momentum? Should we think that this level of growth is sustainable? Paul Thwaite: Thanks, Alvaro. Katie, do you want to take the C&I kind of markets products question, and I'll take the wider lending. Katie Murray: Yes. No, absolutely. So I mean, Alvaro, it's interesting. Obviously, you've been with us for some time, and you've been on that journey in terms of NatWest Markets. And I think the real strategic important thing that kind of has happened really from the beginning of last year is actually the merging of C&I into into that kind of commercial and institutional business so that you have one team really delivering strategically for their customers. And we've really seen the benefit of that coming through. We've had very robust noninterest income. That -- there's been higher fee income coming through in payments and the strong performance from C&I is an important part of that. And it's really around the strategy that we've got of bringing more of the bank to more of our customers. And a result of that, we see -- we saw the strong demand for FX management and then really strong risk management as well against the backdrop of the volatile markets that was there. So really making sure that we were in place for our customers when they needed us in terms of the general kind of market activity. So I would say it is very much the outcome of that strategy of bringing that NatWest activity into the C&I franchise, making sure that we're there to deliver and meet the kind of customer activity as we go forward. And we would expect that to kind of continue from here. Volatility is a big part, of course. It's hard to call where that will land. Customer activity is critical, but we kind of -- we really do see that as a really strong basis going forward. I'd just remind you, as I often do on these calls, is when you're looking at noninterest income, it's always good to look at the 3 businesses. You do get a little bit of noise in the center as you move forward from here that will reduce a little bit as we go forward. But overall income outlook kind of is -- I think we're very pleased with it, and that's what's enabled us to upgrade our guidance for this year. And you've heard me talk around the confidence we have as we go into 2026 as well. Thanks, Alvaro. Paul? Paul Thwaite: Thanks, Katie. And Alvaro, I sense your question on lending was specifically around the commercial institutional business. And -- but just I think it's worth framing our, I guess, our lending growth and our lending opportunity more broadly before that. I say we've got a decent multiyear track record now of growing the 3 businesses. That's 7 years at above 4%. This year, it's currently running up GBP 16 billion. It's up 4.4%. So it's quite broad-based the growth. If you drop down into the commercial franchise, it's a good spot. The quarter 3 print and the growth of around GBP 3 billion is split between, I guess, the large corporates and the mid-market. It's pleasing to see the momentum in the commercial mid-market. You'll have heard me say before, I do think that's kind of a helpful proxy on the kind of wider U.K. environment. When you look at where the growth is coming from in the mid-market, -- you can see it in social housing. You can see it in certain parts of real estate. You can see it in parts of infrastructure. So again, it's quite broad-based. So lending as a total quantum, yes, strong, but the constituent businesses it's coming from is encouraging as well. Infrastructure is a big part of that. And what I'd say is I feel as if our commercial business is very well positioned to some of those bigger structural trends that we're seeing. So whether it is infrastructure, whether it's project finance, whether it's sort of the social housing agenda. So the kind of combination of the structural trends and the policy trends support those areas we are -- we have deep specialisms in and have had for quite a few years. So yes, encouraging, as you say. Thanks Alvaro. Operator: Our next question comes from Chris Cant of Autonomous. Christopher Cant: Can you hear me? Paul Thwaite: Yes, we can. Christopher Cant: Okay. It's still got a little mute icon on the screen, so I was a bit concerned. Paul Thwaite: Crystal clear. Christopher Cant: Just on loan growth, Paul, I mean, I think it's been an area where if I look at consensus, consensus has got 3% or less loan growth in over the next couple of years. It's been something that as a management team, you've typically been reluctant to sort of give an expectation on beyond saying you have a track record of growing quicker than the market. But as you think out to the next planning period, -- how are you thinking about that in absolute terms? I presume you have a view on how much growth you think the market is likely to see and you want to exceed that. But should we be thinking about 4% as a sort of reasonable expectation or in excess of 4% is a reasonable expectation, assuming no kind of macro volatility or blow up? And then on the returns target, please. So again, it's an area where you're a little bit different from your domestic peers. The last 2 return targets you've given, I guess, have been a little bit more of a through-the-cycle expectation where you would expect to hit them sort of regardless of what was happening to rates and the macro environment. Now that things have settled down from a, I guess, customer behavioral perspective, in particular, on the deposit front, are you going to be giving us a different flavor of return expectation when you're looking out to 2028? So will you be guiding on where you think the business will be in '28 with your base case assumption rather than a sort of a floor underpinning a broader range of potentially more downside scenarios around customer behavior and macro activity and so on? Paul Thwaite: Great. Okay. Thank you, Chris. So I'll take the second one quickly first. Obviously, we'll see you in February and talk about it. And obviously, some of the topics you alluded to are what we're thinking about as we go into February and we share '28 numbers. But obviously, we will lay out what assumptions we've made around those targets at that time. But it's a very active debate, as you rightly allude to. On the lending side, I think you characterized the position very well and very consistent with how we see it. We're very confident in the track record that we've had. Our ability to grow above market has been proven year-on-year. It does vary by business and market conditions as to as well. But that's what gives us confidence in terms of the outlook for the lending position. I'm not going to declare new targets or new deltas relative to market growth on the call. I think I've given quite enough color about, I guess, our historic track record and how we're thinking about the business going forward to hopefully give you a sense of confidence and optimism we have around the lending profile. Thanks Chris. Operator: Our next question comes from Jonathan Pierce of Jefferies. Jonathan Richard Pierce: I've got 2 questions. One is on the equity Tier 1 target moving forward. Is that something you'll potentially give us a bit more of an update on in February? Or are we going to have to wait until the back end of the year once Basel 3.1 is pretty much nailed down. I ask, of course, because the MDA is 11.6. I guess it drops 30 bps, something like that on Basel 3.1. And it feels like the scope to probably operate towards the lower end of your current range rather than the middle or the upper end of it. The second question is a bit more detailed, I'm afraid, around deferred tax assets. In the 9 months to date, the DTA deduction from capital has fallen by GBP 250 million, and it was GBP 100 million in the last quarter alone. So it's not an insignificant amount of capital build that's now coming from that DTA. So I just wondered if we should expect that sort of run rate to continue until the stock has run out a few years forward. I guess we should because RBS plc is now generating good profit and so on and so forth. And sorry, just a supplementary on that. The last 3 years, you bought back around GBP 300 million a year of unrecognized DTA back onto the balance sheet. Are we going to see the same again in the fourth quarter of this year, Katie? Paul Thwaite: Okay. Thanks, Jonathan. So Katie, why don't you lead out on the CET1? Katie Murray: And then I will get to... Paul Thwaite: And then we'll get to some of the DTI. Katie Murray: No, that's all right. It's one of my preferred specialist subjects, so I'll make you wait for the answers on that one just for a little bit longer. But on CET1 Look, there's a lot of things going on at the moment, Jonathan, with CET1, as you're very much aware. Obviously, the Bank of England is looking at their review of capital requirements. So we're looking forward to the FEC's update on that assessment. It's due to come out on December 2. So we'll see what comes through with that. Our approach on capital has always been to review it as part of our annual ICAP process and the risk appetite review that we do as well as working with the PRA on their kind of annual stress tests. And you're familiar with the numbers. We can see that our capital position has really improved over the last couple of years as we've derisked the business. We've also added a significant amount of capital into the business as a result of the RWA inflation that we've had. I think importantly, as part of the SREP process that we had this year that just came out in Q3. Our Pillar 2A there was reduced to -- by 17 basis points. which took our statutory minimum requirement to 11.6%. I do expect that number to reduce further once Basel 3.1 is implemented on the 1st of January 2027. And we've got pretty good line of sight in that. So therefore, when you look at it, you can see that we've got strong buffers relative to that lower bound of 13% of our current targets. So I'm not committing today as to the date or what we might do on any change of our 13% to 14% target, but we are actively thinking about the appropriate capital targets and capital buffers that we have required for our business on a more medium to longer term. Look, if you go to the deferred tax aspect of it, I think there's a couple of things to remember within there that the treatment within capital is slightly different than the treatment within accounting. So you sort of -- you can see changes coming through at different times. differences of recognition versus utilization of those assets. But we have just over GBP 800 million of DTA assets remaining. We have written back about GBP 1.2 billion since 2023. So we don't have a significant amount more to recognize. Interestingly, with deferred tax assets, you've got to really look at where they're sitting in terms of the legal entity structure as well and what's kind of -- and the ability to use them is very much structured by that legal entity structure. We do think, however, that our utilization in Q4 would be around in line with Q3. And then for 2026 onwards, we do expect a slightly lower utilization, probably around GBP 100 million to GBP 150 million per year. So continued support to capital generation, but at a slightly different level just given that we've used a lot of the losses up there or given where other historic losses are sitting and your ability to kind of access them. And Jonathan, we happily have a longer chat on DT offline as well with you, if that's something that would be helpful. Operator: Our next question comes from Guy Stebbings of BNP Paribas Exane. Guy Stebbings: So just around NII and the NIM bridge in Q3, and then I had one very short supplementary. So the hedge build was, I think, broadly as expected. The better performance in terms of the NIM bridge, I think came from funding and other and then to a lesser extent, the asset margins, which were up fractionally. So firstly, on the funding and other, I think that included some hedge accounting and reallocations between NII and OI. So perhaps you could just clarify exactly what's going on there. And to be clear, if it's correct to think that we should expect any sort of sequential benefits from there, but nor it reverses, that's the right way to think about it? And then on the asset margins, do you think we should expect to see further growth in there? Or is that really just a function of Sainsbury's coming in fully and then perhaps need to be mindful of some minor mortgage spread churn as we look forward? And then just a very quick point of clarification. On RWAs, I recognize the guidance hasn't changed. You flagged the business growth and CRD IV model changes. But just interested if we're coming into Q4 in a slightly better position than you originally thought and whether that means we might be more towards the lower end of that range for the full year guide. Paul Thwaite: Thanks. Katie, over to you. Katie Murray: Yes, perfect, Lovely. Thanks very much. So first of all, yes, funding and other, up 3 basis points, 2 bps related to treasury, and that's not going to repeat. This bucket is always interesting in the walk. It's got a number of different moving parts within it. And really, it's kind of the reflection of the management of a GBP 700 billion balance sheet that we need to consider kind of in any given quarter. So you do get the odd basis point that comes out. But this quarter, we did implement a hedge accounting solution for some of that FX swap activity that we've talked about over the last number of quarters. It's a one-off 2 bp benefit. in NIM, we don't expect it to repeat nor do we expect it to reverse. But going forward, you should see less volatility in the NIM from that activity quarter-on-quarter, which will be a lower drag to NII, a lower benefit to noninterest income. But really importantly, the same economic benefit overall as we go through. If I look at the asset margin, up 1 basis point is a very kind of small movement. And you're absolutely right, Guy, is benefiting from a whole quarter of Sainsbury's. I'm not expecting particular expansion in that line. It's very much dependent in one quarter on the mix and what you might see kind of happening within there at any time. If I spend a little moment on the kind of mortgage margins that we have within there, you're absolutely right. If you think of where our mortgage margins are versus the NIM overall, that's clearly something that you do see as a bit of a negative -- we've always talked that the book is around 70 basis points. We do see at the moment that we're writing a little below that, just -- and that's very much a symptom of the really intense competition that we're seeing on mortgages. So again, that will be a feature of the NIM as we go through from here. The market does move around in terms of where that is. But certainly, at the moment, there's a little bit of pressure within that space. In terms of RWAs, I would really think of that really as timing as much as anything else. I wouldn't say it's going to be particularly having an impact. In the next quarter, I have talked about more material CRD IV impacts coming through. There'll be a little bit of loan growth, of course. We've obviously continued to work on our risk management -- sorry, our RWA management program as well. But I wouldn't look at that and go actually, that's going to pull them down. It really is just timing. Thanks, Guy. Hopefully, that answered it all. Operator: Our next question comes from Robert Noble at Deutsche Bank. Robert Noble: I wanted to ask one on liquidity, please. So there's been a continued rotation in your liquidity from cash into government bonds that seems to pick up, right? So what's the spread pickup you're getting off that? And hypothetically, could you move all cash into gilts? Or what's the regulatory restriction that caps you out from doing that? And then just on the term deposit outflows in the quarter, should we expect the same next quarter given that 1 year and 2 year ago, rates looked equally as high. Is there a similar maturity issue in Q4? Paul Thwaite: Thanks, Rob. So I take the deposit one quickly and then back to you liquidity piece. On deposits, Rob, we did have some particularly large maturities in the third quarter. And you're right, if you think back 2 years ago when we had the kind of the backup in rates, they related to that. So it's not that we don't have maturities in quarter 4, but they're not of the same size or price or margin price points as what we had in quarter 3. And as I said, our retention rates are actually quite good. We're just being very dynamic in where we see value and retention and where we don't. So that's how to think about that. Katie? Katie Murray: Yes, sure. On liquidity. So we -- a couple of things going on in that liquidity ratio. One, we've recognized the TFSME repayment that we're about to do given the way that's moved through. So don't -- so don't kind of forget that piece, that will be happening in the next kind of few weeks. But you're absolutely right. If I look at the swap we've made into gilts, it really was a question to get some of that pickup. It's about 50 basis points in the 5- to 7-year kind of level. So very pleased to have done that. We wouldn't move the entire piece of our liquidity portfolio into gilts. That would be not quite putting all your money on black. But it's -- we do kind of obviously have some restrictions around where we have to hold and the restriction is really a function of that leverage ratio as well to make sure that, that's the right balance. I would say at the moment, the portfolio is split around 50-50. So there's plenty of opportunity to do a little bit more of maneuvering into gilts if we think that that's attractive as well. But certainly, just as you would expect us to be being quite dynamic in the management of that portfolio. Thanks very much, Rob. Operator: Our next question comes from Benjamin Toms of RBC. Benjamin Toms: First one is just to help my structural hedge model, if that's all right. Your guidance this year for structural hedge maturities of GBP 35 billion. Should we be making the same assumption for next year? I'm just conscious that you added to the hedge in '21 and 2022. So I'm not sure whether that should mean there's a pickup in maturities or whether you're just feathering at the front end, which means maturities should be pretty consistent as we go through the years. And then secondly, on other income, you purchased cushion in 2023 to provide workplace pension solutions. Can you just give us your latest strategic thoughts on that part of the business, what you think you do well and what you think you lack? Katie Murray: Yes, perfect. So in terms of the maturity, I mean, Ben, the way that we look at it, it's GBP 172 billion at the moment. It's obviously a function of current account and NIBs growth. We're pleased to see the growth in that. You'll recall that we do a kind of look back of 12 months as we work out how much we're going to reinvest. We also do some work during the year on the behavioral life in terms of what's happening with our actual current account holders and things like that. But actually, what I would guide you to at the moment is think of it really as GBP 35 billion a year. If we see particularly strong growth on those current accounts, it might change in the future years. But for your model, I would stick to the GBP 35 billion number. It's very even because we've been so mechanistic. So I wouldn't kind of deviate from there. Paul, do you want to? Paul Thwaite: Yes, I'll take workplace pensions. So Ben, cushion is a good business. It's got a strong proposition, very strong technology, and it's proven attractive to our kind of commercial mid-market customers. Obviously, there's kind of legal legal and kind of market dynamics that make it important for a lot of those clients to be able to offer workplace pensions to their employees and colleagues. And it's proven very attractive. And it's -- going forward, I think it's an important part of the proposition that we can provide or facilitate that service. There has also been a series of reg changes in the last couple of years around Master Trust, which certainly lend themselves to Master Trust having significant scale. So net-net, it's a good business. It's an important proposition to be able to offer to our commercial clients, but there have been some regulatory changes as well. So that's how we're thinking about, I guess, that workplace pensions area. Thanks Ben. Operator: Our next question is from Ed Firth of KBW. Edward Hugo Firth: I guess I had 2 related questions. I mean the first one is, if I look at your returns in Q3, they're now -- even if you take out the one-off, over 20%. And if I -- if you can normalize, we can normalize the hedge and capital is quite strong. So you're easily getting into the mid-20s or high 20s. And so I'm just trying to think how do you think about that in terms of what is an appropriate level of return? Because we can talk about the operating leverage and lower capital requirements going forward, et cetera, which would push that up even more. And I'm thinking of that, I guess, in the context of a bank tax potentially in November because it feels like it will be quite a tough discussion between you and the government about levels of return and appropriate levels of return. So I guess that would be my first question. At what level do you think we make enough now and actually we should be focusing on growing from here and fixing the returns? I guess that's the first question. Then the second one is sort of related to that. We're all sort of thinking now about -- I know it's sort of 2 years away, but what happens when the hedge runs out. And if you are at sort of peak returns, what do you do next, I guess, is the question? Because there was various discussions earlier in the year about potentially you buying things, but you obviously stepped away from that. And I'm just thinking, is that what we should think about going forward? Because relative to your own returns, I think it's going to be tough to find anything that makes an equivalent level if that's okay. So rather rambling 2 questions, but I think quite key. Paul Thwaite: Yes. Thanks, Ed. Good to hear from you. I guess there's a number of those points intersect with each other. First thing I'd say is, as you well know, it's taken a long time for a number of banks to return their cost of capital. So in some ways, it's healthy that we're having that discussion. You look at it through another lens, notwithstanding that, U.K. banks are still valued very differently to many other parts of the world for what could arguably be said to be similar businesses, similar business models and mixes and in certain extent, very similar regulatory regimes. I'm going to slightly disappoint you and give you a kind of a politician's answer about what's the right levels of returns. I think the key way we think about it is from a management team perspective and a Board perspective is we need to get the balance right between supporting customers and deploying our capital to do that and helping them grow and hopefully helping the U.K. between investing in the business, it's a very competitive sector, not just the large incumbents, but there's a very broad range of competitors. It's crucial that we invest in the business. And primarily, that relates to technology and people. And we need to make the right returns and return and present what hopefully everybody believes is an attractive investment case. So the debate we have is about the balance between those 3 items. It's a spot RoTE for the quarter. As you say, it has some one-offs in, but yes, fair challenge, it's year-to-date, it's 19.5%. And if you take off the one-offs, it's high 18%. We're working very hard on all the lines, not just the structural hedge. We're trying to grow lending growth. We're driving cost out of the business. We're working the balance sheet an awful lot harder. So we think those returns are the kind of the fruits of our activity. And I think as a Board, you just have to -- we just have to debate, let's get the balance right between making sure we've got a really attractive and sustainable business in the long term, and we're investing it -- we're doing what we need to do in terms of supporting customers and delivering returns. So that's how we think about it. I know I haven't shared a number there for -- because I don't think that's the appropriate way to do it. On M&A or kind of where does that lead, which is a very connected question. The strategy is working. I laid it out 2 years ago. The organic plan is obviously proving successful. We're growing all 3 of our businesses. We're driving a lot of simplification. I think we've got a good runway to go. We've managed to do that without changing our kind of risk profile. That hasn't been a constraint on our growth. We've continued to grow. So that's great. So organic plan looks good. If opportunities come to accelerate that plan, then we'll look at them. You'll have heard probably 5 times my quote about the financial high bar, but that remains true. It has to be -- if we're going to deploy capital on something that we think can accelerate the plan, it has to be compelling from a shareholder perspective. And that's how we look at things. It has to Otherwise, it's -- I think it's a hard case for me to make to investors. So we will look, but we'll be cold eyed. And the counterfactual, as you say, when the organic plan is performing so well, the counterfactual can be arguably more challenging. But I think I have a responsibility to do that in terms of the alternative uses of the capital. So I've expanded a little bit there. Hopefully, that's given you a sense of just how as management, we think about those topics. Operator: We are now approaching 10 a.m. So we'll take our last question from Andrew Coombs from Citi. Andrew Coombs: I guess one follow-up and 2 follow-ups really. Just firstly, on that point about capital return versus inorganic versus organic loan growth. I mean, you yourself have said there's a very high bar for inorganic given the returns you're already producing. And obviously, now you're trading well above tangible book. The buybacks are also slightly less accretive than they would have once been. So when you're thinking about the dividend payout, the 50% policy, any reason why that couldn't be higher going forward? What are the pros and cons of shifting that dividend payout ratio? And then second question, just on the structural hedge. You're still at 2.5-year average duration. Your peers are all now at 3.5 partly due to what they see to be the behavioral life of the deposit base. I'm sure partly due to technical reasons as well. But perhaps you could elaborate on the maturity profile of the hedge and why you don't see the need to increase it here. Paul Thwaite: Great. Thanks, Andrew. I'll take the first. You take the second, Katie? Katie Murray: Okay. Paul Thwaite: Okay. So Andy, obviously, we've increased the ordinary dividend from 40% to 50%. We're in the first year of that. In parallel, we'll also said we'll look at surplus capital at the half year and the full year, as you would expect us to with the Board. We're very keen to have a consistent approach to surplus capital distribution. So we're not actively reviewing the ordinary at the moment. But over time, obviously, it's a responsible thing for the Board to do. Katie, on the average life of the hedge? Katie Murray: Yes, absolutely. So it's interesting -- as we look at the hedge, it's important to remember the hedge has got 2 portions within it. There's the equity hedge and also the product hedge. So you're absolutely right. The product hedge is 2.5%. The total hedge is closer to 3. I think it's important as you look at the assumptions on this is the mechanistic model that we've had has played out very well for us. I mean, for me, I think you'd only increase your duration if you felt the duration of your eligible deposits had increased based on behavioral assumptions. I think given what we are seeing in terms of movement that we have not just on the current accounts, that wouldn't actually necessarily be something that I would say that we've seen in our books. I'm not doing that. And I think it's also really important. We've always been very clear that with the hedge. It isn't there for us to express a view on where rates are sitting. Others sometimes have taken different views on that, and you need to talk to them on that. But that's -- for me, if you were to try to extend at this point, the absolute pickup you'd be getting wouldn't be logical for the difference you would be making in it. And we don't necessarily see that actually within our underlying numbers that we're seeing those changes in behavioral likes that would also support that duration extension of that. But overall, product hedge 2.5 years, total hedge about closer to 3, very comfortable with the performance of it served us well for many, many years. And as we look at that increase in income this next year into 2026, greater than GBP 1 billion and continuing to grow as we go out to 2028 as well. So very happy with how it's performing. Thanks very much. Operator: Thank you for all your questions today. I will now pass back to Paul to close. Paul Thwaite: Yes. Thanks, Oliver, and thank you, everybody, for your questions. We appreciate both your time and the insightful questions on the call. So to wrap things up, we're very pleased with the performance in quarter 3 and the continuing momentum we've got in our 3 businesses. We've upgraded our income and returns guidance, and we continue to see opportunities, as I think we've conveyed today to continue to take market share and grow those businesses. We look forward to catching up with you at a couple of things. We've got the retail banking spotlight on November 25. And also, as I said earlier, we'll update you on our guidance for 2026 and share our new targets for 2028 at the full year in February. So I wish you all a good weekend. Thank you. Katie Murray: Thanks very much. Operator: That concludes today's presentation. Thank you for your participation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome, and thank you for participating in the joint Media Analyst and Investor Call regarding Porsche AG's Q3 2025 results. This call will be hosted by Dr. Jochen Breckner, member of the Executive Board for Finance and IT. [Operator Instructions] At this time, it's my pleasure to hand over to Dr. Sebastian Rudolph, Vice President, Communications, Sustainability and Politics. Please go ahead. Sebastian Rudolph: Yes. Thank you, and hello, everybody, and welcome to our joint media analysts and investors call. We're talking about the results of the first 9 months of 2025 of Porsche AG. And with me today are our CFO, Jochen Breckner; and Bjorn Scheib, our Head of Investor Relations. Jochen will give you a brief overview of our business performance year-to-date, then after a short break, we will hold two Q&A sessions: first, with analysts and investors, then with the media. As always, you can find the press release in the Porsche newsroom. The investors deck and the quarterly report are available in the Investors section of the Porsche website. And with this, I hand over to my colleague, Bjorn. Björn Scheib: Sebastian, thank you very much. Good evening also from my side. And before we begin, please note that any forward-looking statements during this call are subject to the risks and uncertainties outlined in the safe harbor statement which is included in our materials. This introduction is also governed by this disclaimer. With this, I hand over now to Jochen. Jochen Breckner: Bjorn and Sebastian, thank you very much. Also thanks, everyone, for joining this call. Good evening, everyone. Let me walk you through Porsche's performance in the first 9 months of 2025 and the strategic actions we have been taking. Let's start with the big picture. Porsche continues to build on a strong foundation, a loyal customer base, a compelling and completely refreshed product portfolio and one of the most iconic brands in the world. Keeping in mind the current gaps in our product portfolio, our unit sales are resonating well. As you've seen in our press release two weeks ago, Porsche reported robust delivery figures with 212,500 vehicles delivered to customers worldwide between Jan and September. Here, the share of electrified vehicles significantly grew to 35.2%. In Europe, the share even reached 56%. Our region overseas and emerging markets and the USA achieved a new all-time record. North America remains our largest region with 64,000 deliveries and a 5% increase. Now let's skip from deliveries to vehicle wholesales Here, Porsche sold 198,000 vehicles in the first 9 months. This is a year-on-year decline of 11% with a mixed picture across model lines and regions. The Macan showed strong momentum, becoming the best-selling model with 61,500 units. That's 10% increase year-over-year and includes 33,900 units of the new all-electric Macan. Sales of the Cayenne declined by 22% due to a prior year catch-up effect. The 911 saw a 6% drop linked to stack-up launches of the new generation. The 718 was impacted by limited model availability due to new EU cybersecurity regulations. North America, excluding Mexico, recorded a 6% decline in the first 9 months. This reflected temporarily lower imports after the summer break following high inventory levels at the end of Q2. China, including Hong Kong, saw a 25% drop. This was driven by ongoing market challenges in the luxury segment, intensified competition and a strategic focus on value-oriented sales. In contrast, our overseas and emerging markets grew by 3% to almost 40,000 units, which demonstrates resilience and growth potential. Porsche's Global sales remain well balanced across key regions. This underlines the strengths of the brand, the appeal of our product portfolio and the resilience of our diversified market presence. Despite adverse market conditions, incoming orders remain robust. This reflects strong brand desirability and a favorable product mix. Demand for individualization options remains unchanged on a very high level. In the first 9 months of this year, Porsche generated group revenues of EUR 26.9 billion. This is 6% below the prior year period. The under-proportional and moderate decline was primarily driven by positive pricing, along with higher revenues in the Financial Services segment. This performance underscores the strength and diversification of Porsche's business model even in a challenging market environment. Let's now take a closer look at our expense development in the first 9 months. Total expenses including cost of goods sold, distribution and administrative functions increased by EUR 2.3 billion year-over-year, reaching EUR 27 billion. Despite temporary relief from lower production volumes on cost of goods sold, Porsche's broad-based cost increases driven by several structural and external factors. These are the persistent inflationary pressure across the supply chain. A significant increase in R&D expenses, primarily due to reduced capitalization and higher depreciation and amortization, geopolitical challenges beyond our control, most notably the U.S. import tariffs and significant costs associated with our strategic transformation initiatives. To counterbalance these headwinds, our comprehensive profitability program Push-to-Pass delivered targeted efficiency improvements. This initiative reflects Porsche's disciplined execution and long-term commitment to innovation, regulatory preparedness and cost resilience in an inflationary environment. Nevertheless, group operating profit declined to EUR 40 million. This corresponds to an operating return on sales of 0.2%, a result that clearly falls short of our expectations. It is important to note, however, that this figure includes substantial extraordinary charges. Year-to-date, Porsche recognized approximately EUR 2.7 billion in extraordinary expenses related to its strategic realignment, portfolio adoptions and battery activities. In addition, tariff-related costs imposed a burden over EUR 500 million, which further impacted profitability. These charges also had a significant impact on the automotive segment, which reported a year-to-date operating loss of EUR 200 million. Let me emphasize, excluding the extraordinary effects from the strategic realignment and the U.S. import tariffs, the underlying performance of the automotive segment remains robust. This strength is driven by favorable pricing, the successful execution of our Push-to- Pass initiatives and a temporarily favorable foreign exchange and quality environment. Reflecting the operational strength of our ongoing business, Porsche's automotive net cash flow increased to EUR 1.3 billion by the end of the third quarter of this year, up from EUR 1.2 billion in the prior year period. This corresponds to a net cash flow margin of 5.6% compared to 4.8% a year earlier. This also highlights our continued focus on disciplined spending and effective working capital management. The strong cash flow performance in Q3 was supported by disciplined investment and spending practices as well as rigorous working capital management. Notably, based on our value-oriented production approach, we achieved a significant reduction in temporarily elevated inventories in the United States and China, which had built up by the end of Q2. Year-to-date, automotive net cash flow also reflects extraordinary outflows of approximately EUR 900 million. These are primarily related to our strategic realignment initiatives and tariff-related expenses. With that, let me turn to the outlook. We plan to continue our model offensive and customer-focused product strategy. Porsche remains well positioned from both a product and pricing perspective. Our core assumptions regarding unit sales, supply chain stability and cost trends remain unchanged. Recent news flows underline that global supply chains are expected to remain volatile. The supply bottlenecks at the Dutch chip manufacturer and Nexperia continue for the time being to have no impact on production at Porsche. The Dutch company, Nexperia is not a direct supplier of the Volkswagen Group. However, some Nexperia components are used in vehicle parts with which also Porsche is supplied by its direct suppliers. The Volkswagen Group is currently examining alternative sourcing options in order to minimize possible effects on the supply chain. The company is also in close contact with potential suppliers in this regard. Porsche has also set up a task force. In light of the EU, U.S. agreement on import tariffs, our forecast for the full year reflects the 15% U.S. import duty effective August 1. We are proactively implementing mitigation measures such as targeted pricing adjustments to preserve margin integrity. Without the product-related portfolio decisions made last month, Porsche would have reaffirmed its original group return on sales outlook from Q2 '25, despite persistent market headwinds. As a result we expect group revenue in the range of EUR 37 million to EUR 38 billion, unchanged from our previous guidance. At the lower end of the bandwidth, we anticipate a slightly positive group return on sales and an automotive net cash flow margin of 3%. At the upper end of the bandwidth, the group return on sales is expected to reach 2% and an automotive net cash flow margin of 5%. The latter remains well within the range of our initial guidance from the end of April. The Group's return on sales guidance for full year 2025 reflects approximately EUR 3.1 billion in extraordinary expenses, primarily related to strategic realignment efforts. These include the repositioning of Salesforce Group and adjustments due to recent product portfolio decisions. Also, the Group's return on sales guidance incorporates a high triple-digit million euro impact from U.S. import tariffs. For the full year, automotive net cash flow margin outlook, we anticipate outflows related to our strategic realignment initiatives alongside tariff-related payments of approximately EUR 1.2 billion. Our cash flow guidance of 3% to 5% for the fiscal year reflects a tariff agreement reached between the EU and U.S. authorities. Assuming reimbursement would be recognized post December 31 only, current expectations support maintaining the guidance unchanged. We continue to pursue a disciplined currency hedging strategy. For 2025, substantial exposure has already been secured with significant coverage beyond 2025. This approach supports planning reliability and safeguards margin integrity. Before concluding, let me briefly address our capital allocation strategy. Driven by the new product initiatives aligned with our strategic realignment, we anticipate R&D spending to peak in the current and upcoming fiscal year, followed by a decline. Porsche remains committed to delivering a reliable dividend to our long-term shareholders. Supported by our strong balance sheet and robust cash flow, the Executive Board currently intends to propose a dividend for fiscal year 2025 that deviates from the medium-term policy. In absolute numbers, the proposed dividend is expected to be significantly lower than last year's payout. But it still would clearly exceed the level implied by our medium-term framework of 50% payout ratio. Final approval remains subject to the relevant corporate bodies. Porsche reduced its asset base by more than EUR 1 billion in 2025 compared to previous year. This reflects a significantly lower capitalization rates and reduced CapEx year-over-year. Combined with higher depreciation, amortization and impairments. Looking ahead, our capital asset allocation strategy will increasingly emphasize partnerships and licensing over ownership and vertical integration. This shift will not safeguard but enhance our agility and strategic flexibility. With this, we strive to better seize opportunities in a fundamentally transformed market environment. With a clear focus on involving customer preferences, we are expanding our portfolio to include additional combustion engine and plug-in hybrid models. This strategic move complements our commitment to electrification and ensures a broader offering across key segments. We also continue to execute our successful Halo strategy, anchored by high-impact lighthouse projects that elevate brand desirability and attract high-value customers. Models such as the Cayenne Turbo GT and the 911 Dakar exemplify our unique blend of performance and lifestyle appeal. They reinforce Porsche's identity in the exclusive segment. The latest result of this strategy, the 911 Turbo S has received strong demand and highly positive feedback from both media and customers. This underscores the enduring strengths of the 911 brand. Starting in 2028, a more balanced drivetrain offering will further strengthen our market position and support sustainable long-term growth. We remain also committed to electromobility and view decarbonization as a core societal responsibility. We scale our operations and strengthen long-term resilience, we have already taken decisive steps to align our cost structures and strategic footprint with future market realities. We have initiated a comprehensive workforce transformation targeting both direct and indirect roads in order to ensure organizational agility and efficiency. We are accelerating cost efficiency initiatives across the organization to unlock sustainable savings. In China, we are executing targeting strategic adjustments, including streamlining our dealer network and reinforcing our presence in high-demand regions. Where long-term profitability is no longer viable, we will responsibly reduce our footprint. Originally, we anticipated reducing our dealer network from approximately 150 dealerships down to around 100 by 2027. This target has now been revised downward to around 80 dealerships, reflecting a more focused and profitability driven approach. Additional measures are currently under evaluation. Let me also briefly address the discussions on our future package. As you are aware, management and the workers council are currently engaged in constructive dialogue to jointly shape this initiative. Our shared objective is to enhance the company's resilience, flexibility and agility. Thereby reinforcing our long-term competitiveness in an increasingly dynamic market environment. Importantly, we do not anticipate any significant extraordinary burdens arising from these negotiations. While all these measures will temporarily impact our financials in 2025, they are strategically sound and essential for long-term success. We are confident that this approach will strengthen our position in a dynamic market and support sustainable value creation. Porsche has a proven track record of navigating complex environments, and we are currently managing through another period of macro industry by challenges with strategic clarity and operational discipline. With our strategic realignment, we are executing a clear plan designed to strengthen our brand and to sharpen our product offering. Our focus remains on enhancing product portfolio flexibility, strengthening product individuality, increasing exclusivity, and driving desirability across our portfolio. These efforts are aligned with our long-term ambition to position Porsche for sustained high margin growth and Brazilian profitability. We expect 2025 to represent the trough in the current cycle. From 2026 onwards, we anticipate a meaningful recovery in performance supported by positive momentum from our product portfolio and the profitability measures from Push-to- Pass. And with that, let's turn to your questions. After a short break. Thank you very much. Operator: Ladies and gentlemen, we will now have a short break before starting the Q&A for analysts and investors. Please hold the line. [Break] Operator: Ladies and gentlemen at this time we will now begin the question and answer session for the analyst and investors. [Operator Instructions]. With that, I hand over again to Bjorn Scheib. Björn Scheib: Thank you very much. So we will start the Q&A session for analysts with Tim Rokossa of Deutsche Bank. And then next in the row will be Horst Schneider of Bank of America. Gentlemen, as said, this is a joint media and analyst call. As such, please limit yourself to one or [indiscernible] two questions. Thank you. Tim Rokossa: This is Tim from Deutsche Bank. I would have 1.5 questions then. So actually pretty good underlying margins and free cash flow numbers, the 12%-13% margin adjusted for one-offs and tariffs. Now tariffs will likely be the new normal, and that also feels like you still need to do some repositioning for the business, fine-tune here and there. Jochen, when can we expect the burden from one-offs to really go away and think about an underlying matching the stated figure? Is that '26 or already during Q4? And then when we think about Q4 and '26, is there any sound bias you can already give us? You sounded pretty confident in your statements. Can we assume that you can possibly improve as of today from the 5% to 7% EBIT margin range that we had previously? Is there any sort of major one-off still to be expected in Q4? Jochen Breckner: Tim, thank you very much. And as you said, we were really happy with our operational performance in this year for the first 9 months. And as discussed and just also elaborated on, we had various onetime effects that will go away in the future. As of now, we have posted EUR 2.7 billion until September. And this is expenditure. Your question was about cash, but let me start with that one. EUR 2.7 billion that we've already posted for the effects that you know strategic realignment that we committed at the beginning of the year, also organizational adjustments and then the latest decisions on the updated product portfolio. So these expenditures are already digested in Q3. We expect additional one-offs and special expenses in Q4 as we've guided for. So when we look at the full fiscal year 2025, we are very confident that we will reach the 0% to 2% profitability guidance corridor. For '26, no major one-off effects are expected. So the expenditures that we need for the strategic realignment for reorganization, the by far biggest part will be in the books in 2025. Now on the cash flow side, again, a very robust net cash flow by the end of Q3. We have optimized working capital. We have reduced CapEx spending as good as we could. And most of the additional expenditures we had for the one-off effects were not cash relevant until the end of September. Some of them are already gone as cash spending since we are talking about depreciation of capitalized R&D expenditures, for example, and other cash effects are expected to be an headwind in 2026. So again, by the end of this year, cash flow margin will be between 3% and 5% that we've guided for. And having said all that, for the end of 2025, we also will have first effects for the strategic realignment for 2026 pull forward into Q4. 2026, it's too early to guide that year, and we will do that as always, with the official forecast report with the annual press conference. But as I have communicated it earlier and also in this statement, we will be in a substantially better situation on reported numbers. 2025 will be the trough. But having said that, we do not expect on a return on sales level a double-digit performance in 2026. That is something that we will target for the years to come after 2026. Tim Rokossa: Would you confirm though, your previous statement that a high single-digit margin is possible with everything we know today, obviously, things can still change, right? Jochen Breckner: You're saying a high single-digit margin is possible for 2026. I would confirm that, yes. Björn Scheib: Next in the row is Horst of Bank of America, and he will be followed by Sam from Exane BNP. Horst Schneider: Yes, my first main question that is basically on the tariffs again. I think that's an item that surprised me the most on the upside in this release. So you say it was above EUR 500 million in year-to-date, which implies a burden of something like EUR 100 million, maybe EUR 150 million in Q3. I know the tariff came down, but it looks to me that the impact in Q2 was a little bit overstated. And in Q3, it was basically, there was a benefit from kind of tariff provision release maybe. So maybe you can explain that and also the magnitude of that? And is it right basically that the underlying tariff burden is something like EUR 250 million and not EUR 150 million a quarter? Jochen Breckner: Yes. Tariff situation was quite complex, Horst. So maybe just for everyone in this call to have everyone on the same sheet of paper. We are 27.5% as of April 3, then the reduction to 15% as of August 1. And on that assumption, we are also guiding the full fiscal year, so that tariffs will remain at 15%. Based on quarterly numbers, we communicated with the H1 numbers that we had effects from the U.S. tariffs around EUR 400 million. And by the end of Q3, cumulative numbers are a bit more than EUR 0.5 billion. And this is a complex math of the varying rates that we had, the 27.5% and the 15%. We did not have the 15% for the full third quarter. That's something that just kicked in by the end of July. So as August 1 and based on these assumptions and facts, by the way, in the actuals, we have made up the tariff numbers. For the full year, we expect a very high 3-digit number. You can do the math. I mean, having the number for the Q2 with the special effects also Q3, lower rate and first pricing mitigation numbers that we have there. So for the full year, we expect the tariff burden to be in the ballpark number, as I've communicated also in the last call. So this is something where we would see around about EUR 0.7 billion for the full fiscal year. Horst Schneider: Okay. That's great. Just a small follow-up. Would you be able to comment on price/mix in the third quarter? Because you raised prices, maybe you can give a wrap-up again overview by how much? And are any further price increases coming from here? Or you're basically done now with the tariff pricing? Jochen Breckner: Yes. We've increased pricing for the new model year 2026 across the board for all regions. So that's an effect that depending on the launch of these new cars already started to kick in, in Q3 and will further strengthen the pricing position throughout the year and then also for 2026. On top of that, we had an additional pricing hike in the United States for first compensation measure for the U.S. tariffs to keep our margins on a, say, decent level and coming through pricing as a mitigating effect on and measure on the tariffs, we are planning to have an additional price increase in the months to come. It's not communicated yet and not decided in full detail yet. So that's something you can watch out for, but we really plan to have a second step there. And the full effect of all these pricing measures will be seen in 2026. Horst Schneider: But just as I got it right on this tariff, you said EUR 0.7 billion for the full year, and you have not released provisions in the third quarter. Did I get that right? Or... Jochen Breckner: No, I said that for the full year, we expect EUR 0.7 billion as a tariff effect. And that includes and is based on the assumptions that we have paid the 27.5% until the end of July and that we have paid and will pay the 15% from August 1 through December 31. Björn Scheib: But to be clear, there is no release in any tariff provision or anything as such. Next in the row will be Sam, and he will be followed by Stephen from Bernstein. Samuel Perry: Building on Tim's question, frankly, around the reversal of one-offs into next year, which judging from your previous answer was that you basically expect them to fully reverse. What's the risk here that with the new CEO, we get further tilts in the strategy into next year and therefore, further one-offs? Or is the assumption that he's going to come in and then adopt the exact strategy that's already been laid out? That would be my first question. Then a quick question on China. Have you seen any impact of the luxury tax that's come in, in demand in August and September or any prebuy in July before it came in? Jochen Breckner: Yes. So on your first question, Sam, whether we would expect additional strategic realignment decisions with the new CEO coming to our company on January 1, Michael Leiters -- that's something that we will see when he is here. I mean he's not here yet. He's in a competitive situation with his former company, McLaren. So we have not started discussing professional issues and business issues as of now. Having said that, Michael is a well-known colleague. We've worked together in the past when he worked with Porsche, great collaboration, a great guy, and he knows Porsche very well. He knows our strategy, is from the automotive business. So of course, every time a new CEO joins the company, there will be a programmatic approach to that. But from today's perspective, would be early to expect more one-off expenses from my personal perspective. I think the major decisions have been made and are suitable and great decisions for the company. Second question was on China. The baseline for the luxury tax has been lowered to CNY 900,000, which affects our portfolio or some part of our portfolio. We have not seen prebuying effects because that new legislation was launched within 48 hours. So no customer had a chance to really run much into prebuying. So that effect was close to 0, I would say. After the effect, we have conserved prices and protected prices for the existing customers. So demand was on the level that we have seen. And looking forward, the increase of the luxury tax or the lowering of the baseline for the level when the luxury tax kicks in is something that we will monitor. We have looked at our portfolio, and we will come up with strategic decisions on how we can position the one or the other derivative to be in a more competitive situation. Björn Scheib: So next in the row will be Stephen of Bernstein, and he will be followed by Anthony of ODDO BHF. Stephen Reitman: My question is about the U.S. I asked on the last call about your the repeal of the IRA, which and the particular lease credit on your BEVs. Could you comment on what's been happening since then, in particular, the pricing and how you're pricing the leases of the Macan Electric and also the Taycan, which I noticed were some of the better performance in the third quarter, at least at the retail level, indulging by some of the data that we can see here. Jochen Breckner: Yes. You're referring to the $7,500 tax credit. The electric cars were to -- if they are not bought as cash buying -- this is brought on lease contracts. And of course, the deduction of that effect leads to higher lease rates on a monthly basis. And therefore, our products are getting more expensive than they have been. And there we see some minor effects on the demand side, but the effect is significantly lower than you might have expected that it could be given that USD [ 7,500 ] is a rather big number. But as of now, we are quite happy with how the demand developed also at the higher monthly payments that we have to communicate with our Porsche Financial Services offers we have. Stephen Reitman: And the second question, could you remind us as well what the time line is for the ending of production of the Macan ICE and also for the Cayman and the Boxster, please, ICE versions? Jochen Breckner: Yes. We still offer the ICE Macan in the regions out of Europe, out of the European Union. We will produce the car well into 2026, and that car will be on offer throughout 2026 and in some markets, even in 2027 based on final stocking that we will do, exact EOP, end of production date still to be decided and planned in the exact planning, but it will be more or less in the middle of 2026. But as I've said, customers will get their cars also throughout 2026 and some even in 2027. On the Boxster and the Cayman, the end of production is here to come. That will be in October. So we are producing the very last cars these days. And then it's the same situation as with the first Macan, the ICE Macan that customers will receive their products throughout the next month. Björn Scheib: Very good. So next then will be Anthony. And after Anthony, we have Michael. And please note in about 5 minutes, then we move over to the press. Anthony Dick: Yes. The first one is on just the general kind of margin environment for 2026. So it seems like there's quite a few tailwinds for you, of course, outside of the nonrecurring charges you had in 2025, but you might also be having lower tariff impacts based on that kind of EUR 150 million run rate and also some positive pricing and likely mix also. So I was just wondering what might be preventing you from reaching that double-digit margin in terms of what headwinds should we take into account for 2026? And then the second one is just a follow-up also on the free cash flow. So you mentioned EUR 1.2 billion of cash out this year for the restructuring and the tariffs. Could you actually maybe break that down between the restructuring and the tariffs? And also what remains in 2026 in terms of what cash out remains on the restructuring? And what kind of reimbursement should we expect for the tariffs? Jochen Breckner: Yes, a couple of questions. Let me answer it. So first, a question on why do we not expect double-digit return on sales performance in 2026, given the quite robust performance that we've seen if you do the reconciliation with all the one-off effects from 2025. In 2026, based on the substantial improvement that we will expect, we also have some headwinds that we have to take into account. First one is product offering. I've just commented on the ICE Macan and also on the runout of the 982, so the Boxster Cayman car, which will have [ last ] sales based on the production that we had so far. But from a portfolio perspective, we will have additional issues where we do not have supply. Second is we do not expect China to recover. So given the trend in China and also in some other markets, our assumption is that our sales will be -- unit sales will be lower in 2026 than expected for 2025. Also, from an FX perspective, as I've said, 2025, almost fully hedged. Also in the years to come, we have quite high and substantial hedging ratios, but there are some open positions and also in 2026, first effects will occur where our FX situation is a little bit weaker than it has been in 2025. And given these effects, we see a huge improvement, really a relevant one single-digit performance in return on sales, but it will take a bit more time to come back to the 2-digit performance. Net cash flow for Q3. So year-to-date Q3 outflows were about almost EUR 900 million. When it comes to U.S. tariffs, that's a bit more than EUR 500 million. And then we had additional spendings on the strategic activities and organizational realignment activities that gives you the number of almost EUR 900 million of special effects on the cash side for the one-offs and U.S. tariffs. Anthony Dick: For '26 remaining in terms of disbursements related to the realignment and reimbursements related to the tariffs? Jochen Breckner: But for 2026, we will have, from our perspective and based on our assumptions, a stable tariff situation of 15% import tariffs to the United States. So we will see that in the full year compared to 2.5% in the first quarter, 27.5% until July and then 15% from August through December. If you do the average for these different quarters in this year, for the next year, you will have a similar number that we expect for the next year. So tariffs, stable situation, 15%, more or less a burden as we have it in this year. And for the strategic realignment, the one-off expenses will be -- the really biggest part will be posted in 2025. So we do not expect material effects in 2026. Björn Scheib: Very good. So next then will be Michael, and then we will hand over to our colleagues of the media. And if we would have time at the end of this call, we will see if we can squeeze in the one or the other question. Unknown Analyst: A couple of quick ones, if I can. Just in regards to China, the work you're doing in China, can you talk about the cost of that? So shrinking from 150 dealers to 100 now to 80, what have you had to pay the dealers to have them walk away from the contracts that you've got with them? That's the first question. So China compensation, if you like. And then the second question is just around the tariff piece. If I remember rightly, you built inventory in the U.S. on your own books in the first half. Is that the reason why the tariff in the first half looks really high versus what looks to be a very low tariff in Q3 that you were actually burning off that inventory in Q3, which meant the actual tariff impact was smaller? Jochen Breckner: Yes. Thanks for the questions. On China and the restructuring work that we are doing in the dealer body from 150 to initially 100, and now we're targeting 80 dealers to set up a dealer network that is robust and financially viable and profitable. That's an activity that we are doing in really good cooperation and good talks together with our dealers because they have the same interest in coming up with a business model that works profitably in the Chinese markets as opposed to what we've seen during the last couple of months or years. That comes with the cost. That's clear. But these costs are not substantial compared to the other effects that we have communicated in terms of strategic realignment and restructuring of the company. If there would have been -- we would have incorporated that into our communication. So I'm not in a position to give you an exact number since we're also in negotiation position with our dealers. But as I said, very constructive talks, joint interest in adopting the -- and joint target in adopting the dealer network, the dealer body, and that's something that we can digest in our profitability in the current year and also in the next year when these actions will happen. On tariffs, of course, the cars imported by the end of Q2 had a 27.5%. We had to pay based on the import data that we have. And once you release these cars, of course, the tariffs are posted to the cost of goods sold when we reduce the working capital. So you have some effect there. But I think you should look at the tariff situation, as I commented on it on a yearly basis for the full year, EUR 0.7 billion, and that's also a good estimate for the year to come based on then 15% throughout the year. Björn Scheib: Before we hand over, may I only clarify one thing. When Jochen talked about lower unit sales next year, we are talking about unit sales to the degree of car sales, wholesales. This is no revenue guidance. This will all come next year, because I already got first questions if this is our revenue guidance. This is no revenue guidance. Jochen Breckner: Thanks, Bjorn. Sebastian Rudolph: Okay. colleagues, then we make a short break and then we're right back with the Q&A for the media. Operator: Ladies and gentlemen, we will now have a short break before beginning the Q&A for the media. Please hold the line. [Break] Operator: Ladies and gentleman, we will now begin the questions and answer session for the media. [Operator Instructions]. With that, I hand again over to Dr. Sebastian Rudolph. Please go ahead. Sebastian Rudolph: Yes. Thank you very much, and welcome back colleagues to the Q&A session for the media. We have limited time. It would be great if you limit your questions to one, if possible. And with this, I would say we start with the Financial Times and Sebastian -- just unmute your mic and the floor is yours. Unknown Attendee: I wanted to ask with respect to the U.S. tariff resolution last week, which has bought somewhat of a tailwind for U.S. carmakers. How do you feel this impacts your position and the position of European car makers relative to other manufacturers with a manufacturing presence in North America. Jochen Breckner: Sebastian, thanks for the question. If we got you rightly, you're asking about the U.S. tariffs and changes that you were referring to. So commenting on that one, I'm not aware of any relevant changes, as I've just communicated in the other call. We are planning our assumptions on 15% as persisting and remaining tariffs for cars to be imported. I know that there are some political decisions on the truck business where trucks might be affected, but it's not relevant for us as passenger car manufacturers. So again, we are paying 15% since August 1, and that's our assumption for the end of this year and also for the next year. Sebastian Rudolph: The next question goes to Rachel Moore of [ Reuters ]. Please, Rachel. Unknown Attendee: I wanted to ask if there is an update on the measures that will be required as part of the restructuring. You have the second package of measures currently under negotiation. Can we expect more job cuts? And what's the time line on that? Jochen Breckner: Rachel, we have started the negotiation on the second package. We call it the future package because that's a package that will really improve the competitiveness of our business model and our sites in Germany. We do that internally. The discussions and negotiations with our workers' council. So we are not in a position yet to communicate anything detailed because it's not agreed and we're not do not want to discuss this in public. We do that on ICE level with the partners from the works council. But what I can say is that we are targeting significant measures, and you were talking about job positions on that one, I would like to comment that a major part of the future package is not about job positions, but rather on salary levels and additional perks and compensation elements that we have in our current baseline. Sebastian Rudolph: Question goes to Stephen Wilmot, Wall Street Journal, Stephen, please. Unknown Attendee: Question, I just wanted to ask, can you give us any -- beyond the second package that you just talked about, what are you doing internally to reflect the strategic realignment that you've provided for in your financial results. Can you give us any kind of indication of what -- what is going on internally in terms of kind of teams being allocated to hybrids or other kind of projects that reflects the strategic realignment? Jochen Breckner: Yes. I mean we -- when it comes to our R&D work and our product portfolio work, we have a multi project planning approach and we are staffing the projects along our cycle plan and strategy as the projects come along and needs to be developed. And based on the later decisions that we -- that we would push out the new electric platform and the car projects, the heads, as we call them, that were planned to be on that platform. Of course, we've updated our multi-project planning approach and have redistributed, if I may say so, our colleagues and experts in R&D, but also in other areas of the company from that platform and that car projects into the other ones that we will develop to put our portfolio in a more flexible position starting as of '28. So that's a bit of a process of change, but it's nothing special in general. We do that regularly because projects come, projects go, projects are finalized. So engineers and all the other colleagues and experts need to be allocated to various tasks. And in with the latest decisions, it has been a little bit bigger than a task to execute it. But in general, that's a daily business, and we are executing that, yes, in a very stringent way, and colleagues are already working on the new cars on the ICE and plug-in hybrid drivetrains that we communicated. Maybe if I may add one thing. This has nothing to do with the second package. So this is, as I said, a daily work, reallocating experts, engineers resources the second package, the future package we're talking about is more about structural changes. Sebastian Rudolph: We have one more question on our list. That's why I repeat. [Operator Instructions]. So with this, Monica, Bloomberg, the floor is yours. Unknown Attendee: We've heard quite a bit from Mr. Blume already in previous calls about Porsche's intention to expand the [indiscernible] program, and that individualization and sort of higher-margin vehicles will play an important role in Porsche's future strategy. I was wondering if we could hear a bit more color or details on what structural changes or concrete measures are being taken to expand that program? And what would need to be offset for that expansion, specifically in Zuffenhausen physically, if facilities need to be expanded if more people need to be onboarded, et cetera? Jochen Breckner: Yes, Monica, thanks for that question. The exclusive and [indiscernible] manufacturer, as we call it, business is really key to our strategy is one key pillar for the brand, but also in that part of the business for highly profitable margins. We will expand that business as communicated earlier, and we will do that step-by-step in a very cautious way because in that area of our business model, it's really key that we keep scarcity and keep it as a luxury part of the business. So this is a step-by-step approach year-by-year. We have already increased significantly the capacity and also the output in that area throughout the last years and over the next 2, 3, 5 years until the end of this decade, substantial increases in terms of output will be organized in our operational model. This will come with additional capacity in that area of our business model, but we are not planning for a substantial additional hires to organize that one. That is something where we -- as I just said in the answer to the other question, our multi-project planning, given the staff and the workforce we have we will organize the increase in capacity in the [ Zonda bunch ] and exclusive manufacturer program. When it comes to assets, buildings, machinery, et cetera, again, our plant in Zuffenhausen is big enough to -- yes, to implement the increases in the Zonda bunch exclusive manufacturers. So there are no significant CapEx expenditures planned to organize that part of the business on the growth path that we've entered. Sebastian Rudolph: I would take 2 last questions. The first goes to [ Stuttgarter Zeitung ] then we finish with Dow Jones. So Matthias Schmidt, you go first, Stuttgarter Zeitung -- second, please. Unknown Attendee: Just one short question. Is the new CEO already involved in the negotiations on the second package? Jochen Breckner: I just repeat because it was acoustically hard to. It's the upcoming CEO already involved in the negotiations. We're talking about the [indiscernible] package. Yes. No, he's not. Michael Leiters will join the company on January 1. He's not with the company yet. Decisions have been made that he will join the company. We are looking forward to welcoming and a portion working together with him. But given the situation, competitive situation with also the other company that you used to work for, we are not in discussions in any direct work with him yet. We will start that as of January 1. And given the fact that he's been with Porsche for quite some years. And then afterwards, is a highly respected expert in the automotive industry, we really expect to have a fast start and the kick start in Jan 2026, but no actions so far. Sebastian Rudolph: Then we have the last question for today, Markus Klausen, Dow Jones. Unknown Attendee: One question regarding the analyst call. You said Mr. Breckner, to be 100% sure that next year, Porsche will reach high single-digit return. And then year ahead, 2027, a double-digit return is possible. And is it reasonable to assume that Porsche will once again achieve a return of 80% at some point in the future? Or is it no longer within reach? Jochen Breckner: Yes. So first, let me confirm that we are expecting high single-digit return on sales next year. That's correct. Second, we've communicated that our ambition is a 10% to 15% profitability, margin and range in the midterm. And whether the midterm starts in 2027 or maybe a bit later, that's something that we still have to see that's 2 years from now, so do not give exact guidance on that one. I can't comment on 2026 -- sorry, on 2027 more precisely. But I think the most important information is high one single-digit margin in 2026, not double digit, and then we take it from there. And as of 2028, the positive effects from our strategic realignment will start to kick in. Unknown Attendee: Okay. And 18% is within reach in some point in the future? Or is it no longer reachable? Jochen Breckner: Yes. I mean I just said that we communicated that our ambition is to have a return on sales in the midterm between 10% to 15%. That's a way to go. We have taken the decisions to get there and higher margins would have been even higher than the 10% to 15%. So from today's perspective, I would not confirm a target of 18%. That's why we communicated a range of 10% to 15%. Unknown Executive: And as a surprising factor, Jose, you had been quite tenacious patient and weighted in the queue right to the end. This is a sports company that is incentivizing this passion. So that was last in a row is Jose of JPMorgan Jochen Breckner: Jose, great to hear you, looking forward to your question. Jose Asumendi: Thank you so much and thank you very much for the opportunity, and apologies to yes, coming the last one here. Simple question, please. As we think about the next 6 months, 12 months, medium term, but a bit more like in '26. I'm sure you're launching new vehicles, right? So which vehicles do you think will drive the momentum in '26? When do you expect Cayenne electric to start helping a bit P&L in that sense. Jochen Breckner: Yes. From a model availability perspective, Jose, I've already commented on the fact that the 982, the Boxster Cayman is in the runout phase, also the H1 ICE car is still available in some markets out of the -- outside of the European Union in 2026, but that car is also starting its runout phase, but that will take a bit longer than with the Boxster and Cayman. A positive momentum we can expect from the completely newly developed full electric Cayenne, what we call internally the Cayenne E4 that car is about to be launched in 2026. And that's in addition to the existing Cayenne lineup. So we expect that we will gain some market share in the Cayenne segment then given the fact that we have the ICE plug-in hybrids and also electric cars. On top of that, we've just launched the very important derivative, the icon in the icon model line. I'm talking about the 911 Turbo S in the 911 model line in the Munich Auto Fair,and that car will be available by the end of this year and, therefore, will give us tailwinds, especially when it comes to margin and also brand and company positioning in 2026. And given all these effects, maybe also combined with a weaker demand in China that we expect will put us in a position to reach the 1-digit profitability margin I've just talked about. And Yes, that's how we look at 2026 from portfolio and also sales unit perspective. Sebastian Rudolph: And with this -- both of us say thank you to Bjorn. And for myself, I say thank you to Bjorn as well. And for your colleagues from the media and also analysts and investors for the joint call. Have a good weekend, and see you. Bye-bye. Jochen Breckner: Thank you, everyone, for joining. Thanks for your questions. Talk soon. Operator: Ladies and gentlemen, the conference has now concluded, and you may disconnect. Thank you for joining, and have a pleasant day. Goodbye.
Operator: Hello and welcome to the Coca-Cola FEMSA Third Quarter 2025 Conference Call. My name is Sophia and I'll be your moderator for today's event. Please note that this conference is being recorded. [Operator Instructions] I would now like to hand the call over to Jorge Colazzo, Investor Relations Director at Coca-Cola FEMSA. Jorge, please go ahead. Jorge Alejandro Pereda: Good morning and welcome to this webinar to review our third quarter 2025 results. Joining me this morning are Ian Craig, our Chief Executive Officer; Gerardo Cruz, our Chief Financial Officer; and the rest of the Investor Relations team. Before I hand the call over to Ian, let me remind all participants that this conference call may include forward-looking statements and should be considered as good faith estimates made by the company. These forward-looking statements reflect management's expectations and are based upon currently available data. Actual results are subject to future events and uncertainties that can materially impact the company's performance. For more details, please refer to the full disclaimer in the earnings release that went out this morning. As previously mentioned, after our management's prepared remarks, we will open the call for Q&A. [Operator Instructions] With that, let me turn the call over to our CEO to begin our presentation. Ian, please go ahead. Ian Marcel Craig García: Thank you, Jorge. Good morning, everyone. Thank you for joining us today. Before reviewing our third quarter results, I would like to take a moment to express our sincere support for all of those affected by the recent storms in Mexico. This year's Tropical Storm Raymond brought torrential rain during the first weeks of October, impacting Central and Northeast Mexico. In accordance with our principles and protocols, we're taking action to prioritize the well-being of our teams and their families while also supporting local communities. We're working hand-in-hand with FEMSA and the Coca-Cola Company on several community relief initiatives as we always do during these unfortunate natural disasters. We are hopeful that with everyone's support, the affected communities may soon be back on their feet. Also, we are deeply saddened by the recent passing of our esteemed Board member, Ricardo Guajardo Touché. Ricardo was a member of Coca-Cola FEMSA's Board since 1993, sharing his valued insights in its finance committee and was committed to advancing economic, educational and social development in his community and throughout the country. We offer our condolences and prayers to the Guajardo family. Now moving on to discuss our results. During the third quarter, Mexico continued facing a soft macro background, impacting consumer preferences and demand. On the other hand, South America enjoyed a more resilient macro and consumer environment, which supported positive volume performance. Despite this environment, our consolidated results improved sequentially as we implemented cost control and productivity initiatives. As we look beyond this year, we will leverage Coca-Cola FEMSA's ability to adapt to challenging operating conditions, including the impact of the recent beverage excise tax increase in Mexico. We are confident that focusing on our sustainable growth model, combined with RGM affordability initiatives, short-term productivity and cost control measures and the revised CapEx investment level is the best way to navigate these conditions, while maximizing value for our stakeholders. Now let me expand on our consolidated results for the third quarter. Our consolidated volume declined 0.6% to reach 1.04 billion unit cases, a sequential improvement versus the second quarter, which is partially explained by a softer comparison base in Mexico than the one we faced during the first half of the year. In particular, the quarterly volume decline was driven by contractions in Mexico and Panama that were partially offset by the growth achieved in the rest of our territories. Total revenues for the quarter grew 3.3% to MXN 71.9 billion, led by revenue management initiatives that were partially offset by a volume decline, promotional activity and unfavorable currency translation effects from the depreciation of the Argentine peso and most currencies in Central America. On a currency-neutral basis, our total revenues increased 4.7%. Gross profit increased 0.9% to MXN 32.4 billion, leading to a margin contraction of 100 basis points to 45.1%. This margin performance was driven mainly by an unfavorable mix, increased promotional activity and fixed costs such as labor and depreciation, partially offset by a better sweetener and PET cost. Our operating income increased 6.8% to reach MXN 10.3 billion, with operating margin expanding 50 basis points to 14.3%. This operating margin expansion is explained by expense efficiencies such as freight and marketing across our operations, coupled with an operating foreign exchange gain. These effects were partially offset by higher depreciation, labor and IT expenses. It is important to consider the recognition of a onetime income of MXN 218 million of insurance claims recovered in Brazil, net of expenses during the third quarter of 2025. Adjusted EBITDA for the quarter increased 3.2% to MXN 14.4 billion, and EBITDA margin remained flat at 20.1%. Finally, our majority net income increased slightly to reach MXN 5.9 billion, driven mainly by operating income growth that was partially offset by an increase in our comprehensive financial results. Now diving deeper on our key markets performance for the quarter. In Mexico, our volumes declined 3.7% as we continued facing a soft macroeconomic backdrop. For instance, consumption drivers such as remittances and formal job creation have declined year-on-year. In this environment, consumers are looking for the best value equation and our strategy remains clear, implement top line initiatives to incentivize demand by focusing on providing affordability and attractive price points, allowing us to capture share opportunities. To achieve this, we have made adjustments throughout the year to our promotional grid and [Technical Difficulty] across formats and channels. As I mentioned during our previous call, these initiatives have led us not only to recover share in the modern channel but also to surpass previous year's levels, achieving now more than 6 percentage points of recovery, which positions us at a record level in this important modern channel. In the traditional trade, promotions and execution are also contributing to share recovery, especially by leveraging refillable multi-serve packs. The adjustments we have made to our price pack architecture in multi-serve refillable packs from July to September are showing encouraging initial results, reversing volume declines in this segment of the portfolio. Moreover, Coca-Cola Zero continues delivering positive results, growing 23% versus previous year, [indiscernible] plans increased connect with consumers with the right communication and execution. Indeed, Coca-Cola Zero has grown more than 40% as compared with 2022. In addition, our flavor sparkling portfolio is also ahead of previous year's share levels, driven by the recovery achieved in the modern and on-premise channels. To achieve this, we are combining global strategies in core brands such as Fanta and Sprite with local heroes such as Mundet and other heritage regional brands. These top line initiatives are supported by our ambition to install a new record of 125,000 coolers during the year. In digital, we are encouraged to share that we are now rolling out our state-of-the-art salesforce tool, Juntos+ Advisor in Mexico. This digital tool has been fundamental in supporting share improvements and service levels in Brazil and we expect to see its positive impact in Mexico in the upcoming quarters as adoption matures. Now I would like to discuss recent developments in Mexico. As you know, last week, the House of Representatives approved a federal revenue law presented by the executive branch, including a significant 87% increase in the excise tax on soft drinks, taking it from MXN 1.64 per liter to MXN 3.08 per liter and installing a new excise tax on noncaloric formulas of MXN 1.5 per liter. The federal revenue law is currently pending approval by the Senate and once approved, it would take effect on January 2026. During the past month, we engaged with the government in conversations regarding the proposed excise taxes. As a result of these interactions, the Coca-Cola system in Mexico reaffirmed its commitment to continue incentivizing low and noncalaloric products as well as to maintain an open and constructive dialogue with the health authorities in Mexico. As we look to 2026, we expect another challenging year for volume performance in Mexico, with our customers and consumers dealing with the impact of the excise tax increase together with an economy that is expected to grow a modest 1.5%. However, we anticipate a positive impact on brand equity due to the World Cup as has been the case in host countries for these incredible assets. Taking all of these factors into consideration, we believe that the best course of action for our business in Mexico is to continue focusing on our sustainable long-term growth model while addressing the short-term headwinds with RGM initiatives, productivity and cost control measures and a revised CapEx investment. Now moving on to Guatemala, where our volumes increased 3.2% to reach 50.8 million unit cases. In this important market, we continue seeing a higher propensity from consumers to save. Amid this background, we continue outperforming the industry by gaining share in key categories such as sparkling beverages, water and energy. Notably, Coca-Cola Zero Sugar grew 16.9% year-on-year, while additional capacity is allowing us to strengthen our performance in flavors with Fanta and Sprite growing 8.8% and 3.8%, respectively. Commercial enablers are another area of focus, and I'm encouraged to report that Juntos+ and Juntos+ Premia continue growing at a fast pace. During the quarter, we surpassed 100,000 digital monthly active users in Juntos+, 25,000 more than the previous year, with more than 73% of these users active on the app. This is 23 percentage points more than in the first quarter of the year, underscoring our customers' fast adoption. Finally, in Juntos+ Premia, we have more than 46,000 clients redeeming points, which is more than double what we had in 2024. As we look towards the end of the year, we are adjusting our initiatives to continue optimizing our portfolio, capturing white spaces in key categories and executing rigorous cost control and productivity initiatives to grow sustainably and profitably. Now moving on to our South America division. In Brazil, despite lower average temperatures than the previous year and size of slower growth, we were able to increase our volumes 2.6% year-on-year, driven by share gains. As has been the case throughout the year, additional capacity, coupled with the reopening of our plant in Porto Alegre is supporting share gains in the nonalcoholic ready-to-drink segment. Notably, in the sparkling category, regions like Minas Gerais and São Paulo are more than 1 percentage points ahead of the previous year. And in Rio Grande do Sul, we have recovered approximately 5 percentage points of the total 8 points that were lost due to the temporary closure of our plant. Another highlight from our operation in Brazil remains the continuous growth from Coca-Cola Zero, which during the quarter grew volumes by 38%, supported by the Star Wars campaign that began last September in both Coca-Cola Original and Coke Zero. Regarding still beverages, we saw double-digit growth in juices and energy. In the case of Monster, last month, we launched a new flavor with a local Brazilian appeal, Monster Rio Punch, underscoring continuous innovation across the portfolio. On digital enablers, our monthly active user base in Juntos+ continues expanding with 18,000 additional customers and a 15.8% increase in average ticket size. Importantly, the Juntos+ Premia loyalty customer base increased 40% year-on-year. We remain encouraged by the results we are seeing from the nationwide rollout of Juntos+ Advisor, which, as I have mentioned in previous calls, is a game changer for our sales force and is supporting Brazil's positive share performance. Finally, in Brazil, we continue showing strong improvements in the supply chain front, which translate to increased customer satisfaction. For instance, order fulfillment during the quarter improved 1.9 percentage points as compared with the previous year to reach 94.5%. Similarly, our delivery service metrics improved 1 percentage point to reach 94.6%, supported by declines in product unavailability. For the remainder of the year in Brazil, we will continue striving to outperform the industry, leveraging our digital initiatives and our customer-centric culture as we aim to continue improving our profitability by controlling expenses and increasing productivity. In Colombia, our volumes grew 2.9%, reflecting a gradually recovering economy, driven by improving sectors such as commerce, services and agriculture. Notably, the consumption basket for fast-moving consumer goods has gradually recovered over the past 5 months, driven mainly by an increase in the average ticket. Our positive volume performance is supported by share gains in brand Coca-Cola, flavors and water with clear opportunities for us to reverse the trend in stills. Regarding brand Coca-Cola's category growth, we are leveraging affordability initiatives and managing price gaps in both multi-serve and single-serve, while supporting the growth of Coca-Cola Zero Sugar. Additionally, in flavors, we're encouraged that for the first time in our Colombia franchise's history, Quatro, our great fruit flavor brand, is the #1 flavored sparkling beverage in the country. On the digital front, we are enhancing adoption with monthly active buyers growing 27% year-on-year. We expect to continue leveraging the capabilities of our Premia loyalty plan to drive adoption and generate additional frequency. Finally, we're encouraged by the fact that the CapEx investments behind our supply chain have addressed key logistical pain points, allowing us to improve our cost-to-serve by reductions in primary freight costs and third-party warehouse expenses. Finally, despite facing what is still a complex environment in Argentina, our volumes increased 2.9%. Our strategy during 2025 can be summarized in 4 key elements: enhancing the affordability of plans we implemented since 2024 during the sharp macro adjustment; two, accelerating single-serve mix; three, leveraging digital with the rollout of Juntos+; and four, maintaining a lean and flexible cost structure. During the quarter, we continued delivering positive results across these elements of the strategy. For instance, we have consolidated the execution of what we call [ Sección de Ahorros ] sections or savings home section, which are attractive promotions and price points for our consumers. [ Sección de Ahorros ] is now present in more than 87% of our customers and growing. Regarding our single-serve mix, we reached 25.8%, which represents a 1.8 percentage point increase as compared to the previous year, driven by an 11% recovery in the number of on-premise clients. In digital, we began the rollout of Juntos+ last June. And thanks to its rapid adoption, more than 40% of our client base are now monthly active buyers. Amid Argentina's complex context, we have and will continue emphasizing responsiveness in managing a flexible and lean cost and expense structure. As we look to the last chapter of 2025 and adjust our plan for 2026, we feel encouraged to be a part of a resilient beverage industry. We have a clear long-term strategy, supportive shareholders in FEMSA and the Coca-Cola Company and a committed team focused on continuing to make Coca-Cola FEMSA a stronger and more adaptable organization. With that, I will hand the call over to Jerry. Gerardo Celaya: Thank you, Ian and good morning, everyone. I will begin by summarizing our divisions' results for the quarter. In Mexico and Central America, volumes declined 2.7% to 612.1 million unit cases, driven by volume declines in Mexico and Panama that were partially offset by growth in Guatemala, Nicaragua and Costa Rica. Revenues decreased 0.2% to MXP 42.5 billion, driven mainly by volume decline, unfavorable mix effects and promotional activity. These effects were partially offset by our revenue management initiatives. On a currency-neutral basis, revenues remained flat. Gross profit decreased 2.6% to reach MXN 20.2 billion, resulting in a gross margin of 47.5%, a 110 basis point contraction year-on-year. This margin contraction was driven mainly by unfavorable mix effects and promotional activity, coupled with higher fixed costs such as labor. These effects were partially offset by lower sweetener costs and the appreciation of the Mexican peso as applied to our U.S. dollar-denominated raw material costs. Operating income increased 1.1% to MXN 6.8 billion and our operating margin expanded 20 basis points to 16%. This expansion was driven mainly by a decrease in freight expenses and an operative foreign exchange gain on MXN 159 million as compared to a loss of MXN 298 million during the same period of the previous year. These effects were partially offset by an increase in expenses such as labor, IT and depreciation. Finally, our adjusted EBITDA in the division declined 1.4% with a 20 basis point margin contraction to reach 21.9%. Moving on to South America. Volumes increased 2.6% to 423 million unit cases. This increase was driven by positive volumes across the division. Our revenues in South America increased 8.7% to MXN 29.4 billion, driven mainly by our revenue management initiatives and favorable mix. These effects were partially offset by unfavorable currency translation effects into Mexican pesos. On a currency-neutral basis, total revenues in South America increased 12.5%. Gross profit in the division increased 7.2% and gross margin contracted by 50 basis points to 41.6%, mainly driven by labor, restructuring and maintenance costs. On a currency-neutral basis, gross profit increased 10.4%. Operating income in South America rose 19.7% to MXN 3.5 billion, with operating margin up 110 basis points to 11.9%. This improvement was driven by expenses -- expense efficiencies such as freight, marketing and the recognition of onetime income, net of expenses of MXN 218 million related to insurance claims from the floods that impacted Brazil in May of 2024. Finally, adjusted EBITDA in the division increased 12.6% to MXN 5.1 billion for a margin expansion of 60 basis points to 17.6%. Now let me expand on our comprehensive financial results, which recorded an expense of MXN 1.2 billion as compared to an expense of MXN 823 million during the same period of the previous year. This increase was driven mainly by, first, a reduction in interest income as a result of a lower cash position and interest rates in Mexico and Argentina. Second, we recorded a foreign exchange loss of MXN 65 million as compared to a gain of MXN 49 million recorded during the same period of the previous year. And third, a loss in financial instruments of MXN 39 million as compared to a gain of MXN 86 million in the third quarter of 2024. These effects were partially offset by a higher gain in monetary positions and inflationary subsidiaries. Finally, I would like to take a moment to expand on the cost environment and commodity hedging strategies for the remainder of the year and into 2026. We feel confident about our ability to manage costs effectively. Although the trade environment may continue to generate some ongoing volatility, especially in aluminum prices, we are seeing more stability in the rest of our key commodities than in prior years, especially regarding sweeteners and PET. Additionally, our teams continue to focus on efficiency, productivity and disciplined procurement, which should continue to help mitigate pressures to our margins. On the hedging side, our approach remains disciplined and proactive. For the remainder of the year, we have already locked in a solid portion of our main commodities, including more than 90% for sweeteners, 75% for PET resin and 65% for aluminum, which gives us good visibility and comfort for the fourth quarter. As we move into 2026, we will keep a flexible stance, protecting against potential volatility while taking advantage of favorable market conditions in raw materials such as sweeteners and PET. For instance, given current market conditions, we have already hedged more than 90% of our needs for the year in sweeteners and 40% for PET. Regarding currencies for 2026, we have hedged approximately 70% in Colombia, 40% in Mexico and 20% in Brazil at levels that are below 2025. Finally, I am pleased to report that our supply chain team has reached our savings commitment for the year ahead of time, generating $90 million year-to-date, approximately $43 million coming from primary distribution, $32.5 million from cost-to-serve and $14.5 million from cost-to-make. With that, operator, we're ready to take questions. Operator: [Operator Instructions] Our first question comes from Ricardo Alves with Morgan Stanley. Ricardo Alves: A couple of questions. I think that on our side, the main surprise of the quarter came on Mexico and Central America profitability. When we try to calculate the adjusted margin, so taking out the insurance gains from last year, we actually see Mexico and Central America margins up about 50, 60 basis points, if I'm not mistaken. So clearly, a big improvement from the 200 basis points decline that we saw in the second quarter. So to us, that's a remarkable improvement, obviously. But when I look forward, I'm interested in -- is this something that was mostly driven by a better operational leverage because volumes improved on a sequential basis? Or is it much more about internal initiatives and cost-cutting initiatives that you may have put in place to adapt to a new reality of volumes? So I just wanted to go a little deeper on eventual efficiencies that you are looking within KOF in Mexico and maybe Central America because we don't have the breakdown exactly. So that would be my first question to explore a bit more the improvement on profitability. My second question -- it's -- I do have another one in South America but I'll jump on the line again. But I wanted to explore this time Central America, Argentina and Colombia because typically, we spend a lot of time on Mexico and Brazil. And I think that after a while, it would be helpful, Ian, if we could explore again these markets. I remember, for example, a couple of years ago, we were talking about per caps in Guatemala, the opportunities that you saw when you took over in improving per caps. Given that Argentina has surprised us to the upside, I think that Coke FEMSA is outperforming a couple of other bottlers in the region. Colombia is getting back on track and it's been a while that we don't discuss Guatemala in more details. I wanted to see with you, when you take a step back and you reflect on this past couple of years on the lead of the company, what were the strategies that worked for these 3 main markets outside of Brazil and Mexico? What are the things that didn't work that you still see an opportunity? So I just wanted to take a step back and take the opportunity to talk to you to see if -- it seems that there is something coming. Things are improving. So I just wanted to revisit the strategy for these, let's call it, secondary markets outside of Brazil and Mexico. Gerardo Celaya: Thank you, Ricardo. I'll jump on the first one, first on profitability on Mexico and Central America. And there's a few parts to this question. So starting first on gross profit. We are continuing to see pressure on gross profit, even though we see volumes performing better versus last year, that's mostly related to having a lower base from the third quarter of last year. But we are seeing some gross profit pressures coming from mix that are affecting at the gross profit level. But going further down the P&L, the main reason for us turning around our profitability are savings initiatives. We're working all across our P&L to identify and execute savings initiatives starting from raw materials cost and expenses that has been a tailwind for us this quarter. We're optimizing marketing spending. We went through also restructuring in our teams to adapt to our current volume conditions, also preparing for what we're expecting for next year and the supply chain initiatives and other smaller savings initiatives that we are working on. And also, there's a virtual effect that you see in EBIT margins also that we are benefiting from. This is related to operating expenses, accounts payable denominated in foreign currency with a peso -- with a strong peso that is providing also relief to our EBIT margin as well. Ian Marcel Craig García: Jerry gave a very detailed explanation. But in terms of the strategy, it really was bringing our productivity back in line, Ricardo, the main driver. So like I had mentioned, this is such a resilient business that even if you have challenging volumes, you can still deliver on results, positive results, if you have your structure aligned for that sort of environment, which was our big miss in the first and second quarter where I could say it was tough to read because of the consumer backlash. But by the time we got around to having the real sense of what was going on in April, then in May, we started adjusting very quickly. And now our productivity is back in line and we have a much more lean structure. So that's what explains the turnaround in Mexico. In the 3 markets that you mentioned outside of Mexico, Argentina, Colombia and Guatemala, it all follows under the same umbrella but with different recipes. And what do I mean? As I mentioned, our strategy is to have a sustainable long-term growth model. And why? Because this is a scale business, and it is critical that we continue to improve our relative competitive position because when you don't do so, then it becomes very complicated. Price gaps are stickier with competitors, you give them scale and you end up in a bad place. The way that played out in Argentina, which was the first one you asked about, was knowing that we were going to go into a very deep recession, we did not want to leave Argentine households. So we wanted to maintain household penetration. So we did not pass along all of the increase in inflation in the initial shock. And that obviously implied to us a hit on the P&L. But when the bounce -- the recovery came, we were much better positioned. And that's why when you compare the system, for example, versus 2 years before the crisis, our volumes and our results are much better. And it has been a more resilient strategy to have not lost that relative scale. It was just -- all strategies are valid but I think ours played out well in the end. In terms of Colombia, it's a big learning for us in Mexico because in Colombia, we faced a large tax increase such as the one that we're going to have to face in Mexico starting January. And what that essentially does is it shifts your volume 2 years out. So the growth that we were -- we had planned for '26, now instead of that growth in Mexico, we're going to have, like we had in Colombia, a volume decline to be followed by a recovery in the following year. So in essence, it shifts your curve 2 years out. And what we've done in Colombia is a full review of our OBPPC, focusing on key price points, focusing on key flavors leverages. And in Colombia, you see that year-over-year, we continue to gain share. And now that we've cycled the impact of the tax, we should be continuing to have, I wouldn't say easier comps but comparable comps without the effect of a tax. So now it's -- we're on a comparable basis going forward in Colombia and we entered out of that tax disruption in a more favorable competitive position. And in Guatemala, as we have mentioned, it's just a jewel of a market with a very young population becoming more urban with more disposable income. We hit a short-term turbulence there because with all of this risk on remittances, even though it has been more perceived than real because remittances haven't actually declined but they have slowed there. That anxiety, I would say, has trickled into consumers saving more. So we see nothing more in Guatemala other than a short-term adjustment to consumers saving more under the risk of them -- their family members losing the remittance sending capacity. But everything else being said, I would say this was an adjustment here there. We've also adjusted our structure, become more lean and are ready to resume growth there in Guatemala, where, by the way, our elasticities continue to work very favorably because of our share position. So there's still plenty of headroom there. I hope that was a good overview, Ricardo. Operator: Next question from Alejandro Fuchs with Itaú. Alejandro Fuchs: Congratulations on the results. I have just one very brief one related to CapEx. I saw the comments Ian here and on the release about kind of rethinking CapEx a little bit for next year. We have seen at least 3 years of high investments. I wanted to see if you can share a little more color what are the initial thoughts, right? Where would be kind of the savings in CapEx coming from? And this is -- is this just a delaying of the CapEx, as you were saying with volume recovery probably 2027. So if you could give us a little bit more detail, that would be very helpful. Ian Marcel Craig García: It's exactly that, Alex. So let me give you an example. And it's mostly in Mexico but it's in a couple of other countries where volumes weren't as high as we expected, for example, Guatemala. Let me give you the example of Mexico. We were putting in a couple of new lines, 3 new CDs. The lines are going ahead as planned but the distribution centers, for example, we've taken the land site but we're not going ahead with the construction. Because the worst thing that we can do is if we're going to have a low to mid-single digits volume decline next year due to the tax is to put in 3 new distribution centers and have those distribution centers be unproductive. You just get the extra depreciation, labor cost and you don't need it if our volumes are going to be facing that contraction from the tax. So it's really pushing out Mexico 2 years out. That's basically it. Operator: Next question from Lucas Ferreira with JPMorgan. Lucas Ferreira: Ian, first of all, a follow-up on your comment now. You mentioned low single digits decline in Mexico. Was this just sort of to illustrate or this is the number you are working with for Mexico next year? That wasn't exactly my question. My follow-up on the tax story. If -- well, first of all, the transition towards that around 30% reduction in the calories for the sugary drinks, how fast you guys are thinking on getting there? And if you think there could be any sort of impact on the flavor, on the consumer adoption, anything like this you can comment on sort of the risk of going towards that 30% reduction? And then the other question I have is, if this adjustments towards a sort of a new more leaner structure for Mexico right now, if it's -- how far we are from getting there? So you mentioned the CapEx. Is there anything else to be done still on the expenses side, cost side that you can help us understand to better model Mexico next year? And if I may, a second point is on Brazil, another clarification. If you look at your operations, let's say, in regions outside Rio Grande do Sul with the ramp-up of the plants, how the business is working? I mean you mentioned market share gains. Is this like sort of a better go-to-market strategies? Or is there anything related to pricing there, execution? So just to understand a bit how the operations, let's say, excluding the effect of the ramp-up of Rio Grande do Sul is going, if you're seeing sort of a bad weather, consumer dynamics? I'm asking because we see a lot of other consumer companies complaining right about the consumption in Brazil kind of slowing down. So wondering if you also noticed this happening in Brazil. Ian Marcel Craig García: So let me -- there were several points there, Lucas and I'll ask Jorge to help me on some of those. But just in general, in Mexico, the big thing was, like we mentioned, starting May, downsizing to what needed to be done in terms of our operational structure. And there is some remaining adjustment there to be done in terms of productivity in line with the volume impact that we expect from the tax increase. You have to -- when you look at the 2026 numbers, you have to normalize internally what the effect was of the backlash. So the effect of the increase in the tax per se is a little worse but it gets masked or it doesn't look as large because we don't no longer have the backlash that we left after the first -- that we also ended around May of last year. So that's sort of taking all of those effects into account, that's why we were saying low to mid-single digits is what we expect. And there's a lot of uncertainty on that. So we have to see what the impact is in the first quarter to see if we have to do further adjustments and what depth of adjustments. We do have a shock plan in terms of savings in all sorts of instances of that. And it's a large plan to go and accompany this tough tax -- excise tax impact. In terms of how we move consumers gradually to low or noncaloric options, that -- it's something that we'll do with our promotional grill -- grid with adjustments to some of our formulas, always taking care to make sure that we are the best choice out there and giving the consumers choice. We don't expect in that sense, really material savings from sweeteners or such. That is not the case. We don't expect that. And we have to be very respectful to consumer space and what they want and how the mix evolves naturally. We can't be too forceful on that. It's just something that we need to be working and it will be gradual. Going back into Brazil, in Brazil, we do see consumption softening. We have the advantage of a really tough base last year with the closure of the plant. So when we normalize what's going on there, that's why we mentioned the type of share gains that we're getting outside of the Southern region. And that's really what has been the differential for us. That's what's been driving our growth there. It's really share gains because you're right, we do see softer consumption. That being said, remember that next year, we're going into an election cycle in Brazil. So I don't think, at least for the remaining of the year and 2026 that we expect anything other -- you know that, still a resilient Brazil. I think the big risk in Brazil is more relating to 2027. We have mentioned that. At that point in time, the selective tax on soft drinks should be coming into effect. And also, there may be as historically has been the case in certain elections, a post-election hangover, for example, like what we saw in Mexico. So I would say, Brazil, we see a softer consumer but it's not a contraction for us and we are not worried of 2026. We have to keep an eye out though on 2027. I don't know, Jorge, if there's anything you'd like to complement. Jorge Alejandro Pereda: Perhaps the only thing I would add, Lucas, the first part of your question, you referred to Ian's comment on volume outlook for next year. So of course, this is a very preliminary early take. Now we have to put everything into consideration. We have to think about the implications, of course, of the excise tax. So this is, I would say, like a very early preliminary take on that, where we expect volumes to decline in the low to mid-single digits range -- for Mexico, of course, yes. Operator: Next question from Benjamin Theurer with Barclays. Benjamin Theurer: Just coming back to that point on the volume outlook. And obviously, you tend to have a lot of flexibility as it relates to like packaging mix and trying to offset and help profitability. So I would like to understand, in first place, what has been driving over the last couple of quarters, actually in Mexico but to a degree as well in Central America in contrast to South America transactions being somewhat even weaker than volume. So kind of like that relationship would like to dig into that. And as we look into next year, the way to offset maybe some of that with different packaging or trying to drive transactions, what strategies can you implement to kind of like boost the transactions at least into next year, even if volume might be under pressure, as you've just said, low to mid-single digits? Ian Marcel Craig García: Well, I'll let Jorge dive into the details on that, Ben. But I would say the main point is whenever you see a more challenging economic environment or disposable income for consumers and things get tight, usually single-serve mix suffers and you move into multi-serve. And within multi-serve, you move into multi-serve returnables. And that's just a natural mathematical result of looking for lower price per liter, okay? And that correlates a lot with transactions. So that's the main directional point. What we do then is, focus a lot on the magic price points. And if you take that -- I mean, I think transaction, like you said, is important. But really the biggest, biggest thing is maintaining our volume base and our household penetration. So for us, the main focus that we have now in Mexico, when we look at our relative competitive position, the biggest gap is in traditional channel, refillables and that's what we are addressing. And what we're addressing that is with the 1.25 liter glass at the MXN 20 price points, which competes with Pepsi 1.75 liter and 2-liter Red Cola at that same price point. So we didn't have anything there. And now we're having the 1.25 liter glass there and that's a very big and important price point. It also drives transactions when you look at multi-serve per se. And then upsizing our 2.5 liters [indiscernible] PET to 3 liters and that's around the MXN 33, MXN 34 price point, which competes with 3 liters [ one way ] of Pepsi and Red Cola. So obviously, we have a very good brand that commands a brand equity lead and that allows us to be able to inconvenience our consumers with a returnable presentation that they have to carry to and from the point of sale but that really is the way that we're able to have that revenue management initiative there. That's our big focus per se. You see all of the transaction growth, for example, the biggest example is Argentina, will recover naturally with single-serve mix as the economy improves. So I would say the biggest and most important question for us with the excise tax increase looming is maintaining our household penetration and volume base really more than the transactions. Benjamin Theurer: And real quick on pricing. I mean, obviously, you need to pass through the tax. Are you planning to anticipate some of the pricing already in the fourth quarter to kind of like get the consumer kind of like used to a new price point because of that? Or are you simply just going to wait and do the regular pricing as we move into next year, coupled with the tax as it might has to be applied? Ian Marcel Craig García: The base plan basically is maybe at the very end of the curve but it's really preparing and passing through the excise tax that will commence in January. It's how -- there are certain time that you have to give, especially the modern trade to process that change in the pricing lists. So it's basically going to be that. It's the pass-through of the excise tax, getting ready by giving the modern channel enough time to have that ready to start in January. Operator: Next question from Ulises Argote with Santander. Ulises Argote Bolio: Sorry, I was having some technical issues here. This is kind of a follow-up question that I had on the pricing side of the equation. But given those changes in taxes and the differentiation there between sugar and nonsugar products, we wanted to get some color on how you're thinking about the price gaps on the 2 kind of going forward, right? Any color there on how you're thinking on the strategy? And maybe if there's any major shift there happening on pricing on one versus the other, that would be really helpful. Ian Marcel Craig García: Well, one of the things that we've committed to is to incentivize a move towards noncalalorics. And in that sense, be it through differentials in baseline prices on the aisle or through a more intense promotional grid or both, a combination of both, we expect in the end to have that sort of differential above the size of the tax between those 2 to try to incentivize a move on -- in the mix. That being said, like I said, we are very respectful of being pro choice, offering the consumers what they want and we'll always have the full original formulas and the zero-calorie formulas and we'll let the consumer choose. It's just how do we nudge them with either increased promotional grids or different baseline prices, okay? We do expect, in the end, a lower effective price by either of those 2 measures. Ulises Argote Bolio: Okay. No, that's super clear. Yes. And maybe a quick follow-up, if I may, just looking there a little bit on the capital structure side of things. I mean net debt-to-EBITDA is below 0.8x. Obviously, you've made those comments on lowering the CapEx. You don't have any major debt commitments in the short term. So how should we think about the capital allocation priorities kind of for the next couple of years? Gerardo Celaya: Ulises, as we've been talking to the market throughout the past few quarters, we certainly are aware of our inefficient capital structure and are looking to address it. In 2026, obviously, with the excise tax coming to play, we will put -- evaluate how we start the year and what implications it has. As Ian mentioned in regarding our previous question, this results in a delay of a couple of years to cycle the impact of the tax in Mexico, which in turn will have some impact in our cash flow projections for the year. So we'll evaluate that further and let you know of any news during -- starting next year. Operator: Next question from Thiago Bortoluci with Goldman Sachs. Thiago Bortoluci: I have also 2, right. And those are follow-ups in Mexico. The first one and I think this is for Ian. Just to understand, Ian, how you see your company position versus the state of the consumers, right? If I can summarize what we saw in the quarter, you obviously declined volumes a little bit more than apparently where the industry is, while you keep pricing growing with inflation but decelerating the pace versus the first 6 months of the year, right? In your comments, you alluded to the need of promotional activity to keep demand somehow healthy. But going forward and imagining that macro shouldn't improve that much in the near term, at least, how you think about the fit of your pricing on a like-for-like basis versus the demand sentiment that you're getting from consumers? So how you're seeing your average price list and effective pricing to accommodate the current situation? I think this is the first question. And then the second one related to this topic but now on the excise tax, to the extent that you can comment, how much and, or how at all would the new rate fit in your discussions with Coca-Cola Corporation for the concentrate prices going forward? Ian Marcel Craig García: Thank you, Thiago. Let me put things into perspective. Remember that this year, January started strong. And then in February, we had the backlash, which we exited by the end of May, June. So Mexico is a very big country, not as big as Brazil or the U.S. but it's a very big country and it has different economic performance in different regions, by the remittances impact and different depth in the backlash that we face was different along the regions, mostly impacting our region, which is where most migrants have family members in the U.S. So I think when you look at and break that -- break out that effect, you see our share, if you look at our monthly chart, taking a big hit in February and then recovering month over month over month. Well, today, if you look at September, for example, the point data in share of value versus September of last year, in flavors, stills, fruit drinks, teas, water, energy, sports drinks, ARTDs, we're above last year. So we had a value and we're above last year. In colas, we still have about 0.6 points to recover. And that has -- is really what explains the increased promotional grid. And really, the point that we have missing is, like I said, traditional trade multi-serve refillables. That's the share point that we have left. And with the latest adjustments that we've done, eventually, we're hoping or thinking that we should get to cover that gap and we'll be above last year and having cycled everything. So I would caution that we are doing well versus the industry. But like I said, we took a big impact that other competitors didn't take in February, right, Thiago? So you have to normalize with that. So we took that impact but we're every month getting back to where we need to be. And we're back in every single segment and only missing 0.6 points in colas still. So that's the context. I think your question is very pertinent going forward because when you have a region that is with soft macros and now we have a large excise tax increase, obviously, our pricing power, we believe, is going to be limited. So we're not expecting anything above inflation because our customers, it's also a big impact for customers and consumers are going to be dealing with that excise tax. So to assume that we're going to have real pricing above that, I don't think is very realistic. It's already going to be a lot for customers and consumers to digest just with the excise tax impact, okay? Does that help? Thiago Bortoluci: It certainly does. Anything you could share on the relation between Coke under the new excise tax? Ian Marcel Craig García: Yes. Well, the way our model works, like I said is, we look at how the system profits behave and then divide those profits. Obviously, when you have an impact such as a tax, well, it's going to have an impact in our profitability and that's taken into account in the model. So it remains to be seen because you have to look at both companies' relative performance on what that trickles to and whether it's some sort of support or cost avoidance. We don't have enough visibility on that yet. But what I can say is that, that is included as well as when we do very well, that's also included in the model. So yes, that effect will be captured but it's too early to tell -- to see if there's going to be really an impact for us on that. It's -- we don't know yet. We'll have to see in the first quarter how customers and consumers deal with this excise tax pass-through. Operator: Next question from Rodrigo Alcantara with UBS. Rodrigo Alcantara: As a means of just staying a bit out of the tax discussion, I would like to explore on some interesting commentary we heard a couple of days ago in [indiscernible] conference call regarding their dairy category, right? They already mentioning the Coke system already a market share leader in terms of value, right? Volumes growing 13% in the third quarter, right? So my question would be here how this figures or how this category is shaping for you guys specifically, right? And what is really driving this good performance and the relevance of overall the Santa Clara brand for -- and the dairy category for you guys? That would be one question. And the other one very quickly, I mean, unfortunately, right, we saw what's happening in Costa Rica, Veracruz, right? In addition to that, weather is not improving and macro is still weak, right? So any preliminary read on Mexico volumes ahead of the fourth quarter? And kind of like a similar question would say to, to Brazil, right, where you somehow mentioned about the share gain momentum, et cetera but also some commentary on volumes on the 4Q would be also very, very helpful. Those would be my 2 questions. Gerardo Celaya: Rodrigo, thank you very much for your question. I'll start with the dairy question. And indeed, Coke mentioned that we're now leaders in value-added dairy, which is great news. This is the main focus for us with Santa Clara. As you know, this is a great brand, a brand that we're very proud of that has grown amazingly when it was brought into the system. This year, as you mentioned, dairy has been an outperformer for us in the still business. Stills business growing at a rate of 20% for the year, year-to-date. So this is great growth, especially when you look at it in the context of macro weakness overall. So we expect dairy to continue to be an outperformer. This is something that we're very excited about and that we can leverage the brand, the umbrella of the brand of Santa Clara to bring innovation and do all sorts of interesting things in this space. So that's good news for us. In terms of our fourth quarter, we -- I think a good thing that we are seeing is, we see patterns of improvement in weather that certainly we expect to continue to help. And we expect to see a little bit of an uptrend in volume performance for the remainder of the year as compared to what we've seen in the year-to-date. This is Mexico. Jorge Alejandro Pereda: Yes. This is Jorge. On the comments about the fourth quarter and weather as well expectations for Brazil, I think something that we certainly saw in the early weeks of October in parts of the South Cone and especially Brazil was a little bit of unfavorable weather. That seems also, as Jerry mentioned, it seems that it's going finally to end. It seems that weather is finally improving. Throughout the third quarter in Brazil, we saw about 1 degree Celsius on average below the previous year. But I think the good part is that it, that seems to be out of the road for us. And you mentioned about the unfortunate events also going back to Mexico, in Veracruz. That's definitely very -- as Ian mentioned during the prepared remarks, we are working hand-in-hand with FEMSA and with the Coca-Cola Company on several community support relief efforts. Specifically for the business, we have taken into consideration also support to our teams on the ground. I wouldn't say that the region represents a big material part of the big Coca-Cola FEMSA Mexico volumes. So we think in terms of -- if you are asking about a specific impact about that, you can think maybe around 350,000 unit cases over the first 8 days of the disaster there. So not material. And as I said, I think the most important part is that we're working on community and support relief efforts there. Ian Marcel Craig García: Yes. This difference to last year -- year before last, where we had either lost a plant or equipment, in this case, our infrastructure was not impacted other than a couple of vehicles and routes but not really large infrastructure. Our clients, however, were very impacted. So we have around 1,600, 2,000 clients that we're sensing to see if our coolers still work, if they got damaged, we'll replace them. And we did have, unfortunately, for us, for the first time, some loss of life in our collaborators' families. So that was the worst part. And obviously, we're supporting our collaborators that were impacted in these unfortunate floods. Operator: Next question from Renata Cabral with Citi. Renata Fonseca Cabral Sturani: I have 2 quick follow-ups here. The first one on Mexico. You are discussing right now about the weather that's going better. And it's possible to try to have an evaluation on how much of the current performance, I mean, from the year is more related to weather and/or the economic situation. I know it's super difficult to make the assumptions but a best guess. Or if you also could give some color of the performance per month, so we can try to make here some correlations related to the weather, it would be really helpful. And another follow-up is related to Argentina because we saw an improvement for the company in terms of volumes and margins, I mean, compared to last year, naturally. So for now on, we know that stability is great but at the same time, we are seeing also a slowdown in terms of overall consumption in Argentina. So the outlook for -- to conserve the current improvement or even continue to improve in the country. Gerardo Celaya: Thank you, Renata, for your question. I'll start with weather patterns in Mexico. I think in this third quarter, weather was less -- significantly less relevant as a comp effect versus last year. Even though we didn't have good weather, it wasn't consumption promoting weather, we had bad weather during the third quarter of last year as well. So when you see weather compared to this same period last year, it seems to be less of a factor. What has been playing out to be an important impact for consumption certainly has been overall macro development. I think for the first time this quarter, we saw the whole Nielsen basket underperforming or decreasing altogether. We had in previous moments seen consumption in certain industries underperforming versus others. But this quarter, we did see an outright underperformance in all consumption products. So I mean, macro has been, I think, the main driver of underperformance during the third quarter. Looking a little bit forward, I think we do see a little bit of better macro performance next year, although nothing exciting but certainly a marginal improvement from the base that we have in 2025. Ian Marcel Craig García: Moving to Argentina, Renata, I think there -- it's very clear that things have started to slow down especially since the Buenos Aires province election. And remember, we have very important legislative elections this weekend. So consumption really took a -- slowed down going into this election. What we're seeing from our advisers in Argentina is there's a lot riding on the outcome of this weekend's legislative elections in the sense of whether the government's position, how much will it be strengthened and will they be able to avoid logjams in the legislative branch regarding reforms. So Argentina, I would say, let's wait and see what happens this weekend and that will give us a guide. That doesn't mean we expect a recession next year. That's not in the cards, at least from what our advisers tell us but there could be a case of sluggish growth next year instead of continuous recovery. So that's really what we're going to look at. Will it be a scenario of sluggish growth next year, or will we continue and reaccelerate as the government has a more favorable position that will allow it to push through reforms? So it's a bit early to tell, Renata. But like I said, we think this slowdown has a lot to do with the elections this weekend and we'll see what happens. Operator: Next question from Antonio Hernandez with Actinver. Antonio Hernandez: This is Antonio. Just following up on those beverages sweetened with noncaloric sweeteners. I mean you've already mentioned a couple of times during the call that there's not going to be a specific push from you towards the consumer. But just wanted to get a sense if you have a type of a target going forward of maybe how much they can represent as a percentage of total sales? And also, how do you see competition specifically in that segment? Ian Marcel Craig García: Antonio, we don't have a specific target per se. But like I said, even before the excise tax, to us, Coke Zero is a big, big silver bullet. It's great for the health of the category. It does fantastic for the Coca-Cola trademark brand umbrella. And we were already focused on growing Coke Zero and this type of alternatives. So when you think of what we've been able to do in Brazil, where we've taken the mix of Coke Zero all the way to 28% and it's still growing high double digits. There's plenty, plenty of headroom in Mexico. We don't have a target yet but we're around [ 4% ] mix in Mexico. So there's plenty to grow our Coke Zero and other noncaloric alternatives, Sprite Zero, so another fantastic product. So I don't have a -- we don't have a target per se, Antonio. But that more or less gives you a sense of the difference on the market that has already developed Coke Zero getting to 28 percentage points versus a market where we're starting to crack the code such as in Mexico, where we're around 4%. So there's plenty of headroom there. Antonio Hernandez: Okay. And in terms of competition in that space? Ian Marcel Craig García: I would say we have a leadership position there. It's not that much that will come out of share gains there. Really, it's more a portion of growing the mix and growing the total category. We -- there are some share gains opportunities there but that's not the big driver at all. Operator: Next question from Felipe Ucros with Scotiabank. Felipe Ucros Nunez: Most of my questions were asked, but I had a few smaller ones. So Ian, you talked about Coke Zero in recent quarters and you talked about being able to break the code finally in Mexico. So just wondering how your perception has changed, if at all, since obviously, there's an expectation that it's going to accelerate from the trend that it already had. Still feeling very confident about cracking that code? And the other 2 questions. One, on the World Cup, what kind of historical impacts have you guys seen in the portfolio when the World Cup is going on? And obviously, the occasions increase. Just to get a sense of what we expect for 2026 when it comes to KOF. And then in Brazil, obviously, your plant is back up and running and back up at capacity. Wanted to see if you could give us a sense of where the competition stands with regards to their capacity in that region. Are they also back up and running? Or did they not have disruptions? Just any color you can give us on that side would be great. Ian Marcel Craig García: Thank you, Felipe. So I would say on Coke Zero, we're very confident that we're on the right track. I think the biggest measure of that was that during the consumer backlash in the beginning of the year, Coke Zero grew double digits and continued to grow double digits. And it's even under this softer macro environment, it's still growing double digits. So Coke Zero is doing nicely. It's going to get a boost also from the World Cup. It's going to be a hero product there. It's going to be highlighted in all of our publicity and marketing campaigns. So I think our confidence on Coke Zero and our care towards making sure we keep that ball rolling and we keep all of the 5 elements from the Brazil playbook that we call for Coke Zero being there is a huge source of focus. Like I said, we think of Coke Zero as a silver bullet for us and we're taking great care with that. Regarding the World Cup, it really -- when you look at historical effects, I think it's like a 5% uplift in volumes -- relative volumes during the World Cup months. It's not a big volume thing per se but it's huge in terms of brand equity. I was there in Brazil during the World Cup and I remember clearly that the most recalled and remembered favorable brand post the World Cup was Coca-Cola. It's an incredible asset and we're going to leverage it fully for both Coke brand, including Coke Zero and for Powerade. And finally, your final point on Brazil capacity in the South, I would say that during the floods, only Coca-Cola FEMSA was impacted. So we were the only ones to lose a production facility, which was also our biggest distribution center. So that's why we lost 8 points of share, Felipe. It was only a Coke FEMSA impact thing. We're back on track, like I said, since midyear. So we're producing at full capacity now and we've recovered 500 basis points of those 800 basis points that we lost. Obviously, the last remaining points of share are going to be the hardest but we have plans to recover them fully. So no, the rest of the competitors did not receive the impact. And we're starting also on the way -- by the way, on the remediation plan, meaning the containment walls and pumps to be ready to face any future natural disaster. So that has -- we're back on track producing. We are not yet finished with the remediation to face a future flood and that should be done by next year. Felipe Ucros Nunez: No, great color on that. If I can do a very small follow-up on that World Cup. When you talked about the low single digit -- low to mid-single-digit volume decline expectation in Mexico due to the tax, is that purely containing the effect of the tax? Or is that net of everything else that you have going on? So for example, is the World Cup impact included in that number [indiscernible]? Ian Marcel Craig García: It's net of everything else. Just the tax, it's a higher impact. But we are cycling a backlash that we no longer have and we're including the World Cup. So that includes everything. Operator: Thank you. This concludes the question-and-answer section. I would now like to hand the floor back to Coca-Cola's team for closing remarks. Jorge Alejandro Pereda: Thank you very much for your interest in Coca-Cola FEMSA and for joining us on today's call. As always, we are available to answer any of your remaining questions. Thank you and we wish you a great weekend. Operator: Thank you. This does conclude today's presentation. You may disconnect now and have a nice day. Jorge Alejandro Pereda: Thank you, Sophia. Thank you, team.
Wu Yu: [Audio Gap] we continue to stabilize the business. You can say that now, besides the price, we can also see that value has already become a key focus of majority of the consumers, whereas you can see that we also continue to see the emerging of the new consumption scenario, which is accelerating the evolution of the consumption structure to some extent. We believe that good products need compelling stories to support them. We also need effective presentation method and the life cycle management to truly convene the value of the brands and products. Currently, industry opportunities still exist, but seizing those opportunities has become more challenging than before. Against this backdrop, Topsports has remained committed in advancing our core strategy and actively adapting to changes in market conditions and consumer demands. Externally speaking, we continue to expand our brand partnership ecosystem and evolve our capacity metrics. Internally, we persistently refine our omnichannel retail agility as well as operational efficiency. Despite the challenging external environment, we'll still be able to achieve our planned performance in H1 of this year. Look ahead, of the second year, we will remain a product business approach while keeping a resolutely optimistic attitude. We will gain market insights from core diverse perspectives, respond to external challenges with great agility and continued to enrich Topsports role and value within the industrial ecosystem. Next, I will hand over the floor to Rebecca, please. Rebecca Zhang: Thank you. Please allow me to update you on the financial performance for H1 of this year. Overall speaking, we achieved our planned performance as expected, which has been mentioned by Mr. Yu, which also exceeds the market expectations we observed from the capital market. Well, from the revenue perspective, affected by the weak consumer demand and offline traffic fluctuations, overall revenue declined 5.8% to RMB 12.3 billion. By category, retail business declined by 3% Y-o-Y in H1 of this year. Wholesale business declined by 20.3%. By brand, core brand sales revenue decreased by 4.8%, reaching RMB 10.8 billion, where other brand sales revenue declined by 12.2%, reaching RMB 1.4 billion. The performance of other brands was primarily affected by lifestyle sports brands. Though overall performance of the specialized vertical brands remain the best, comprehensive sports and live sports category. At the GP margin level, specific affecting factors including, one negative factors and two positive factors. Regarding the negative factors, we have a deeper discount rate Y-o-Y, which have a negative impact on the GP margin, which is also indeed the same as what we mentioned to you. There are a few factors leading to the interaction. As you can see, that still, we have an ever-increasing number of the business. And especially in China, the online sales discount is more than what we have for the offline channel. So that's the reason the online channel sales continue to go up, which will indeed have a negative impact over the GP margin as a whole. Well, at the same time, as we have already mentioned, the deeper discount is being further ramped up, but still compared with the second half of fiscal year 2025, there's a narrow down. Meanwhile, we can see the revenue from the retail business contribution started to go up, whereas you can also see that the brand partner support that can also be supportive to our GP margin with the 2 positive factors to some extent, is diluted the negative factors burden. So in other words, resulting in the overall GP margin declined only by 0.1 percentage, reaching 41%. At a percentage ratio perspective, during the period, revenue declined by 5.8%. Total expenses decreased by 5.5%, with expense ratio only increasing slightly by 0.1%, reaching 33.2%. In the challenging environment, we hope to alleviate offline operating expenses pressure through the omnichannel deployment and the refined cost efficiency management. Overall estimated rental expenses from the value perspective, is being decreased by 12.1% on a Y-o-Y basis. Rental expense ratio declined by 0.8 percentage points, which was the biggest contributor to the overall expense ratio control. First of all, for the offline channel, we continue the structured optimization in offline channels to reduce losses and improve efficiency, where with operating as well as openings and renovation efficiency improved on a Y-o-Y basis. The second point is channel mix changes. The online and offline channel indeed performed different for GP margin and cost. Online channel has a lower expense ratio, where we have more revenue from the online channel. It also helped to further lower the overall expense ratio. Well, regarding the employment, we maintained a staffing line with omnichannel deployment needs, building an agile and efficient Thailand supply to consolidate our cost efficiency advantage. Overall, employee head count decreased by 16% Y-o-Y. Total employee cost decreased by 5.2%. The expense ratio has been quite stable, only increasing 0.1 percentage reaching 10.5%. They are mainly due to 2 reasons. First of all, we aim to provide long-term development support to quality talents where average productivity improved during this period, while at the same time, we also made organizational efficiency optimization work in H1 of this year, which will be demonstrated in cost efficiency going forward. Other expenses increased by 1.6% on a Y-o-Y basis, mainly including property, plant equipment depreciation, platform service fees, logistic service fees, where you can see that with rapid online business sales growth during the fiscal year, the corresponding platform operating expenses also increased. From an overall business progress perspective, negative factors mainly include operating negative leverage impact from the offline traffic situation, where this impact was partially offset by continued optimization of the offline network and increased proportion of the online rental business. Let's also take a look at the net profit changes. The trajectory from the net profit trend chart on the left, you can see the main factor affecting the net profit are decline in GP margin and impact of other income. Well, the remaining items, including total expenses, the net financing cost and the tax expenses provided a positive contribution. Well, you can also see on the right side of this slide, the GP margin deduction along with the decline in GP margin, a slight increase in the expenses ratio and the decline in other incomes were negative factors, where net financing costs and tax expenses provided positive contributions. Excluding the impact of other income, net profit declined by 6% over Y-o-Y basis. Consistent with 5.8% Y-o-Y basis, while our net GP -- our net profit rate was only being reduced by 0.3%, reaching 6.4%. And continue to further improve the negative leverage that may impact our overall business operation. Coming next, let me just discuss our working capital efficiency. During the fiscal year, inventory management has been our key focus. We adhere to the principle of maximizing merchandise efficiency, conducting omnichannel inventory circulation management. Inventory amount decreased by 4.7% with increased turnover days increased slightly from 1.7 days to 100 -- reaching 150 days. Trade receivable reduced by 1.5%. Turnover days declined by 3.5 days, reaching 12.6 days. Trade payable decreased by 64%. Turnover days declined 6.5 days, reaching 8.2 days. Payable related to the merchandise procurement reduced, which will also lead to the inventory reduction at the end of August. Regarding the working capital efficiency, the revenue decline continued to be seen, but average working capital as a percentage to revenue remained flat. We continue to maintain essential efficient working capital management. Let's now move to the cash generation capacities. Net operating cash flow was RMB 1.35 billion, down by 48.2% due to a few factors. So let me just share with you those factors. There are 2 reasons. The change was mainly due to the different -- the Chinese New Year timing between the 2 years, which actually have RMB 1 billion of the receivables and tradeables. And first of all, let me see, regarding the receivables. In H1 of this year, we need to calculate the Y-o-Y difference from February to August of this year regarding the operational capital. So it's actually a 6 months comparison. So performance in February has been essential, but at the same time, for February, the performance will be impacted by the Chinese Spring Festival. In 2024, the Spring Festival was in February. So the peak sales reason, the cash collection happened in March of 2024, but actually in 2025, the Spring Festival was in January. So the peak cash collection happens in February of 2025. So that's the reason the month-on-month perspective, you can see that receivables by the end of 2025 February is lower than what we have for the same period of 2024. So indeed, for receivables, different Chinese New Year timing between the 2 years, affecting the Y-o-Y comparison of the sequential changes in receivables, while at the same time, we also see impact from different procurement cadence on payable changes. Payable changes has everything to do with products we procured, we have reduced inventories, so as the payables. The second point is regarding the brand support and collaboration. It's more like a synergy between brands and us, including the rebates and also payment period and product refund. As we can see for the past few years, all those factors are not going to perform the same on a yearly basis, where we always continue to maintain good communication with the brand company to have collaborations to make strategies according to the landscape we have by them. So I was talking about the 2 factors impacting our operation cash flow. Free cash flow was RMB 1.22 billion. During the period, dividend payments were RMB 868 million, representing 34% of the beginning cash. Period end cash was RMB 2.538 billion, down by 1.9%, essentially flat. Net cash was RMB 1.27 billion. During the period, we maintained robust cash generation capacity. Last but not least, I'd like to talk about our dividend payout ratio. Based upon our cash generation capacity, there are 3 ways for capital allocation. First of all, supporting organic business growth; second, investing in scale expansion opportunity; third, excellent shareholder cash returns. We have constantly maintained this approach based upon the actual cash position of the fiscal year after funding requirement for the first 2 items, we still remain substantial cash reserve to support future business growth. During the period, our free cash flow was RMB 1.22 billion, representing 1.5x of the net profit for the same period, which provide a solid foundation of our dividend payment. Therefore, the Board has resolved to decline the interim dividend of RMB flat or consistent, maintain the same with last year. We hope we can leverage our high-efficiency operations and continue to provide a positive cash return through our efficient operation, creating sustainable shareholder return value. Coming next, let me just welcome Rebecca Zhang to -- Mr. Zhang to walk you through the business review section. Qiang Zhang: Thank you very much. Review H1 of this year. Micro retail market demand fluctuate. Social retail data show that textile and power industry grew by 2.5%, slightly faster than last year, but recovery pace was lower than the growth rate of the total social consumer goods retail sales. Industrial growth is no longer universal. It extend from the specific scenario and the demographic. In omnichannel retail, we now have instant retail, the broader and deeper channel deployments. The experience economy has risen with consumer purchasing not only product, but also service, content and emotional connections. Technology innovation also play a crucial enabling role in both back-end operation and front-end interactions. Where for sports industry, consumer segmentation has been more subdivided and be more diverse, shifting from general sports population to specialized vertical interest communities. Professional functionality has become the key direction for product upgrades with consumer pursuing high performance and scientific support. Meanwhile, while domains have been deeply integrated, sports has been connected to lifestyle, social interactions and the technologies. Facing such environment, industrial leading company generally focus on core strategies, invest in product R&D to build technology barriers, capture segmented demand through brand and category metrics expansion, advanced operational lean management, improving resources conversion efficiency. We are facing the external challenges. Topsports adapts to trends, refine internal capacity and enhancing our corporate resilience through forward-looking strategy positioning and agile execution. Against the backdrop of coexisting opportunities and challenges, we have made 2 reinforcement, reinforcing expansion into emerging scenarios and high potential area. Our brand metrics covers the comprehensive sports, lifestyle sports, professional sports and IP culture, and we continue to expand the brand deployment in running and outdoor. Committed to become an omnichannel one-stop operational partners for more partners in China's market on the diversified sports landscape. We also have 3 major iterations. In omnichannel retail, we comprehensively focus on continuous lean improvement of the offline and online efficiency. In talent strategy, we have released Topsports talent philosophy of ambitious, self-driven, disruptive, self-reflective, responsible and mutually achieving, focusing on building a growth-oriented team with both innovation and practical capacity. In technology upgrades, we continue to advance our digital intelligence strategy, optimize and expanding application of diversified tools, improving multichannel digital operational efficiency. During the period, facing continued evolving consumer habits and scenario demands, we expanded and optimized our omnichannel retail capacities based upon the offline and online synergy plus differentiated channel operations. We proactively drove traditional stores to breakthrough single growth to comprehensively deploy one plus and diversified operating models. While physical store as a core, extending to online consumption scenarios through the middle school expansion, embracing new platforms and method of connecting with consumers. By period end, our offline store has extended to online operational touch points covering multichannels, including constant e-commerce, private domain operations, local lifestyle and instant retail, leveraging the multipoint deployment and merchandise advantage. With coordinated support from merchandise management, user service and digital intelligence, we will be able to capture differentiated demand across various consumption contacts, building a flexible and efficient online operational system to support the high-quality growth of the online business. Where in terms of the store layout, facing the market environment with fluctuating offline traffic, we use operational efficiency as our core anchor, prudently advancing optimization of underperforming stores, adapting to the demand changes through flexible layout adjustment. We adhere to the optimize plus principle, optimizing and deploying one brand, one strategy retail store structural adjustment strategy based upon brand partners differentiated characteristics, target consumer profile and product attributes. More importantly, by building an integrated omnichannel retail network, Topsports has provided consumers with seamless connected full scenario service experience. At the end of August 2025, we operated 4,688 directly operated stores with store count down by 19.4%, sales area down by 14.1%. Compared with February 28 of 2025, store count down by 6.6%, total sale area down by 4.6%. Average sales are per store increased by 6.5%, consistent with 4.8% trend from the same period last year. Due to our more focused resources allocation, capital expenditure decreased by 36%, selling and distribution expenses ratio decreased by 0.2 percentage. Frankly speaking, we recognize the essential role a physical store play in sports industry. We upgrade the store with potential value. We're also actively expanding offline store online capacity, seeking ideal alignment between experimental value presentation and the store performance. Against the backdrop of complex and the variable retail markets and consumer behavior, Topsports remain strategic foresight, continue to work with our upstream and downstream partners to explore diversified offline value, providing Chinese consumers with rich experience and good product recommendation across all scenarios. This year, we jointly let and implemented NBA Star China tour activity with major brand partners covering the key CBD in Shenzhen, Chengdu and other cities. Fan enthusiasm was high at the event value, further highlighting our value as an active co-contributor of the diverse culture. Meanwhile, we launched new concept stores with multiple brand partners. Serving as exclusive collaborator and leading facilitator, we're working with brands on localization strategy creating fresher and more cutting-edge product and the store experience for young consumer groups. We also deeply practice sustainability concept, partnering with emerging pet brand [indiscernible] to launch the used closing recycling charity initiatives in stores, advocating circular economy principle and engaging more than 10,000 consumers. Regarding the online business, we advanced refined channel operation, optimizing overall metric strategy based upon the scenario characteristics. During the period, retail online business sales, including both public and private domain achieved a double-digit growth Y-o-Y. Let's take a look at operational factors for each channel. For e-commerce platform, we focus on store cluster metrics, omnichannel expansion, leveraging multi-brand advantage to enhance efficiencies through merchandise support. In content e-commerce, we use account metrics and building product synergy, and to build a heat product to penetrate into target demographics through interest-based approach. Private domain operation deepen user connections through precise and customized community service. The newly added instant retail during the period leverage our store network to provide instant need, instant purchase and instant fulfillment consumer experience. By period end, we have 800 Douyin and WeChat video accounts, more than 2,300 Xiaohongshu accounts with more than 3,600 mini program stores and 3,700 stores participating in instant retail. During the period, we continue to maintain first place on Douyin Sports and outdoor ranking. Our private domain mini program also maintained first place on Tencent official WeChat popular mini program sports and outdoor category rankings. Through the above deployment, Topsports online business can now comprehensively cover consumer 4 major purchase scenario as brand interest-based, recommendation based and instant need purchase achieving effective extension and the systematic organization of the online business. That concludes my sharing. Let me just pass on the floor to Ms. Zhang Huijing to review our initiatives and achievements in user operation and digitalization. Huijing Zhang: As many of you can already see, Topsports is committed to building a diversified user value system. We're deeply mining user potential value to form a virtuous circle development ecosystem to continue to deepen the user relationship. Where in user acquisition, we have a very targeted focus. We focus on omnichannel expansion, combining the omnichannel scenario-based interactions, engaging marketing and cross-industry collaboration to engage new users. While at the same time, we also drive multi-platform user information integration and consolidation, improving omnichannel user profile to ensure users enjoying consistent benefits across all scenarios. In existing user operations, we upgraded and refreshed the naming and benefits of Topsports membership tier system, deepening emotional connections with users. Meanwhile, we also built an omnichannel integrated operational closed loop using product, content and coupons as entry points to continuously enrich and cultivate user value. Whether users are in-store or after visit, we maintain omnichannel operation thinking, closely following characteristics of each stage in user life circle, achieve success reach and efficient conversion, further enhancing user belongings and brand affinity. Well, till now Topsports user base has steadily grown to 89 million. We focus on refined deployment managing and continue to give my user value. We deeply integrated our original membership IP, TOP Run Free into city scenarios like travel shopping and Q&A. During the May Day holiday, online active activities awakened more than 1 million private domain users, contribute more than RMB 100 million in sales beyond regular membership activities. We launched money-saving season cards for high-frequency members addressing their high-frequency consumption effectiveness pain points. Results show that card purchase a significant repurchase rate than regular users. Those above initiatives can allow the user to maintain consistent high stickiness and loyalty across all scenarios. Total member accounts reaching 92.9% of the sales in offline store and WeChat mini programs with repeated purchase member contributing to 60%. We also achieved positive result in high-value member operation, though they only represent a mid- and single-digit percentage of the total consuming member, but their value contribution is approaching 35%. High-value member average order value constantly and significantly exceeds the membership average, reaching 6x of the average member order value, demonstrating strong consumption potential and user stickiness. While at the same time, we also build a digital platform as our key strategy. In H1 of this year, our digital platform evolved towards a more intelligent strategy. We constantly guided by precision plus efficient inking combined with business strategy to focus on scale expansion and cost reduction and efficiency improvement across omnichannel dimensions. We refine and strengthen efforts across 3 themes, including omnichannel integration intelligence and panoramic view, building Topsports smart retail ecosystem. To be specific, omni-channel integration comprehensively connects business processes across 5 dimensions, including product members, marketing, service and data. In product dimension, we focus on building a system that can maximize inventory sharing, ensuring omni-merchandise visibility, stability and fulfillment capacity. In members, we drive universality and value maximization of the traffic acquisition and operation, enabling members to achieve consistent and quality service across different touch points. In marketing, we actually provide strong momentum into business development through diversified coupon and combination, supporting user value mining and sales conversion. In service, we achieved the consistent efficiency in consumer service tickets, significantly improved the user service response speed and quality. We achieved our mid-wall upgrades and migration, improving system utilization and operating speed while delivering efficiency optimization. While at the same time, we are also improving our sales efficiency. As you can see, in omnichannel intelligence, we continue to further improve the on-shelf efficiency, while at the same time, we will be able to continue to improve the inventory listing and utilizing of efficiency through end-to-end supply chain timeless control. Intelligent marketing and sales, we drive dynamic upgrades in product delisting while forming automatic process communications with AIGC content creation and copy AI-assisted product selection recommendation. At the intelligent operation and the decision-making, we complete the leap from the passive analysis to proactive intelligence, advancing store operations towards automation and precision. In omnichannel ergonomic views, we rely on digital intelligence capacity to achieve deep constructions of the user ecosystem and value enhancement on the AI-powered ecosystem. By building user operational model support that match user value growth curve, we support the development of the user ecosystem across all time period scenario and life cycles. Meanwhile, accelerated AI technology penetration also bring new momentum to -- the Chinese consumer cautious where consumption motivation shifted from a purely practical to pursuing emotional value and on the multidimensional aspects -- combined with the rising running enthusiasm, consumer demand for sports equipment has been upgraded to dual requirements of professional and quality, value in both segmented scenario enhancement experience and resonate with brand value, making the vertical segmented sports brands more favored. Based upon this, we can seize market opportunities by further expanding our freight cycle with a focus on deepening deployment in running and outdoor. We have successfully launched a partnership with running brands, including Norda, Soar, Ciele and outdoor brand Norrøna, to meet differentiated vertical demands. Additionally, we expand our own capacity circle as exclusive operational partners of those brands in Chinese market. Topsports is responsible for end-to-end operations, including brand strategy, content, communication, omnichannel operation and community cultivation, working with brand partners to tap the market potential, achieve effective connections with the target user and sustainable healthy brand environment. Currently, those brands are proceeding with orderly expansion based upon their distinctive features through a differentiated approach and plans. They attract new users through the major events and circle activities building social media metrics with leading style products to achieve cross-scenario brand mature cultivation and process demographic service. In channel, they adopt a multichannel development strategy, successfully opening the offshore online flagship stores. We're also flexibly utilizing the offline pop-up stores and buy stores to meet the Chinese consumers. In deploying those brands, we continue to explore to bring consumer with more diverse and distinctive experiential value across all domains. During the period, the Norda brand operated by Topsports debuted at the 2025 Yunqiu Mountain Trial race, creating a scenario-based independent retail space, emphasizing on try-on experience featuring with minimalist artistic and a strong design, attracting numerous runners for the on-site inductions. Sequentially, Norda successfully held the first brand event in China at Aranya, Jinshanling, the Mountain Breeze as Escort, Wild Trails into Zen, connecting with domestic running communities to accelerate their presence in China market. As an innovative attempt to invest in more heavily in running shoes and retail formats. We help to connect the runner brands and cultures through running lifestyle brands. Recently, we actually have our running concept store, Ektos in Shanghai, reconnecting the traditional offline retail language with runner needs as a core, emphasizing our integration into community and runner lives to increase user stickiness. The store social infrastructure provides runner with one-stop services. In product selection, we emphasize on professional logic using professionalism to resolve consumer pain points. We're introducing the unique product to maintain user freshness, where we focus on the community operations and content co-creation, transforming the store positioning from a single run equipment sales venue to become Ektos, a platform or spreading running culture and promote exchange and growth among the running enthusiasts. We hope to achieve good products and service through Ektos building reputation and influence in domestic and international running industry, making Ektos an independent operational platform for understanding Chinese running culture, therefore, engaging more brands to open their new stores in China. Going forward, we are optimistic about the running subdivision, and we'll have more deployments in this regard. Currently, the sports consumption industry are facing the opportunities and the challenges amid the intensified competition. Facing such situation, we will actively adapt to the trends and confront market challenges. We refine our competitiveness in sports retail industries through forward-looking strategy as well as ensure execution. Looking to the second half of the fiscal year, we're going to focus on the 4 parts. Focus on omnichannel scenarios, user innovative formats and service positioning for long-term growth. Continued focus on consolidating efficiency, forging fundamental resilience of the retail platform, optimize precise plus efficient digital intelligence empowerment support, practice ESG principle, building sustainable pathways for ecological co-construction and value co-winning. So that's all for the presentation. We're now happy to start the Q&A session. We welcome the online investors to ask questions. Thank you. Operator: [Operator Instructions] Coming next, let's welcome Wei Xiaopo from Citi. Xiaopo Wei: Can all of you hear me? Unknown Executive: Yes, please. Xiaopo Wei: I have 2 questions. My first question is regarding your key partners. A few weeks ago, your U.S. partner, Nike, has make some very interesting comments of the China market in their quarterly report. They specifically emphasized they're going to have a major investment in China market. Mr. Zhang, in your presentation, you already mentioned, Topsports continue to actually refine our omnichannel operation and also to help to tap into the online value of the offline stores. Just as was being mentioned by Nike, for Nike global directed e-commerce, the Chinese partner dilemma facing the offline operation dilemma. So Nike's online retail business is not 100% aligned with the China market needs. So in other words, as far as I believe that Nike is going to invest more for the offline channel, is it possible for the Topsports management team to comment on what would be the future of the Nike in China? Or what about the partnership strategies? What about the order and the product you see from Nike? But at the same time, my second question, in your interim report, your GP margin residence is much better than what we expected. You have already mentioned, part of the reason is because of the brand support, but how sustainable the brand support would be? This is my first question. Unknown Executive: Thank you, Mr. Wei. I clearly noticed for Nike Global, it has already disclosed its comment for Chinese market. It was measuring its business structure product in China. Its business recovery in China is much slower than its business development in other countries. In Nike's statement, it was mentioning the online platform and online business in China has been quite chaotic. People are all competing over the price. So that's the reason that Nike started to roll out its management and plan for online channel, and they are going to further reduce discounted product for e-commerce sales, which has been mentioned by Nike, where we are being supportive to Nike's initiative. We are helping them. We are, at the same time -- and it also mentioned it's going to invest for the offline channel, because sometimes if you operate a single brand store, the churn would be pretty long, including store selections, GFA decisions, the shelving, listings and product presentations, all the offline store operations be further challenges with more adjustments being needed. We are in the process with Nike for negotiation. Some has already generated a good further results or some are still in negotiation. Let me just give an example based upon the existing sales and the market landscape. Topsports already narrowed down the GFA for many of our own stores because you can clearly see the offline traffic has been changing. So that's the reason we are actually narrowed the GFA for many of our stores, which would also be aligned for the future new openings and renovations we have for our stores. While at the same time, we also continue to further reduce the accretion cost. Let me just give you an example. For Category 1 Jordan store, for a single store, the traditional -- the decoration criteria cost being reduced by 45%, where for STORE 750, actually, the decoration cost being further reduced by 42%, which can also help to further reduce offline store operation expenses, which can further improve the operation of the physical stores, where there's another improvement on the product or merchandise by embracing the sports brands, we already see 2 significant improvement on 2 categories. The first 1 is a running category. And you can see that our product continue to perform above industry average. Starting from Q3, we invested in [indiscernible] and its single month sellout is close to 50% to 60%. In other words, it has already been taken as the best-selling products, which actually further improved the selling rate of the new product. In winter, we actually have the [indiscernible] with just 3 months after the product debut, the authorization is already more than 40% or the sell rate is already more than 40%. We do see for the running shoes, some of the new products and functional products are actually having very good sales performance. For the basketball category, copy product sales rate was also outstanding. So you can see for the functional product sellers, no matter for running or for basketball, the key flagship sales all see very nice selling performance of the new product and highlight of the new product, while at the same time for Topsports in order to make sure we can respond to consumer needs in a more efficient way. As we are working with Nike for their next highlight of flagship product and that is outdoor ACG product. For outdoor ACG product, its independent brand. For Topsports, we are also an important partner of the independent outdoor brand, ACG for Nike. Till now, we have already nailed down the first 5 stores. The first 1 is the Beijing Sanlitun store. It's being operated by Nike, but the top 2 to top 5 stores were all being operated by Topsports. Stores being located in Nanjing, Chengdu, Guangzhou and Changchun. The location has already been selected. And the commence time has already been confirmed. We are actually working with the brand to further explore their offline potentials. Xiaopo Wei: I have the second question regarding your brand metrics. Especially for the past 1 year, we say your brand metrics being further expanded with accelerated pace. For example, the management mentioned you are engaging more brands for partnership and the cooperation was being more innovative, for example, Norda. So I really would like to know with those new models, for the emerging brands besides Nike and Adidas, for example, like Norda, Soar, Ciele and Norrøna, what would be your future target? Do you have any qualitative or quantitative target that can share with us? Unknown Executive: Thank you, Mr. Wei. This is also a very good question. Let me just respond to your question from different perspectives. If you have any ongoing questions, please send me more message. First of all, for the past 1 year, as many of the friends already see, we are accelerating our pace for brand metrics expansion. You see it from the results we shared with you, but actually, it's not a short-term action. It's been a long-term commitment. Many of the brands, especially the emerging brands, we have already engaged with them for 2.5 or even 3 years. It happened just been released within the past 12 months. We have already have a long engagement and commitment or negotiation with those brands many years ago. For my second point, let me just share with you how I comment on the brand metrics and the brand family. If -- you are the one follow our company for many years. You probably still remember when we go for IPO roadshows, we tell people we are more like a combination fund or just like the portfolio that you may have. For many of the ETF shows, we're going to talk about tracking error. Tracking error can actually reflect whether you can effectively tell the market changes. We are also bringing the tracking error thinking to see whether our brand metrics would be able to tell the brand, the future development, market dynamics or showcasing the segment with new potentials. By having such a thinking in our mind, we continue to think about and review what are those brands we can work sustainably to bring them into our brand metrics. So generally, for our brand deployment, to a great extent, it also shows the changes we have to the market dynamics, our focus on segmented areas with new highlights. If we believe there's any segment with good short-term, long-term development value, we'll continue to add into this segment to make a continued investment to showcase our confidence. To be more specific, for example, in the secondary market, you may actually have the circulations, no matter for consumables or industrial products or technologies. We hope that in the areas, we're supposed to have our presence, we then would like to have more leadership in that segment. Especially for Topsports, we are a platform having the omnichannel presence. We need to continue to leverage our advantage. We indeed have the platform and scale up capacities to work with different brands for partnership. So that's the reason from this perspective, it can also help you to truly understand why we continue to expand our brand metrics. Mr. Wei, I remember, you also have the second part of your question regarding our vision and our targets. Well, for vision, you probably have been already inspired by what I mentioned, how you understand our brand metrics and the market development. What we do now is to leveraging our partnership with brands to continue to support them. Besides retail operations, we also provide brand management support and initiatives to the brand. I hope that the capital market could be more patient because at a new stage, we'd like to take baby steps to make every step counted to consolidate our business. For any new business transformation, we also keep an eye on the new model besides transitional retail operations, truly hope to have a more refined product or business model. A new business model provides more promising opportunities to us and to brands to tap into more market potentials. So 3 points from a response. You can understand our brand combination and the product portfolio, which showcase the market dynamics, our confidence and our investment of the market. Secondly, we hope that by having the ownership and leadership in our key areas, the brand we're working with is also emphasizing our business shift from traditional retail operations to brand management. But still, we are focused on the product, making the business model right to lay a solid foundation for our future sustainable growth. Hope I helped to answer your questions. Wu Yu: Thank you. Thanks, Mr. Wei. I find out, there are 2 questions you may need some answer from me. So let me just share with you how sustainable the brand support is going to be, and then what about the order. Let me see for support sustainability. The market is not performing well. We get more support from the brand partners. We're looking into the future. I truly believe as the largest and the best partners with the brands, we're surely going to have more support more than others get. Regarding the product order for the past 2 quarters, you can see that the order has been decreased on a Y-o-Y basis. Majority of our brands are adapting the flexible supply chain. In flexible supply chain, there are opportunities for us to have more order placement. You can see in the actual seasonal sales, our actual sales or product arrival is actually higher than the order were placed. So that is my answer to your question. Operator: Coming next, let's welcome Ding Shijie from Guosen Securities. Shijie Ding: Thanks for giving me the chance to raise a question. I'd like to ask the company, what would be the outlook you have for H2 of this fiscal year or even next fiscal year? And we also noticed the wholesale revenue for Nike in China market was declining for the past few quarters, but the decline has been further narrowed down. So as someone ordered from Nike, will Topsports share with us what would be the breakdown of the new product or the old product you ordered from Nate? Whether any updates you may have on the discount or product sales from Nike? My third question was supplementary Ektos project. We see that we have more consumers who's been deeply engaged in running. But still, there are some pain points for shopping, for example, the brand preference and know-how of the salesperson, we are very interested in Ektos. Is it possible for you to share more the product Ektos, how is future developments being planned? Unknown Executive: Let me just respond to your question regarding H2 of this fiscal year. Well, as you can see from our presentation, communication or what you can see from the industry. You noticed, the industry still faced challenges even in recent weeks. In such a challenging macro environment, in this fiscal year, what we are committed to is to fulfill our full year guidelines that we provided in May of this year. In other words, in fiscal year 2026, we hope the net profit could be flat. Net profit rate could be improved on a Y-o-Y basis. This is also the commitment, we still outlook now. Well, regarding fiscal year 2027, as many of you know, we only give the outlook when we hold the annual release. So it's too early to provide the fiscal year 2027 outlook. Let me just ask Mr. Zhang to respond to the inventory metrics to you. Qiang Zhang: Thank you for Nike products, around 70% to 80% of the products on the new product, which is healthy and which is also the level we are keeping now. We're going to keep it in the near future. Where for the key brands, what the key brand is doing now is that they are actually leveraging 3 strategies. For example, we control the volumes to maintain the discount rate. So actually, the discount rate has been quite stabilized. Where you can also see that the sales of the running-related products will continue to go up, which is indeed supporting the new product sales, which can also benefit our GP margin to some extent. This is what we are having now. Wu Yu: Thank you. Thanks for the questions. All the questions are quite professional and well targeted. That really makes me truly inspired. Those questions are quite good. So please allow me to share with you some of my ideas by responding to the questions. Let me just try to give a few comments on the questions I heard before. For Ektos. Ektos indeed is a business or a more accurate manifestations we have for our commitment into this business. So Topsports' investment or commitment in running has been further manifested by Ektos. For Ektos stores, what is happening for the project and to our stores? What are those content business going to be presented by Ektos? Well, from the physical format, Ektos is more like a multi-brand retail space in the physical channel. But when we started the trial operation from the 1st of October to now, it's around more than 20 days. So besides selling the exclusive product ready to be seen by the market, Ektos has already become and evolved into a hub that can connecting the people who are in love of running. For example, we have KOLs who come to the store for visit. We have the runners who come to the store to talk to us. In our Ektos, we call ourselves as a social infrastructure. It's a social infrastructure concept. What do we mean by saying social infrastructure? For example, there's 1 corner in the Ektos store, they are going to open to our membership. In Zhongshan parks in Changning district, we do have a coastal running pathway. Our store can provide the storage locker and the 24/7 vesting service to our runner, hoping that we'll be able to have direct reach to the runners for more communication and interactions. But at the same time, for Ektos, we also have some top runner from Shanghai. They are not coming to Ektos for store visit or shopping. They just take Ektos as a place for their appointment or engagement, just like the social space, we have in Europe, just what Starbucks presented to the community, is actually a connection hub of the community. I think for Ektos not only bring more product sales, engaging more brands. For the past 2 to 3 weeks, there are more sports brands connecting us, hoping that we can have some co-branded events or running their brand communities in Ektos. We're helping them to show more content. So actually, Ektos is a diversified harbor rather than being limited on the physical space. It's already go beyond its physical format. Then how Ektos is going to develop in the near future? I think it was not contradictory with what we have already mentioned. When Mr. Wei was reading the question, I have already shared with you, we're not only going to limit ourselves for the retail operation or omnichannel deployment. We are now shifting into brand management, too. So all those initiatives when we combine together, we are, in other words, continue to embracing brand management with a physical platform and ready-to-go strategies. So in other words, Ektos is indeed our store, a physical store or manifestation of our commitment for the branding sector, where it's going to be parallel to our single brand business and more emerging business or more connection service would be available at Ektos. In other words, let me just use 1 sentence to summarize my comments. Ektos is not only a new store of shopping the new brands or new products. If you have any further questions, I welcome you to raise the questions now or after the meeting. Thank you. Operator: Coming next, let's welcome Dustin Wei from Morgan Stanley, please. Dustin Wei: Recently, trend update would be my first question. Double 11 has already been started, and I know you have many good online sales. Do you have any trend to update us? My second question is a long-term question. For retail market in China, offline and online has been changing all the time. Right after COVID-19 in 2023, offline traffic has been recovered. But in 2014, 2025, offline traffic has been kept at a very low level. I know you closed some underperforming stores, but still the offline traffic continue to go down. I see it's actually structural changes of the consumer behavior. I'm not sure whether I'm making the right statement. Now your online sales is already 40% to 45% in 3 to 5 years, it's going to be 70% of your overall sales. From our membership data, can you indeed see that majority of the young consumers on the age of 30 still purchase online rather than go for offline store. If such thing happen in the next 3 to 5 years, then for Topsports, where we already taking the right strategy to improve our digital capacity, whether this is going to generate some good opportunities or setbacks to our GP margin or business model? My third question is regarding your new business models. For example, you have exclusive partnership from a few nice emerging brands. Let me just ask you, for example, like Norda, Norrøna, are you contracting those brands for exclusive partnerships or may within that agreement term, you help them to take care of all the commercials in China, for example, distributions self-directed stores. Does exclusive partnership look like this? I know that the company has a very strong cash flow capacity. If you really would like to engage those brands in long run, did you consider JV or equity investment as a way of being part of the emerging brand operation? Wu Yu: Thank you, Dustin. Let me respond to your questions. The first question is regarding the market landscape now, where you can see the market data or market sentiment. I think you can already observe that as a consumer or even you talk to other peer company, you probably already feel what the market may look like. I see there are more challenges are in the market, where from Topsports, especially from our fiscal year Q3 to mid of October. In other words, from the beginning of September to the mid of October, in just 6 weeks, the sales is very much in line with the Q2 performance of the previous fiscal year. I mean, from June to August. Online offline performance are also quite consistent with before. I was talking about the sales. Well, regarding the discount and inventories. Let me see that for inventories. Topsports still maintained a very stringent control over inventory. The inventory level is pretty healthy and controllable, which has already been mentioned by Mr. Zhang in his presentation. Regarding the discount rate, for the past 6 weeks in Q3, discount rate has still been deepened. The attitude of the deepening has been narrowed down compared with what we saw in Q2. So these are the latest observation updates. Well, regarding the overall market, still we see the challenges. But for Topsports, we always maintain our own cadence in H2 of fiscal year, we're going to be more priority-oriented, right after moving into H2 of the fiscal year. Our business or the actions we take are still going to be in line with our overall road map and the expectation. Let me just ask Mr. Zhang to respond to your question regarding the evolving landscape of online and offline business. Qiang Zhang: Thank you, Dustin. I noticed the observation you mentioned in your question. We see the challenge for the offline channel is truly huge. This is how we comment on the online opportunity. First of all, the traditional channel expansion used to only focus on the store number, but now we focus on the omnichannel operation. For example, one physical store going to have a 10 online stores. So for one store, it has 1 physical store and 10 online stores. That is to make sure the offline store can develop their online capacity, especially when we have the traffic drainage for the offline channel, we have to find a self-rescue strategies. First of all, we need to build our private domain. By having a private domain to engage the traffic, we will be able to find a way for the offsetting the traffic drainage in the offline channel, retain the consumer, continue to enrich touch points and conversion. Besides the private domain, we also have the content e-commerce. That is basically restored with Douyin and Little Red Book. And we are also going to have the key stores and the flagship stores on the social platform, engaging more public traffic to this opportunity for sales. And the third part is Dianping.com or TikTok localized, and then they can actually direct the traffic to the stores. We also have our store presence, sales coupon, interaction with consumers, supporting them to come to our physical store for consumption. The fourth part, or should I say the most emerging and also 1 of the most important part, that is the instant retail. Instant retail can actually leverage the offline discount, providing more convenience to the online consumers. It's just like the food takeaway service of delivering Topsports product to consumer hands, which can have a fast fulfillment by providing the localized solution. Those are all indeed the strategies we have in order to support our offline stores to divide their online store capacity to offset the traffic drainage in the physical channel. Those are indeed the initiatives we are adopting now. Wu Yu: Okay. Dustin, let me just respond to your final question. I think you have already made a very few important points. Same as you mentioned, for the contracting relationship within certain geographic regions, for some brands are partnering with us in Greater China or even in Chinese Mainland area that is exclusive partnership we reached with the brands. But just 1 more comment I'd like to make on that. We never excluded the possibility of having some equity cooperations with those brands. But let me just point it out, being an equity investor is just a tour rather than the final objective. What we are going to do is to share the interest with the brand to have a deep collaboration. We hope that when we were working with different brands, each brand has a very different background, the history, development milestones. If equity investment would be a way to deepen such a partnership, if other parties stay open for negotiation, then for sure, we are happy to have the negotiation. But if the timing is not right, we are still quite patient and be fully committed of supporting the brands to prove to each other, we are the right partners for long and sustainable growth. Operator: Ladies and gentlemen, due to time constraints, let's welcome the final question. Let's welcome Samuel Wang from UBS to raise the final question, please. Samuel Wang: I'm Samuel Wang from UBS. I have a question for the management team. The sales revenue decline is kind of significant in H1 of this year. Would you mind to elaborate on the reason? My second question, you now have 89 million users. You must have generated some good insights from the user. Did you see any new trends? For example, outdoor and running categories still registered fast growth, where for other categories, whether basketball has been pressured or is it being remitted or for other sports, for example, like tennis, like badminton or like golf, do you have any trends or dynamics updates with us? My final question is regarding the new brands. What about their sales contribution to your overall sales? And what about their profit or even the net profit contribution to our overall business? Wu Yu: Thank you, Samuel. Let me just try to answer your question. I mean the first 2 questions. I will then ask my colleague to respond to a final question regarding new brands. My first response to your first question, wholesale revenue decline in H1 of this year. First of all, has been planned for the full year. This is also within our expectations. You know that for wholesale users, they are in the top-tier cities or Tier 1 cities. From the management perspective, I mean, if we consider efficiency, if the efficiency is not in the right timing, we may have some wholesale users or consumers. You know that for wholesale, the offline are the key for wholesale. Majority of our wholesale consumers, they have many offline stores. The offline traffic has been heavily impacted for this year. So our wholesale partner, I think their revenue is being heavily impacted. When we are dealing or handling with the wholesale customers, we would like to focus on the sustainable and healthy development. This is the strategy we have with our wholesale partners. Let me just complement on that because the overall micro environment is not looking right. Wholesale consumer confidence being impacted, order continue to go down, where there's another reason we have to notice, the market is facing various competition. The online product price and the sport product price has been quite chaotic. I mean the pricing system. For some of the wholesalers, they actually order less from the wholesale channel. They believe they will be able to get a better discount by having temporary small batch orders. So that's the reason the wholesale business was going down. Samuel, I didn't get your question very clear. You were asking about the insights from the membership to new brands. Are you asking me to comment on the new brands? Or are you asking me to talk about new brands deployment and the strategy? Would you mind to repeat the question again? Samuel Wang: No problem. My question is that you have 89 million users. You might have some user insights data. Did you see that the category difference, for example, running outdoors, the growth rate was looking pretty right. Basketball used to be pressured, whether the pressure is being elevated or for some of the niche sports like badminton, like tennis, like gold, do you see there's any brand who have a promising future with nice growth or any category who may have similar performance as outdoor in the near future? My second question -- third question regarding new brands. What about the new brand sales contribution and profit contribution or the net profit rate? Wu Yu: Thank you. Actually, first of all, sales contribution from new brands or niche brand, you see Topsports is a large company. So here now, the niche brands contributed less to the profit. You can almost neglect that. But running those niche brands or emerging brands is our strategy or our business pilots for future growth opportunities. Well, regarding profitability, you can see all the brands we are working with are having exclusive partnership with us. For those niche brands, we hope we can help them to have a good and high quality debut in China, consolidate their future growth opportunities in China. So profit and the discount control over those emerging brands being -- will by done by Topsports. So those are the 2 response I have regarding your new brands question. Well, let me just be brave in showcasing the promising verticals or the categories. I will ask my colleagues to give you more comments. First of all, as we can see, sports industry is being highly integrated, no matter from sports or from brands. While with these preconditions for the past 1 decade, you can see that we have domestic and international brands continue to show up. But to some extent, it was showcasing differentiation, people's interest and the preference being further sparked. This is actually 1 thing for your reference. Well, based upon that, you ask me what are the categories, what are those niche sports can grow? First of all, some of the so-called non-niche segment may not be niche in the near future. It may engage in more consumers in the near future. Well, based upon that, you see what would be the category that may likely to become the outdoor category. Just like the secondary market, you need to have the alpha and beta. Alpha shows the sports developments. And beta actually means the market dynamics that may lead to the brand growth in short run. You have to consider both factors together. Well, regarding the alpha, there are some niche market or sports, who have a very strong momentum for future growth. We have already made the corresponding resources allocation. Where for data, it's more like marketing campaigns, you just follow that, keep it on eye and be a part of that. That's my response. Let me welcome Mr. Zhang to say a few words. Qiang Zhang: Thank you. Responding to your question on category. In the category we are operating now, we see demographics and the consumption data is truly aligned. The largest category is still running. Running is still the best and still growing segment we see. It's also a category that all brands in competing with. For running shoes now, I mean for the light-weighted running shoes, people just want to make it less than 200 grams. Adidas made a running shoes weighted less than 200 grams. It's going to be a onetime marathon running shoes. Performance being extreme. The surface is quite breathable and thin and making sure it have very good elasticity. So in other words, all brands have been competing over technology innovation and material progress. So all brands have been working for running market. It's still the largest application with every growing market momentum. It's still a place with a new product on a daily basis. All brands are actually taking running as a focus area of development. Well, let's talk about outdoor segment. Outdoor category is more like a high rising -- and even if it was rising fast, but still this market is still a vertical market with focused demographics. No matter like North Face or other brands, they actually made a substantial growth in the outdoor categories, which is truly well demonstrated with very nice growth. There are other segments, including basketball. Basketball is more like the inventory market. For basketball, we actually focus on the junior high school and the senior high school or even sometimes primary school students. Many of those target users are the on-campus students. The brand allocation in the basketball won't change that much. Nike probably be the trial taker where other brands are taking the corresponding shares. So it's actually a relatively fixed market with nice inventories led by Nike. Mainly the basketball market is being led by Nike and other brands just take of the rest part of the market shares. For the niche market, tennis registered very nice growth, especially Nike tennis series, where Nike sponsored Jannik Sinner, were in the tennis global competition, we have many new rising stars from China, which actually be a great momentum among the public. We see such growth momentum from Tennis, but the contribution and volume is quite limited. I see the growth momentum from tennis is looking good. Well, for football. Football don't have too much promising potential for the professional product lines. For viewers of the football or the people who play football, in other words, we have more people watch football games rather than play football. But the football lifestyle products do register nice growth for the past 2 years. That would be the category dynamics, I'm happy to share with you. Operator: Okay. Due to the time constraint, ladies and gentlemen, here comes to the end of our presentation. Our management and IR team will continue to engage our friends from the capital market. Thanks for your time, and thanks for supporting Topsports.
Leonardo Rosa: Good morning. Welcome to the conference call of Usiminas in which the results of the Third Quarter of 2025 will be discussed. I'm Leonardo Karam, Investor Relations Officer at Usiminas. [Operator Instructions] This conference call is being recorded and simultaneously broadcast on the Usiminas YouTube channel. We would like to remind you that this conference call is exclusively for investors and market analysts. [Operator Instructions] We also request that any questions from journalists be directed to the Media Relations team at Usiminas via e-mail in imprensa@usiminas.com. Before proceeding, we would like to clarify that any forward-looking statements that may be made during this conference call regarding the prospects of the company's business as well as projections, operational and financial goals related to its growth potential constitute forecasts based on the management's expectations regarding the future of Usiminas. These expectations are highly dependent on the performance of the steel sector, the country's economic situation and the situation of the market at the international level, so they are subject to change. With us today is our President, Marcelo Chara; the Vice President of Finance and Investor Relations, Thiago Rodrigues; and our Commercial Vice President, Miguel Homes. First, Marcelo will make a few remarks, then Thiago will present the results. Afterwards, the question asked in the Q&A section will be answered. Now I give the floor to Marcelo. Please, Marcelo. Marcelo Chara: Thank you. Thank you very much. Thank you very much, everyone. Good morning, ladies and gentlemen. It's a pleasure to be here with you to share the results for the third quarter of 2025. This quarter was marked by important advances in our management with the consolidation of our operational stability, continuity of the cost reduction plan and the evolution of our priority CapEx project. These initiatives reinforce our strategy of ensuring competitiveness and sustainability for the business in the long term. In this quarter, we achieved an adjusted EBITDA of BRL 434 million, with a margin of 7%, representing growth compared to the previous period. I would like to highlight the following: the 3% reduction in COGS per ton in the steel business unit compared to the second quarter as a result of the expense and cost reduction plan. We posted growth in sales volume in Steel business unit despite the increasing pressure from imports under unfair conditions. We reported higher prices and volumes in mining, strong cash generation exceeding BRL 600 million in the period and reduced leverage, mainly due to the control and efficient management of raw material inventories. In the market environment, we remain vigilant and concerned about the increase in subsidized imports due to the excess global production capacity, particularly in China, which continues to negatively impact the entire domestic industry. Imports increased by 33% in the first 9 months of 2025 as to flat steel compared to the same period of the previous year. And we do not clearly see the effect of the tariff quota system on import penetration. The antidumping cases of heavy plates that has been extended for 5 years as a measure against China and South Korea as well as the one for metal sheets, where the duty was also applied against China and the one for prepaint and steel, which is at an advanced stage, give us confidence in the technical capacity of the authorities of the ministry department and industry to recommend effective measures against the serious damage that affects the entire steel value chain in Brazil. The challenging conditions are also impacting industrial goods that include steel components. Data from ANFAVEA shows that compared to 2024, there was an 11% growth in the registration of imported light vehicles and only 2% of domestic light vehicles. In the machinery and equipment sector, data from the National Industry Association, ABIMAQ show an accumulated annual increase of 9% in imports with a trade deficit of the sector totaling USD 13 billion this year alone. Due to this imbalance in international trade, we have seen important movements such as that of the United States, which raised its tariff on imported steel in Europe, which proposes to tighten current safeguard measures, proposing a tariff quota system with a sharp reduction in volumes and an increase in tariffs with the aim of protecting jobs and the local industry in Europe. For the fourth quarter of 2025, we expect to continue reducing costs due to efficiency and raw material prices, stable net revenues per ton and lower volumes due to the typical seasonality of the period at the end of the year. As for mining, volumes are expected to be slightly lower, but to remain higher in 2025 than in 2024, consistent with our planning. I would like to point out that despite the challenges of the external environment and the pressures on the domestic industry, we remain confident in our ability to adapt and deliver sustainable value to our customers and shareholders. We believe that with discipline, strategic focus and the commitment of our entire team, we will continue to advance and consolidate our leading position in the sector. I thank everyone for their trust and partnership and we continue together building the future of Usiminas in the Brazilian industry. Thank you. Thiago Rodrigues: Thank you, Marcelo. Good morning, everyone. So we are now going to start with our presentation about the results for the quarter. We would like to start that we showed improvements in the main performance indicators in the third quarter of 2025, even considering the complex scenario that we are facing in Brazil and abroad, as mentioned by Marcelo. Sales volume increased in steel and for mining 2%, consolidated EBITDA had an increase of 6% in relation to the previous quarter. And the highlight is the strong cash -- free cash generation of BRL 613 million is in a drop of our net debt and our leverage ratio. We can see the consolidated results on the next slide. Net revenue was BRL 6.6 million, slightly lower than the previous period, and the impact was the lower prices in the steel segment. And the revenue was higher than last year and was driven by mining, in particular. Adjusted EBITDA was BRL 434 million, 7% of margin and slightly higher than the previous quarter as a result of the best operational performance in the steel area. Accumulated EBITDA in the 9 months of 2025 amounts to BRL 1.6 billion, 45% when compared to the same period of 2024. Net income did not reflect the best operational results of the quarter, as we mentioned, due to the accounting effect of BRL 3.6 billion related to impairment of assets as well as deferred taxes. Those effects are accountable for accounting effects and generate no effects on the cash of the company. Otherwise, the net record would be BRL 10.8 billion in the quarter. Next slide, we have seen the steel sales volume was higher, 1.1 million tons, a bit higher than the previous quarter, showing the resilience of the demand of our main segments. The accumulated volume is above what we posted in 2024, but it's important to mention that in the same period, the apparent demand of steel increased by 6%. In other words, this increase of demand was captured by subsidized imports reinforms the need of implementing antidumping measures as Marcelo has previously mentioned. Moving to net revenue, the unfair competition that we mentioned affected the prices in the period. We had reductions in the quarter, especially in the sector of distribution. Exports were impacted by the mix except for high-grade steel, and there was a 3.5% drop, reaching BRL 5.8 billion. In spite of the complex market scenario, we offset the drop in revenue with a reduction in cost and expenses, reaching 7% higher result and EBITDA of 30.8%. EBITDA amounted to BRL 1.1 billion, 44% when compared to 2024. On the next slide, we show the main variations of the quarterly results. And here, we can see the drop of 3.5% of net income per ton, generated a loss in our results and the offset came through the reduction of cost in sales that generated an increase of BRL 164 million, which was expected. And this was also driven by the appreciation of the real and also the drop in the price of raw material, but also with the gain in efficiency in our operations. We have a positive effect due to lower SG&A expenses and contingencies. In the next quarter, we continue reducing costs and our expenses are expected to remain stable. As for mining, the production volume was 4% higher when compared to the second quarter due to the operational yield, which was higher and sales had an increase of 2% with 2.5 million per ton, which was the highest volume of the quarter since 2021. Net revenue was 4% higher when compared to previous periods with better reference prices and lower discounts related to quality, but it was partially offset by the devaluation of the dollar. Net revenue amounts to BRL 2.8 billion and 27% higher than the accumulated revenue of 2024. The cost per ton for the quarter had an increase, especially due to the freight tariff hike and EBITDA was -- of the third quarter was BRL 130 million, slightly higher when compared to the previous quarter and accumulated was stood 60% higher than 2024. And now talking about the financial indicators. This quarter, we had a strong cash generation with important generation of working capital due to the reduction of raw materials, which stands at a normalized level nowadays after an increase that we had in the first quarter, one-off effect. The CapEx was BRL 266 million, and we keep advancing with the main projects that are going to generate gains for Usiminas, especially the PCI plant that is going to be completed in the beginning of next year. And [ auto repair ] and coke plants that are going to finish, completed in 2028 and 2029. And we ended with free cash flow of BRL 613 million. In relation to working capital, we can see a reduction in -- at a lower volume, but we can see a reduction, especially due to the lower volumes that was estimated for sales in the steel business unit. As for CapEx, the expectation is to follow our guidance close to the lower limit of BRL 1.2 billion. Next slide. we can see the strong cash generation has made the debt to be reduced as commented before, closing -- close to BRL 300 million and reduced the leverage to 0.16x. In this quarter, we also ended the repurchase of the bonds that are going to mature in 2026. And we also took the opportunity of the favorable conditions to anticipate BRL 160 million of the new debenture issuance. And with this, we continue with a very solid financial position and with the scheduled elongated debt that will make us focus on our operating performance and continue with our investment plan. I will turn back to Leo so that we can start the Q&A session. leo, please? Leonardo Rosa: Thank you, Thiago. So we are going to start with the session of the Q&A. Our first question is to Marcelo and Miguel. And this is the most asked question about antidumping. There are many questions come from Marcio Farid, Caio Greiner from UBS, Caio Ribeiro from BofA, Marcelo Arazi of BTG, Raj Kanjani, Igor Guedes of -- from Genial, Lucas Laghi from XP, Daniel Sasson from Itaú BBA. All of them are asking about anti-dumping, and I'm going to try to concentrate on the following topics. Are you confident in the implementation of antidumping measures. And what's your vision? What changes since the preliminary decision? Are the deadlines being maintained? Are there delays likely to happen to February? Is there a possibility that even if the antidumping measure is adopted, the market will continue being pressured. Can other countries being involved. And if there is the antidumping implementation, is there any chance of going back to going -- getting the blast furnace #1 back into operation? Marcelo Chara: Thank you, Leo, for all the questions. This is a very relevant topic. And we have been mentioning all of this in the previous calls about the measures for the steel segment and the industry in Brazil. We are confident, of course, because these are processes which are very solid from the technical view point as to dumping. And this was confirmed in the preliminary decisions that was published by the ministry. In case of dumping, you analyze 2 factors mainly. What is the margin of dumping that was being confirmed by the preliminary valuation by the technicians of the ministry, with tariffs above $500 per ton, both for coated and cold. And another important factor is the impact of the imports of the gain in the local industry. So if this -- all this is confirmed, and if this is confirmed after the preliminary decision where the imports continue to increase, prices continue to be pressurized in the margin of the industry, both the local industry and international industry. And this allows us to feel this confidence of -- on the final determination that should come next month. In relation to the deadline, it's important to clarify the following: As for dumping, there are deadlines for the final determination after each case has been filed. As for the cold area, the opening of the case happened in August 2024. After that date, the maximum deadline for the final decision is February 2026, okay? The ministry has been publishing different schedules according to the capacity for the technicians to analyze of each case, considering the technical capacity of the ministry. In the last publication, however, the last schedule that was published by the ministry, the date was November 2025. This is not likely to be completed. So our expectation is that the final documentation will reach the final deadline, which is February '26. As for coated product, so it's going to be 30 days after the cold item case is solved. So we expect that the final decisions to be made in February and March. As for the hot items, they will continue with the original schedule, and we are going to continue monitoring all the advances. And the other question was related to the possibility of having more countries involved and the pressure. Of course, in the -- we are living a very important commercial work, especially for the manufactured product that comes from the overcapacity that comes from China that is pressurizing not only the Brazilian market, but the European market and global market. But we have seen that commercial measures have been implemented in the United States, in Mexico and Europe. And of course, we should expect that the market should continue being pressurized by this commercial work. And it's very important for us to continue monitoring even after the measures of anti-dumping. And we have to monitor the potential impacts that we can have after the results come in. As mentioned by Miguel in our industry, an important percentage of the cost, more than 50% of the ore and coke and coal and there are -- there is a formula which is applied to calculate, say, what is the difference of prices that are adopted. And when we see the prices, especially the products coming from China, and we can see that the margins are negative. These are not fair competition conditions. This is not fair. And of course, it generates a significant imbalance. At the moment, we can -- we have confidence in what Brazil is doing and my friends who are part of the Board. And we have been -- we are visiting the authorities of the federal government, and we have also been in talks with government of the states, and we are sharing our concern. And we see that there is a strong challenge, a strong threat to our industry when we think about the GDP of the country. And an important factor that when we see this kind of competition, we understand that it affects the employment possibilities. And this also affected the qualifications of the jobs in Brazil. There is another question that was asked. If the implementation of the measures could increase the capacity at Usiminas. For example, the beginning of the blast furnace #1. As we mentioned before, we trust the Brazilian authorities. In the initial speech, we mentioned that. And there were some measures that I have already mentioned. And we understand that there is the importance of implementing technical measures and antidumping is a technical measure. And we believe in the capacity for us to have more light in what is happening to the industry. In relation to the added capacity, I would like to say that we have made investments of $600 million in the modernization of blast furnace #3 which is operational. And we're also looking at the efficiency of those furnace. And with the blast furnace 2 and 3, we have managed to reach efficiency levels similar to what we had with the 3 blast furnaces in operation. So today, we have idle capacity in all industry. And then I would say that we are prepared to absorb higher demand. We are prepared to absorb the unfair competition that we see in the Brazilian market in a very efficient way. Leonardo Rosa: Thank you, Marcelo, Miguel. We have a session about prices. I'm going to select some questions. First, about price in the distribution, and then we can talk about the carmakers. Prices, this is what we have. What is the transfer of prices for distribution. So what is Usiminas opinion in relation to this transfer? Is there any possibility of higher prices? What's the expectation of prices in the short term? Miguel, could you answer those? Miguel Angel Camejo: Thank you, Leo. Usiminas increased the increases in the prices, spot businesses as of October, the prices depending on the product varies from 7%, 4% or 5% depending on the product. And this is a result of the strong pressure from the unfair competition with negative margins. When we reach the price scenario, the spot price, which was not sustainable to our Brazilian market. So that was the -- we felt the need of increasing the prices. We are returning to positive margins to the sector. And obviously, we are going to continue monitoring this possibility of new increases to the future. It's important to clarify, Leo, and everyone that as we suffered the pressure from the fair competition, and we also saw a strong drop in the spot prices, an adjustment was very low considering the inflation so much so that we did not feel this drop in price in the spot price. And we do not expect any increase in the fuel in the steel sector can impact the IPCA or the inflation rate in Brazil. Leonardo Rosa: Thank you, Miguel. I forgot to mention the names of the people of those who were asking about prices at first. So it was a Caio Greiner, UBS; Caio Ribeiro of BofA; [indiscernible] Goldman Sachs; Matheus Moreira with Bradesco BBI and Carlos from Morgan Stanley. Now continuing for prices in the industry, and then we are going to talk about the automotive sector. [indiscernible] asks about the prices. And when are we likely to have a positive impact according to the recent increases? And what is the lag between the movement of the industry and movements in distribution? How could we compare those? Miguel Angel Camejo: Thank you, Leo. As we always explained in our call, the dynamics of pricing at the industry has -- is associated with the spot prices. In the industrial [actually], depending on the client and the sector, we have [indiscernible] increases, quarterly increases. So these are the movements. And this is what we can observe this in the future. So the adjustments that are being made right now as of October in the spot sector, are likely to be reflected in when the industry renovated agreement as of January next year, especially in this period. Leonardo Rosa: And now about automakers. We have some questions by Caio Greiner; Ricardo Monegaglia, Safra; Igor Guedes, Genial; Lucas Laghi of XP; and Daniel Sasson, Itau BBA. Marcelo Chara: In case of carmakers, as you all know, we have 2 periods of negotiations. In January, when we update the agreements, we have the period of January, December and April and March, about 30% of car makers in Brazil and those installed in the region have a start negotiations at a very preliminary stage. So we are not sure of when the negotiations are going to be completed that are likely to advance up to December this year. As for the agreements that update the conditions as of April, they will start negotiations as of January and February next year. We'd like to remind you that the dynamics of agreement is very different, from the conditions that we apply in spot prices. The case of spot prices, well, it's important to clarify that what happened along '26 is -- '25 is not sustainable so much so that the result of the scenario is the different processes or cases -- the lawsuits of dumping. And we expect that the authorities are going to recognize considering the negative impact on the local industry. Leonardo Rosa: Maybe just a follow-up. Still talking about the automakers because there's an additional question. How an anti-dumping measure can influence the negotiations within the automotive area? Marcelo Chara: Now there is no influence, as I mentioned before. The dumping scenario is a result of the strong pressure from imports. In the case of automotive agreements, it's another logic. We are associated with the competition, but we also have to consider the variable of costs of raw materials and the agreements are maintained in the local currency. Leonardo Rosa: Miguel, to end the session about prices, Gabriel Barra with Citi asks the following. In relation to steel prices, could you talk about the carryover of prices of September to understand what will be the carryover for the next quarter. Miguel Angel Camejo: Gabriel, the price of September was the average price in the domestic market was about 12.5% that was impacted by the drop -- continuous drop that we observed in the spot price and the worst mix of product in September compared to -- for the quarter. Leonardo Rosa: Okay. Miguel, another question for you. And now about imports. Daniel Sasson with Itau BBA. What's -- how do you see the volume of imported product reaching Brazil in the next months? And the premium versus the imported prices lower for the next months reflected in a lower order for you? Miguel Angel Camejo: Daniel, let's separate your question. Your question is very interesting. Of course, the local steel unit reacted to the pressure of the strong imports, and we made adjustments, the price in the spot price in order to protect and to respond to this international pressure that led to a lower level of imports that we observed in 12 last months. But as I mentioned before, this scenario of domestic prices was not sustainable. So on the other -- on the side, the steel industry reacted strongly because we would have the possibility of lower the production. So because of the unfair competition, we have to go to the spot sector and defend the position of the steel industry at the local level. Imports reported and they lowered the volume of imports in the last few months. And we expect the same dynamic to be implemented up to the end of the year. Another factor is that you can see there's a cooling in different sectors of the economy. And this generates lower expectations, and we expect lower volume of imports because of the lower activity expected for the end of the year. And up to the end of the third quarter, we expect imports to -- lower imports, and that generated the drop at the imports that we observed in the last months. So we are likely to observe a reduction -- a sequential reduction in imports, but it's very relevant to continue advancing with the final measures for the decisions related to dumping so that we can go back to the regular levels after all those unfair competition that we have been suffering in the past 2 years. Leonardo Rosa: Thank you, Miguel. Now Marcelo, we have a question about the compact mining, [indiscernible], Caio Greiner asked at what moment we can have the decision? And do we have any update on the decision? Marcelo, please? Marcelo Chara: Thank You, Leo. As we mentioned before, in all previous calls. And we continue making headway with the preparation of the engineering that we have a clear adjustment in the project. But basically, the process of permitting is within the deadlines. As I mentioned before, in 2026, we will be able to define which would be the next steps. Leonardo Rosa: Our next question is directed to Thiago about capital allocation, Caio Greiner, BTG; Gabriel Barra from Citi. He said capital allocation in a favorable scenario of antidumping that will elevate margins and cash generation of the company, how the capital allocation would be changed for the next years? Would that accelerate the dividends, accelerate investments or buyback or payment of dividends? And he says, what's the level of leverage that would be ideal for the company, Thiago, please. Thiago Rodrigues: Thank you, Leo. Thank you, Caio. It's very difficult for us to estimate what's going to happen in the future, especially in relation to anti-dumping measures and how this can impact the result and the cash generation of the company. So I'm going to limit myself to talking about the present moment. First is it's in relation to prioritizing investments and payment to shareholders. You can observe that we have a plan, a robust plan of investments that have already been approved that are going to lead to the disbursement of relevant volume of cash. As we announced in the last call, an investment of -- for the Coke plant. And we also have the hardware repair of the Coke plant, and this would amount to more than BRL 2 billion. Marcelo has just mentioned the investment at MUSA. So we have a robust pipeline of investment for the future. That doesn't mean, however, that we do not evaluate the payment for the shareholders. This evaluation will depend on a number of indicators, cash generation, liquidity level and the investments that we have already planned in the pipeline for the future. In relation to the current situation, we have not made any decision. In this regard, we're still evaluating the possibility of distributing dividends this year, but we still haven't made a definite decision. Of course, this -- we have a proposal that it's going to take to the Board for approval. In relation to the leverage level, you have seen that in the last 2 or 3 years, we have been maintaining the leverage level below 1x the EBITDA. And this is a ratio that we feel comfortable to go through a stability period in the market and also going through periods of higher investments. And answering your question, the leverage level is the level that we understand to be a comfortable level so that we can be prepared to those kinds of future situations. Today is below 1. So between what we have today and 1 point of the EBITDA as the leverage level, that would be a comfortable level where we feel safe and comfortable. As to the future, let's wait and see if anything changes in relation to an improvement in the market situation and how this can be reflected in cash generation. We're going to continue monitoring the possibility of payment dividends to shareholders. But we are always going to focus on our investments so that we can generate competitiveness for the company in the future. Leonardo Rosa: Thank you, Thiago. Still for you, there are many questions here. They're asking for an explanation about impairment and deferred items. Caio Greiner of UBS; Ricardo Monegaglia, Safra; Igor Guedes, Genial and Morgan Stanley. They ask you to explain the impairment and deferred items, why higher? And right now, is there any adjustments that we can expect for the future? Is there an impairment impact after the assets have been reviewed? Thiago Rodrigues: Well, as you know, this is an accounting topic where companies have to evaluate the impairment of their assets at the routine frequency. So this is an evaluation based on premises. Interest rate, foreign exchange rate, demand, raw material prices and et cetera. All those premises are based on the macroeconomic environment in the market at present. And the update of those premises made us register the impairment. So there is no change in relation to the quality or the result generation of our assets, but we changed the premises that would change the situation of the market, the macroeconomic situation that were impacted by those evaluations. There are no expectations of a new evaluation in the short term, except if the macroeconomic situation and the market situation changes in a significant manner. And then we could make the evaluation that would all -- could mean a reversal of this provision. So we can revert the provision that was just being made and this provision was not allocated at any asset specific. This is just a provision without any specific allocation in any assets of the company. Leonardo Rosa: Thank you, Thiago. Miguel, a section about demand. We have questions about Ricardo Monegaglia, Safra; Raj Kanjani from JPMorgan, Lucas Laghi from XP and Matheus Moreira with Bradesco BBI. So we put the questions together, and this is what we have. We noticed that the domestic market was weaker than the steel, flat steel prices, Usiminas increased 2%, as Brazil presented a 4% growth. Was there any change in the commercial strategy or any rationality from the competitors? The planned demand was dropped and the industry dropped -- falling quarter-over-quarter and year-over-year, is there a deacceleration? And as for 2026, what do you expect? And what factors presented the worst scenarios? Miguel Angel Camejo: Thank you, Leo. Thank you, everyone. Let's make a comparison of the internal volumes and as Brazil's reports. We can -- it's important to say that short-term comparisons can lead to bad wrong occlusions. Because in short terms, you have -- we see, as case for Usiminas, we are focused on maintaining our leadership, and we are going to strengthen our leadership in added value, both in products as in -- as to value. And that are different sectors in the industry, and we take part in the commercial sector as well with automakers. And we also have to consider the civil construction and we take part in this less than other steel companies, and that can result in different movement of sales when compared to the previous quarter. As for the highlight of the quarter, we can see that there was a 10% increase, and we are likely to maintaining this recovery. But it's important to mention that the automaker sector is the only sector that still hasn't recovered the values prepandemic period. So it's important to maintain this movement, but the automaker is the only one which is still below the value of 2019. The industrial sector, we can mention the machinery for agriculture and the agriculture sector were at very low levels compared to the previous periods, but the quarter was very good and the road machinery had important improvements. And these are sectors that we can mention that they have had a performance lower than expectation. Another one is the sector of renewable energy. And there are other sectors that we have to consider. And the other sectors are performing according to the indicators of the economy. Of course, on the one hand, we have a negative impact on consumption. And client of Usiminas are being impacted by the imports of manufactured product as we saw from ANFAVEA data. But this strong pressure is also being felt by what comes from the imports. But the government has to incentivize policies that can help this area. For 2026, we can -- there is an estimate that apparent consumption will increase by 1% in -- for the Brazilian market. Of course, potential additional low levels of the interest rates and some aspects of the economy could improve the situation, but we are going to continue monitoring the interest rates and the consumption capacity in addition to industrial policy that can come from the public area. I don't know if I missed anything, Leo. Did I forget any question? Leonardo Rosa: No, I think you addressed all of them. There is another one, which are the sectors that had a lower performance? Miguel Angel Camejo: Well, I would say that sectors that were impacted in the period was renewable energies. That are -- have some important projects that have come to a stop, and they were projects that were very important in the previous year. Leonardo Rosa: Miguel, about demand in the international market, Raj Kanjani from JPMorgan asks about sales to Argentina. Argentina demand was weaker, so can we go to the levels of the second quarter? Is this what we can expect for the fourth quarter and what we can expect from Argentina and from the external market? Miguel Angel Camejo: What happened in the third quarter is that we were delivering the projects of oil and gas, and they were very strong in the second quarter. The sector of oil and gas continue to be striving and that could improve the mix and sales in the fourth quarter, especially for new projects of oil and gas in Argentina. The automotive sector continues to present positive results. And we expect to continue this trend up to the end of the year. So we could observe a better mix of sales, especially driven by the deliveries of oil and gas projects. Leonardo Rosa: Thank you, Miguel. Thiago, we have a question about cash flow Ricardo Monegaglia with Safra asks the following. What's the perspective of cash flow for the fourth quarter of 2025, considering that working capital is stronger, CapEx is weaker in the third quarter? Yes, Thiago? Thiago Rodrigues: Ricardo, the expectation for the fourth quarter is still of having some free up in the working capital. We are likely to have a normal variation in the inventory levels, but the reduction in receivables accounts because of the volumes of sales that usually happen in the fourth quarter, typically. So as for working capital, we are likely to see a good generation, positive generation and with stable results and with the CapEx that should be between BRL 400 million and BRL 500 million in the quarter for us to reach our guidance. We are still likely to see a positive working capital for cash generation. We have some questions about cost outlook that we provided in our results release. These are questions from Ricardo Monegaglia, Igor Guedes with Genial, Gabriel Barra with Citi. We put the questions together, and this is what we have. We expected the best outlook in costs. What were the variables considered? The international reference price of coal and ore reduced, but the COGS reduced. Following the same logic, should those commodities increase the COGS for the fourth quarter of 2025. And lastly, if the magnitude of COGS of the fourth quarter of 2025 would be the same magnitude that we see dropping in the previous quarter. To reinforce what we have already mentioned, we have confidence there will be another cost reduction for the fourth quarter, both in the raw material as for the gains in efficiency that we have been observing continuously at a gradual level. So we have been observing this in our operations. It's always important to clarify that the market indicators of coal, ore, et cetera, are good indicators of what's going to happen to our costs. However, they have a little bit different dynamics. They have different turnovers. So they would impact our COGS at different moments. The ore has a quicker turnover. So we see the impact in prices, impact in COGS. And this does not happen to the coal at present, considering that we purchased a relevant volume of coke in the market. So the Coke index is more relevant than the coal. So the -- it takes longer to reach the COGS and to make things even more complicated, we have different types of cokes, which are used in production at different times. So market indicator would be a good reference. However, obviously, since we know what we have in our inventories and what's being used in the production, we can have a clearer view of what's going to happen to the COGS. So again, there's an expectation of cost reduction in the next quarter in relation to the magnitude, if it's going to be similar as to the reduction that we saw in this quarter, which was 3%. It's hard to say. I would say that it will be something lower than that, but still that will depend on what's about to happen along the quarter. Leonardo Rosa: Thiago, now the question is about mining costs. Yuri Pereira with Santander and Matheus Moreira with Bradesco, they ask the following. Could you provide us more details about the high costs in mining unit? Do you have an outlook for this line for the fourth quarter? Basically, this is the question. Thiago Rodrigues: Okay. The increase in the mining cost came as a result of the international freight costs. So the sales that we make in the mining unit with the freight already included in the cost would impact the amount and the revenue. But with the increase in the tariff, we noticed this increase in the COGS. There was also a one-off increase in the material handling service, this is not likely to happen, but we see that there's a high tariff of an international freight. So this is likely to repeat in the next quarter. And that would lead us to a cost at the same level or at a similar level than what we saw in the third quarter when we compare the 2 quarters for MUSA -- at MUSA. Leonardo Rosa: We still have 3 questions. We're moving towards the end of our call. The first one is about -- to Marcelo, Yuri Pereira asked about mining, our Friable reserves. What's the strategy to maintain the feed of the furnaces? Does it make sense that we are going to purchase from the local market. Yes, Marcelo? Marcelo Chara: In the past 2 years, as we have been mentioning. Our main focus has been in the development of the operational excellence in all segments where we operate at Usiminas. So we integrated MUSA with steel production and optimizing the activities. So we have this reserve of Friable that we didn't used to have in the past. So we are making some mixes in order to expand this. So we have been able to develop alternatives at MUSA that would allow us to extend the life of the Friable items. And we have also been evaluating options that would allow us to use the sintering machines that we have in Ipatinga and we have incorporated a higher content of fines that would make us able to use or to use the reserves that we have. I would say that we are optimistic when we think about optimizing this. And depending on the definitions that we define in the compact projects, we are going to have synergies that would make allow us -- that will allow us to use those reserves so that we can use for the feeding of the furnaces. I would say that we have a good planning going on. We have good perspectives for the next years -- in relation to the supply of ore. Leonardo Rosa: Thank you, Marcelo. Now we have a question about working capital with -- from Igor Guedes, Genial; [indiscernible] the driver of cash generation was the working capital. Is there a space for further reductions? Igor asked the following the level of working capital was higher than we expected. So there was a reduction in the forfeit and the accounts payable. Is it possible to see the current level of current payables? Was it a negotiation so that we could extend the supplier deadlines with the suppliers? Thiago Rodrigues: The first question I think I have already answered. So in relation to the inventory levels, so the turnover of the inventories are normalized. So what we are likely to see in the future are regular variations. And although, obviously, it's going to depend on the production level at which we are operating. We expect to reduce the accounting receivables for the next quarter. In relation to the second quarter, second question, I don't know if I understood well. But usually, when you have a strong reduction in the inventory levels, this also means a reduction of the suppliers since you already acquire fewer raw materials. So this is a natural effect. We had a reduction of about BRL 1.1 billion in the inventory account. And we had a reduction in the suppliers' accounts. And the match was about BRL 500 million, if I'm not mistaken. This is just a natural movement. There was no -- different negotiation going on. If we had negotiated extended deadline, we wouldn't have the reduction in the supplier account, but it would increase. There was no regular impact -- a big impact in the negotiation with the suppliers. This was a natural impact since we reduced the inventory levels. Leonardo Rosa: Thank you, Thiago. So let's move on to our last section, which are some questions about the operation. They come from Gabriel Barra; Marcio Farid, Goldman Sachs; Marcelo Arazi of BTG. Marcelo, people asked the following. Could you make some comments about the status of the new PCI plant? What are the expectations in terms of cost improvement coming from this project? How the blast furnace 3 has been running? Is there a space for improvement? And we expect a stable EBITDA considering the efforts that the company has been making. So what has the company been making along those lines? Marcelo Chara: I will start with the first question. The investments are according to the plan. In the beginning of 2026, we are going to start the operating tasks. In the first half of the year, we are going to be in the right regimen. And then we are going to improve the efficiency of fuels and reducing the coke fuel use. And there is going to be a significant improvement in costs in addition to reducing the emissions of GHG. In general lines and making a summary of the questions asked, it's important to mention that we have been developing along the 2 years, important projects to complement the $600 million that we have invested in the blast furnaces in such a way that the lines that feed the blast furnaces have been receiving important reinforcement in terms of OpEx and important works to -- of improvement making it possible to change the metal grade of the furnaces and we have been reducing the load of costs, and we have already been capitalizing those effects. And we are making a lot of effort on this focus, especially on the environmental areas so that we can reduce the particle emissions and reducing by more than 90% of all those events, whenever we had any potential for reduction. Another aspect, which is very important is the coal and coke mix. And this is directly connected to the working capital. We developed a special team to control our inventories and all the supply system, and we have been able to simplify the number of suppliers as well as the quality of those suppliers, and we made a valuation and we made the reduction of the inventories. And we also improved the operational performance of the use of this raw material. Another important topic is related to the battery, which is being advancing according to the plan. And we have good expectations about this plan. Since we have reconfigured and we have been noticing an improvement in the execution of the project, since we have an expertise in execution that allow us to execute this plan in a more efficient way. And together, we have another project complementary, which is the Gasometer that will also improve the process. We have also made imported OpEx and CapEx investments to promote improvement in the utilities of the company. And we have reduced the natural gas consumption. We have been making other improvements in the utilities to make the proper monitoring of the costs. As we mentioned, as we mentioned previously, in all the previous calls, of the previous quarters, this is a process that has already been installed at Usiminas, and it's been successful. We have a strongly focused and engaged team. Antonio one of our main shareholders has been helping us so much in those areas. And thanks to this, we are confident that this improvement process will continue. And this will continue at a systemic level. All the changes are going to be sustainable and progressive. Leonardo Rosa: Thank you, Marcelo. So we ended our Q&A session. We would like to thank you so much for your participation. We would like to remind you that if you have any questions, our IR team is available to take any questions you might have. Thank you very much. Have a nice day, everyone. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Leonardo Rosa: Good morning. Welcome to the conference call of Usiminas in which the results of the Third Quarter of 2025 will be discussed. I'm Leonardo Karam, Investor Relations Officer at Usiminas. [Operator Instructions] This conference call is being recorded and simultaneously broadcast on the Usiminas YouTube channel. We would like to remind you that this conference call is exclusively for investors and market analysts. [Operator Instructions] We also request that any questions from journalists be directed to the Media Relations team at Usiminas via e-mail in imprensa@usiminas.com. Before proceeding, we would like to clarify that any forward-looking statements that may be made during this conference call regarding the prospects of the company's business as well as projections, operational and financial goals related to its growth potential constitute forecasts based on the management's expectations regarding the future of Usiminas. These expectations are highly dependent on the performance of the steel sector, the country's economic situation and the situation of the market at the international level, so they are subject to change. With us today is our President, Marcelo Chara; the Vice President of Finance and Investor Relations, Thiago Rodrigues; and our Commercial Vice President, Miguel Homes. First, Marcelo will make a few remarks, then Thiago will present the results. Afterwards, the question asked in the Q&A section will be answered. Now I give the floor to Marcelo. Please, Marcelo. Marcelo Chara: Thank you. Thank you very much. Thank you very much, everyone. Good morning, ladies and gentlemen. It's a pleasure to be here with you to share the results for the third quarter of 2025. This quarter was marked by important advances in our management with the consolidation of our operational stability, continuity of the cost reduction plan and the evolution of our priority CapEx project. These initiatives reinforce our strategy of ensuring competitiveness and sustainability for the business in the long term. In this quarter, we achieved an adjusted EBITDA of BRL 434 million, with a margin of 7%, representing growth compared to the previous period. I would like to highlight the following: the 3% reduction in COGS per ton in the steel business unit compared to the second quarter as a result of the expense and cost reduction plan. We posted growth in sales volume in Steel business unit despite the increasing pressure from imports under unfair conditions. We reported higher prices and volumes in mining, strong cash generation exceeding BRL 600 million in the period and reduced leverage, mainly due to the control and efficient management of raw material inventories. In the market environment, we remain vigilant and concerned about the increase in subsidized imports due to the excess global production capacity, particularly in China, which continues to negatively impact the entire domestic industry. Imports increased by 33% in the first 9 months of 2025 as to flat steel compared to the same period of the previous year. And we do not clearly see the effect of the tariff quota system on import penetration. The antidumping cases of heavy plates that has been extended for 5 years as a measure against China and South Korea as well as the one for metal sheets, where the duty was also applied against China and the one for prepaint and steel, which is at an advanced stage, give us confidence in the technical capacity of the authorities of the ministry department and industry to recommend effective measures against the serious damage that affects the entire steel value chain in Brazil. The challenging conditions are also impacting industrial goods that include steel components. Data from ANFAVEA shows that compared to 2024, there was an 11% growth in the registration of imported light vehicles and only 2% of domestic light vehicles. In the machinery and equipment sector, data from the National Industry Association, ABIMAQ show an accumulated annual increase of 9% in imports with a trade deficit of the sector totaling USD 13 billion this year alone. Due to this imbalance in international trade, we have seen important movements such as that of the United States, which raised its tariff on imported steel in Europe, which proposes to tighten current safeguard measures, proposing a tariff quota system with a sharp reduction in volumes and an increase in tariffs with the aim of protecting jobs and the local industry in Europe. For the fourth quarter of 2025, we expect to continue reducing costs due to efficiency and raw material prices, stable net revenues per ton and lower volumes due to the typical seasonality of the period at the end of the year. As for mining, volumes are expected to be slightly lower, but to remain higher in 2025 than in 2024, consistent with our planning. I would like to point out that despite the challenges of the external environment and the pressures on the domestic industry, we remain confident in our ability to adapt and deliver sustainable value to our customers and shareholders. We believe that with discipline, strategic focus and the commitment of our entire team, we will continue to advance and consolidate our leading position in the sector. I thank everyone for their trust and partnership and we continue together building the future of Usiminas in the Brazilian industry. Thank you. Thiago Rodrigues: Thank you, Marcelo. Good morning, everyone. So we are now going to start with our presentation about the results for the quarter. We would like to start that we showed improvements in the main performance indicators in the third quarter of 2025, even considering the complex scenario that we are facing in Brazil and abroad, as mentioned by Marcelo. Sales volume increased in steel and for mining 2%, consolidated EBITDA had an increase of 6% in relation to the previous quarter. And the highlight is the strong cash -- free cash generation of BRL 613 million is in a drop of our net debt and our leverage ratio. We can see the consolidated results on the next slide. Net revenue was BRL 6.6 million, slightly lower than the previous period, and the impact was the lower prices in the steel segment. And the revenue was higher than last year and was driven by mining, in particular. Adjusted EBITDA was BRL 434 million, 7% of margin and slightly higher than the previous quarter as a result of the best operational performance in the steel area. Accumulated EBITDA in the 9 months of 2025 amounts to BRL 1.6 billion, 45% when compared to the same period of 2024. Net income did not reflect the best operational results of the quarter, as we mentioned, due to the accounting effect of BRL 3.6 billion related to impairment of assets as well as deferred taxes. Those effects are accountable for accounting effects and generate no effects on the cash of the company. Otherwise, the net record would be BRL 10.8 billion in the quarter. Next slide, we have seen the steel sales volume was higher, 1.1 million tons, a bit higher than the previous quarter, showing the resilience of the demand of our main segments. The accumulated volume is above what we posted in 2024, but it's important to mention that in the same period, the apparent demand of steel increased by 6%. In other words, this increase of demand was captured by subsidized imports reinforms the need of implementing antidumping measures as Marcelo has previously mentioned. Moving to net revenue, the unfair competition that we mentioned affected the prices in the period. We had reductions in the quarter, especially in the sector of distribution. Exports were impacted by the mix except for high-grade steel, and there was a 3.5% drop, reaching BRL 5.8 billion. In spite of the complex market scenario, we offset the drop in revenue with a reduction in cost and expenses, reaching 7% higher result and EBITDA of 30.8%. EBITDA amounted to BRL 1.1 billion, 44% when compared to 2024. On the next slide, we show the main variations of the quarterly results. And here, we can see the drop of 3.5% of net income per ton, generated a loss in our results and the offset came through the reduction of cost in sales that generated an increase of BRL 164 million, which was expected. And this was also driven by the appreciation of the real and also the drop in the price of raw material, but also with the gain in efficiency in our operations. We have a positive effect due to lower SG&A expenses and contingencies. In the next quarter, we continue reducing costs and our expenses are expected to remain stable. As for mining, the production volume was 4% higher when compared to the second quarter due to the operational yield, which was higher and sales had an increase of 2% with 2.5 million per ton, which was the highest volume of the quarter since 2021. Net revenue was 4% higher when compared to previous periods with better reference prices and lower discounts related to quality, but it was partially offset by the devaluation of the dollar. Net revenue amounts to BRL 2.8 billion and 27% higher than the accumulated revenue of 2024. The cost per ton for the quarter had an increase, especially due to the freight tariff hike and EBITDA was -- of the third quarter was BRL 130 million, slightly higher when compared to the previous quarter and accumulated was stood 60% higher than 2024. And now talking about the financial indicators. This quarter, we had a strong cash generation with important generation of working capital due to the reduction of raw materials, which stands at a normalized level nowadays after an increase that we had in the first quarter, one-off effect. The CapEx was BRL 266 million, and we keep advancing with the main projects that are going to generate gains for Usiminas, especially the PCI plant that is going to be completed in the beginning of next year. And [ auto repair ] and coke plants that are going to finish, completed in 2028 and 2029. And we ended with free cash flow of BRL 613 million. In relation to working capital, we can see a reduction in -- at a lower volume, but we can see a reduction, especially due to the lower volumes that was estimated for sales in the steel business unit. As for CapEx, the expectation is to follow our guidance close to the lower limit of BRL 1.2 billion. Next slide. we can see the strong cash generation has made the debt to be reduced as commented before, closing -- close to BRL 300 million and reduced the leverage to 0.16x. In this quarter, we also ended the repurchase of the bonds that are going to mature in 2026. And we also took the opportunity of the favorable conditions to anticipate BRL 160 million of the new debenture issuance. And with this, we continue with a very solid financial position and with the scheduled elongated debt that will make us focus on our operating performance and continue with our investment plan. I will turn back to Leo so that we can start the Q&A session. leo, please? Leonardo Rosa: Thank you, Thiago. So we are going to start with the session of the Q&A. Our first question is to Marcelo and Miguel. And this is the most asked question about antidumping. There are many questions come from Marcio Farid, Caio Greiner from UBS, Caio Ribeiro from BofA, Marcelo Arazi of BTG, Raj Kanjani, Igor Guedes of -- from Genial, Lucas Laghi from XP, Daniel Sasson from Itaú BBA. All of them are asking about anti-dumping, and I'm going to try to concentrate on the following topics. Are you confident in the implementation of antidumping measures. And what's your vision? What changes since the preliminary decision? Are the deadlines being maintained? Are there delays likely to happen to February? Is there a possibility that even if the antidumping measure is adopted, the market will continue being pressured. Can other countries being involved. And if there is the antidumping implementation, is there any chance of going back to going -- getting the blast furnace #1 back into operation? Marcelo Chara: Thank you, Leo, for all the questions. This is a very relevant topic. And we have been mentioning all of this in the previous calls about the measures for the steel segment and the industry in Brazil. We are confident, of course, because these are processes which are very solid from the technical view point as to dumping. And this was confirmed in the preliminary decisions that was published by the ministry. In case of dumping, you analyze 2 factors mainly. What is the margin of dumping that was being confirmed by the preliminary valuation by the technicians of the ministry, with tariffs above $500 per ton, both for coated and cold. And another important factor is the impact of the imports of the gain in the local industry. So if this -- all this is confirmed, and if this is confirmed after the preliminary decision where the imports continue to increase, prices continue to be pressurized in the margin of the industry, both the local industry and international industry. And this allows us to feel this confidence of -- on the final determination that should come next month. In relation to the deadline, it's important to clarify the following: As for dumping, there are deadlines for the final determination after each case has been filed. As for the cold area, the opening of the case happened in August 2024. After that date, the maximum deadline for the final decision is February 2026, okay? The ministry has been publishing different schedules according to the capacity for the technicians to analyze of each case, considering the technical capacity of the ministry. In the last publication, however, the last schedule that was published by the ministry, the date was November 2025. This is not likely to be completed. So our expectation is that the final documentation will reach the final deadline, which is February '26. As for coated product, so it's going to be 30 days after the cold item case is solved. So we expect that the final decisions to be made in February and March. As for the hot items, they will continue with the original schedule, and we are going to continue monitoring all the advances. And the other question was related to the possibility of having more countries involved and the pressure. Of course, in the -- we are living a very important commercial work, especially for the manufactured product that comes from the overcapacity that comes from China that is pressurizing not only the Brazilian market, but the European market and global market. But we have seen that commercial measures have been implemented in the United States, in Mexico and Europe. And of course, we should expect that the market should continue being pressurized by this commercial work. And it's very important for us to continue monitoring even after the measures of anti-dumping. And we have to monitor the potential impacts that we can have after the results come in. As mentioned by Miguel in our industry, an important percentage of the cost, more than 50% of the ore and coke and coal and there are -- there is a formula which is applied to calculate, say, what is the difference of prices that are adopted. And when we see the prices, especially the products coming from China, and we can see that the margins are negative. These are not fair competition conditions. This is not fair. And of course, it generates a significant imbalance. At the moment, we can -- we have confidence in what Brazil is doing and my friends who are part of the Board. And we have been -- we are visiting the authorities of the federal government, and we have also been in talks with government of the states, and we are sharing our concern. And we see that there is a strong challenge, a strong threat to our industry when we think about the GDP of the country. And an important factor that when we see this kind of competition, we understand that it affects the employment possibilities. And this also affected the qualifications of the jobs in Brazil. There is another question that was asked. If the implementation of the measures could increase the capacity at Usiminas. For example, the beginning of the blast furnace #1. As we mentioned before, we trust the Brazilian authorities. In the initial speech, we mentioned that. And there were some measures that I have already mentioned. And we understand that there is the importance of implementing technical measures and antidumping is a technical measure. And we believe in the capacity for us to have more light in what is happening to the industry. In relation to the added capacity, I would like to say that we have made investments of $600 million in the modernization of blast furnace #3 which is operational. And we're also looking at the efficiency of those furnace. And with the blast furnace 2 and 3, we have managed to reach efficiency levels similar to what we had with the 3 blast furnaces in operation. So today, we have idle capacity in all industry. And then I would say that we are prepared to absorb higher demand. We are prepared to absorb the unfair competition that we see in the Brazilian market in a very efficient way. Leonardo Rosa: Thank you, Marcelo, Miguel. We have a session about prices. I'm going to select some questions. First, about price in the distribution, and then we can talk about the carmakers. Prices, this is what we have. What is the transfer of prices for distribution. So what is Usiminas opinion in relation to this transfer? Is there any possibility of higher prices? What's the expectation of prices in the short term? Miguel, could you answer those? Miguel Angel Camejo: Thank you, Leo. Usiminas increased the increases in the prices, spot businesses as of October, the prices depending on the product varies from 7%, 4% or 5% depending on the product. And this is a result of the strong pressure from the unfair competition with negative margins. When we reach the price scenario, the spot price, which was not sustainable to our Brazilian market. So that was the -- we felt the need of increasing the prices. We are returning to positive margins to the sector. And obviously, we are going to continue monitoring this possibility of new increases to the future. It's important to clarify, Leo, and everyone that as we suffered the pressure from the fair competition, and we also saw a strong drop in the spot prices, an adjustment was very low considering the inflation so much so that we did not feel this drop in price in the spot price. And we do not expect any increase in the fuel in the steel sector can impact the IPCA or the inflation rate in Brazil. Leonardo Rosa: Thank you, Miguel. I forgot to mention the names of the people of those who were asking about prices at first. So it was a Caio Greiner, UBS; Caio Ribeiro of BofA; [indiscernible] Goldman Sachs; Matheus Moreira with Bradesco BBI and Carlos from Morgan Stanley. Now continuing for prices in the industry, and then we are going to talk about the automotive sector. [indiscernible] asks about the prices. And when are we likely to have a positive impact according to the recent increases? And what is the lag between the movement of the industry and movements in distribution? How could we compare those? Miguel Angel Camejo: Thank you, Leo. As we always explained in our call, the dynamics of pricing at the industry has -- is associated with the spot prices. In the industrial [actually], depending on the client and the sector, we have [indiscernible] increases, quarterly increases. So these are the movements. And this is what we can observe this in the future. So the adjustments that are being made right now as of October in the spot sector, are likely to be reflected in when the industry renovated agreement as of January next year, especially in this period. Leonardo Rosa: And now about automakers. We have some questions by Caio Greiner; Ricardo Monegaglia, Safra; Igor Guedes, Genial; Lucas Laghi of XP; and Daniel Sasson, Itau BBA. Marcelo Chara: In case of carmakers, as you all know, we have 2 periods of negotiations. In January, when we update the agreements, we have the period of January, December and April and March, about 30% of car makers in Brazil and those installed in the region have a start negotiations at a very preliminary stage. So we are not sure of when the negotiations are going to be completed that are likely to advance up to December this year. As for the agreements that update the conditions as of April, they will start negotiations as of January and February next year. We'd like to remind you that the dynamics of agreement is very different, from the conditions that we apply in spot prices. The case of spot prices, well, it's important to clarify that what happened along '26 is -- '25 is not sustainable so much so that the result of the scenario is the different processes or cases -- the lawsuits of dumping. And we expect that the authorities are going to recognize considering the negative impact on the local industry. Leonardo Rosa: Maybe just a follow-up. Still talking about the automakers because there's an additional question. How an anti-dumping measure can influence the negotiations within the automotive area? Marcelo Chara: Now there is no influence, as I mentioned before. The dumping scenario is a result of the strong pressure from imports. In the case of automotive agreements, it's another logic. We are associated with the competition, but we also have to consider the variable of costs of raw materials and the agreements are maintained in the local currency. Leonardo Rosa: Miguel, to end the session about prices, Gabriel Barra with Citi asks the following. In relation to steel prices, could you talk about the carryover of prices of September to understand what will be the carryover for the next quarter. Miguel Angel Camejo: Gabriel, the price of September was the average price in the domestic market was about 12.5% that was impacted by the drop -- continuous drop that we observed in the spot price and the worst mix of product in September compared to -- for the quarter. Leonardo Rosa: Okay. Miguel, another question for you. And now about imports. Daniel Sasson with Itau BBA. What's -- how do you see the volume of imported product reaching Brazil in the next months? And the premium versus the imported prices lower for the next months reflected in a lower order for you? Miguel Angel Camejo: Daniel, let's separate your question. Your question is very interesting. Of course, the local steel unit reacted to the pressure of the strong imports, and we made adjustments, the price in the spot price in order to protect and to respond to this international pressure that led to a lower level of imports that we observed in 12 last months. But as I mentioned before, this scenario of domestic prices was not sustainable. So on the other -- on the side, the steel industry reacted strongly because we would have the possibility of lower the production. So because of the unfair competition, we have to go to the spot sector and defend the position of the steel industry at the local level. Imports reported and they lowered the volume of imports in the last few months. And we expect the same dynamic to be implemented up to the end of the year. Another factor is that you can see there's a cooling in different sectors of the economy. And this generates lower expectations, and we expect lower volume of imports because of the lower activity expected for the end of the year. And up to the end of the third quarter, we expect imports to -- lower imports, and that generated the drop at the imports that we observed in the last months. So we are likely to observe a reduction -- a sequential reduction in imports, but it's very relevant to continue advancing with the final measures for the decisions related to dumping so that we can go back to the regular levels after all those unfair competition that we have been suffering in the past 2 years. Leonardo Rosa: Thank you, Miguel. Now Marcelo, we have a question about the compact mining, [indiscernible], Caio Greiner asked at what moment we can have the decision? And do we have any update on the decision? Marcelo, please? Marcelo Chara: Thank You, Leo. As we mentioned before, in all previous calls. And we continue making headway with the preparation of the engineering that we have a clear adjustment in the project. But basically, the process of permitting is within the deadlines. As I mentioned before, in 2026, we will be able to define which would be the next steps. Leonardo Rosa: Our next question is directed to Thiago about capital allocation, Caio Greiner, BTG; Gabriel Barra from Citi. He said capital allocation in a favorable scenario of antidumping that will elevate margins and cash generation of the company, how the capital allocation would be changed for the next years? Would that accelerate the dividends, accelerate investments or buyback or payment of dividends? And he says, what's the level of leverage that would be ideal for the company, Thiago, please. Thiago Rodrigues: Thank you, Leo. Thank you, Caio. It's very difficult for us to estimate what's going to happen in the future, especially in relation to anti-dumping measures and how this can impact the result and the cash generation of the company. So I'm going to limit myself to talking about the present moment. First is it's in relation to prioritizing investments and payment to shareholders. You can observe that we have a plan, a robust plan of investments that have already been approved that are going to lead to the disbursement of relevant volume of cash. As we announced in the last call, an investment of -- for the Coke plant. And we also have the hardware repair of the Coke plant, and this would amount to more than BRL 2 billion. Marcelo has just mentioned the investment at MUSA. So we have a robust pipeline of investment for the future. That doesn't mean, however, that we do not evaluate the payment for the shareholders. This evaluation will depend on a number of indicators, cash generation, liquidity level and the investments that we have already planned in the pipeline for the future. In relation to the current situation, we have not made any decision. In this regard, we're still evaluating the possibility of distributing dividends this year, but we still haven't made a definite decision. Of course, this -- we have a proposal that it's going to take to the Board for approval. In relation to the leverage level, you have seen that in the last 2 or 3 years, we have been maintaining the leverage level below 1x the EBITDA. And this is a ratio that we feel comfortable to go through a stability period in the market and also going through periods of higher investments. And answering your question, the leverage level is the level that we understand to be a comfortable level so that we can be prepared to those kinds of future situations. Today is below 1. So between what we have today and 1 point of the EBITDA as the leverage level, that would be a comfortable level where we feel safe and comfortable. As to the future, let's wait and see if anything changes in relation to an improvement in the market situation and how this can be reflected in cash generation. We're going to continue monitoring the possibility of payment dividends to shareholders. But we are always going to focus on our investments so that we can generate competitiveness for the company in the future. Leonardo Rosa: Thank you, Thiago. Still for you, there are many questions here. They're asking for an explanation about impairment and deferred items. Caio Greiner of UBS; Ricardo Monegaglia, Safra; Igor Guedes, Genial and Morgan Stanley. They ask you to explain the impairment and deferred items, why higher? And right now, is there any adjustments that we can expect for the future? Is there an impairment impact after the assets have been reviewed? Thiago Rodrigues: Well, as you know, this is an accounting topic where companies have to evaluate the impairment of their assets at the routine frequency. So this is an evaluation based on premises. Interest rate, foreign exchange rate, demand, raw material prices and et cetera. All those premises are based on the macroeconomic environment in the market at present. And the update of those premises made us register the impairment. So there is no change in relation to the quality or the result generation of our assets, but we changed the premises that would change the situation of the market, the macroeconomic situation that were impacted by those evaluations. There are no expectations of a new evaluation in the short term, except if the macroeconomic situation and the market situation changes in a significant manner. And then we could make the evaluation that would all -- could mean a reversal of this provision. So we can revert the provision that was just being made and this provision was not allocated at any asset specific. This is just a provision without any specific allocation in any assets of the company. Leonardo Rosa: Thank you, Thiago. Miguel, a section about demand. We have questions about Ricardo Monegaglia, Safra; Raj Kanjani from JPMorgan, Lucas Laghi from XP and Matheus Moreira with Bradesco BBI. So we put the questions together, and this is what we have. We noticed that the domestic market was weaker than the steel, flat steel prices, Usiminas increased 2%, as Brazil presented a 4% growth. Was there any change in the commercial strategy or any rationality from the competitors? The planned demand was dropped and the industry dropped -- falling quarter-over-quarter and year-over-year, is there a deacceleration? And as for 2026, what do you expect? And what factors presented the worst scenarios? Miguel Angel Camejo: Thank you, Leo. Thank you, everyone. Let's make a comparison of the internal volumes and as Brazil's reports. We can -- it's important to say that short-term comparisons can lead to bad wrong occlusions. Because in short terms, you have -- we see, as case for Usiminas, we are focused on maintaining our leadership, and we are going to strengthen our leadership in added value, both in products as in -- as to value. And that are different sectors in the industry, and we take part in the commercial sector as well with automakers. And we also have to consider the civil construction and we take part in this less than other steel companies, and that can result in different movement of sales when compared to the previous quarter. As for the highlight of the quarter, we can see that there was a 10% increase, and we are likely to maintaining this recovery. But it's important to mention that the automaker sector is the only sector that still hasn't recovered the values prepandemic period. So it's important to maintain this movement, but the automaker is the only one which is still below the value of 2019. The industrial sector, we can mention the machinery for agriculture and the agriculture sector were at very low levels compared to the previous periods, but the quarter was very good and the road machinery had important improvements. And these are sectors that we can mention that they have had a performance lower than expectation. Another one is the sector of renewable energy. And there are other sectors that we have to consider. And the other sectors are performing according to the indicators of the economy. Of course, on the one hand, we have a negative impact on consumption. And client of Usiminas are being impacted by the imports of manufactured product as we saw from ANFAVEA data. But this strong pressure is also being felt by what comes from the imports. But the government has to incentivize policies that can help this area. For 2026, we can -- there is an estimate that apparent consumption will increase by 1% in -- for the Brazilian market. Of course, potential additional low levels of the interest rates and some aspects of the economy could improve the situation, but we are going to continue monitoring the interest rates and the consumption capacity in addition to industrial policy that can come from the public area. I don't know if I missed anything, Leo. Did I forget any question? Leonardo Rosa: No, I think you addressed all of them. There is another one, which are the sectors that had a lower performance? Miguel Angel Camejo: Well, I would say that sectors that were impacted in the period was renewable energies. That are -- have some important projects that have come to a stop, and they were projects that were very important in the previous year. Leonardo Rosa: Miguel, about demand in the international market, Raj Kanjani from JPMorgan asks about sales to Argentina. Argentina demand was weaker, so can we go to the levels of the second quarter? Is this what we can expect for the fourth quarter and what we can expect from Argentina and from the external market? Miguel Angel Camejo: What happened in the third quarter is that we were delivering the projects of oil and gas, and they were very strong in the second quarter. The sector of oil and gas continue to be striving and that could improve the mix and sales in the fourth quarter, especially for new projects of oil and gas in Argentina. The automotive sector continues to present positive results. And we expect to continue this trend up to the end of the year. So we could observe a better mix of sales, especially driven by the deliveries of oil and gas projects. Leonardo Rosa: Thank you, Miguel. Thiago, we have a question about cash flow Ricardo Monegaglia with Safra asks the following. What's the perspective of cash flow for the fourth quarter of 2025, considering that working capital is stronger, CapEx is weaker in the third quarter? Yes, Thiago? Thiago Rodrigues: Ricardo, the expectation for the fourth quarter is still of having some free up in the working capital. We are likely to have a normal variation in the inventory levels, but the reduction in receivables accounts because of the volumes of sales that usually happen in the fourth quarter, typically. So as for working capital, we are likely to see a good generation, positive generation and with stable results and with the CapEx that should be between BRL 400 million and BRL 500 million in the quarter for us to reach our guidance. We are still likely to see a positive working capital for cash generation. We have some questions about cost outlook that we provided in our results release. These are questions from Ricardo Monegaglia, Igor Guedes with Genial, Gabriel Barra with Citi. We put the questions together, and this is what we have. We expected the best outlook in costs. What were the variables considered? The international reference price of coal and ore reduced, but the COGS reduced. Following the same logic, should those commodities increase the COGS for the fourth quarter of 2025. And lastly, if the magnitude of COGS of the fourth quarter of 2025 would be the same magnitude that we see dropping in the previous quarter. To reinforce what we have already mentioned, we have confidence there will be another cost reduction for the fourth quarter, both in the raw material as for the gains in efficiency that we have been observing continuously at a gradual level. So we have been observing this in our operations. It's always important to clarify that the market indicators of coal, ore, et cetera, are good indicators of what's going to happen to our costs. However, they have a little bit different dynamics. They have different turnovers. So they would impact our COGS at different moments. The ore has a quicker turnover. So we see the impact in prices, impact in COGS. And this does not happen to the coal at present, considering that we purchased a relevant volume of coke in the market. So the Coke index is more relevant than the coal. So the -- it takes longer to reach the COGS and to make things even more complicated, we have different types of cokes, which are used in production at different times. So market indicator would be a good reference. However, obviously, since we know what we have in our inventories and what's being used in the production, we can have a clearer view of what's going to happen to the COGS. So again, there's an expectation of cost reduction in the next quarter in relation to the magnitude, if it's going to be similar as to the reduction that we saw in this quarter, which was 3%. It's hard to say. I would say that it will be something lower than that, but still that will depend on what's about to happen along the quarter. Leonardo Rosa: Thiago, now the question is about mining costs. Yuri Pereira with Santander and Matheus Moreira with Bradesco, they ask the following. Could you provide us more details about the high costs in mining unit? Do you have an outlook for this line for the fourth quarter? Basically, this is the question. Thiago Rodrigues: Okay. The increase in the mining cost came as a result of the international freight costs. So the sales that we make in the mining unit with the freight already included in the cost would impact the amount and the revenue. But with the increase in the tariff, we noticed this increase in the COGS. There was also a one-off increase in the material handling service, this is not likely to happen, but we see that there's a high tariff of an international freight. So this is likely to repeat in the next quarter. And that would lead us to a cost at the same level or at a similar level than what we saw in the third quarter when we compare the 2 quarters for MUSA -- at MUSA. Leonardo Rosa: We still have 3 questions. We're moving towards the end of our call. The first one is about -- to Marcelo, Yuri Pereira asked about mining, our Friable reserves. What's the strategy to maintain the feed of the furnaces? Does it make sense that we are going to purchase from the local market. Yes, Marcelo? Marcelo Chara: In the past 2 years, as we have been mentioning. Our main focus has been in the development of the operational excellence in all segments where we operate at Usiminas. So we integrated MUSA with steel production and optimizing the activities. So we have this reserve of Friable that we didn't used to have in the past. So we are making some mixes in order to expand this. So we have been able to develop alternatives at MUSA that would allow us to extend the life of the Friable items. And we have also been evaluating options that would allow us to use the sintering machines that we have in Ipatinga and we have incorporated a higher content of fines that would make us able to use or to use the reserves that we have. I would say that we are optimistic when we think about optimizing this. And depending on the definitions that we define in the compact projects, we are going to have synergies that would make allow us -- that will allow us to use those reserves so that we can use for the feeding of the furnaces. I would say that we have a good planning going on. We have good perspectives for the next years -- in relation to the supply of ore. Leonardo Rosa: Thank you, Marcelo. Now we have a question about working capital with -- from Igor Guedes, Genial; [indiscernible] the driver of cash generation was the working capital. Is there a space for further reductions? Igor asked the following the level of working capital was higher than we expected. So there was a reduction in the forfeit and the accounts payable. Is it possible to see the current level of current payables? Was it a negotiation so that we could extend the supplier deadlines with the suppliers? Thiago Rodrigues: The first question I think I have already answered. So in relation to the inventory levels, so the turnover of the inventories are normalized. So what we are likely to see in the future are regular variations. And although, obviously, it's going to depend on the production level at which we are operating. We expect to reduce the accounting receivables for the next quarter. In relation to the second quarter, second question, I don't know if I understood well. But usually, when you have a strong reduction in the inventory levels, this also means a reduction of the suppliers since you already acquire fewer raw materials. So this is a natural effect. We had a reduction of about BRL 1.1 billion in the inventory account. And we had a reduction in the suppliers' accounts. And the match was about BRL 500 million, if I'm not mistaken. This is just a natural movement. There was no -- different negotiation going on. If we had negotiated extended deadline, we wouldn't have the reduction in the supplier account, but it would increase. There was no regular impact -- a big impact in the negotiation with the suppliers. This was a natural impact since we reduced the inventory levels. Leonardo Rosa: Thank you, Thiago. So let's move on to our last section, which are some questions about the operation. They come from Gabriel Barra; Marcio Farid, Goldman Sachs; Marcelo Arazi of BTG. Marcelo, people asked the following. Could you make some comments about the status of the new PCI plant? What are the expectations in terms of cost improvement coming from this project? How the blast furnace 3 has been running? Is there a space for improvement? And we expect a stable EBITDA considering the efforts that the company has been making. So what has the company been making along those lines? Marcelo Chara: I will start with the first question. The investments are according to the plan. In the beginning of 2026, we are going to start the operating tasks. In the first half of the year, we are going to be in the right regimen. And then we are going to improve the efficiency of fuels and reducing the coke fuel use. And there is going to be a significant improvement in costs in addition to reducing the emissions of GHG. In general lines and making a summary of the questions asked, it's important to mention that we have been developing along the 2 years, important projects to complement the $600 million that we have invested in the blast furnaces in such a way that the lines that feed the blast furnaces have been receiving important reinforcement in terms of OpEx and important works to -- of improvement making it possible to change the metal grade of the furnaces and we have been reducing the load of costs, and we have already been capitalizing those effects. And we are making a lot of effort on this focus, especially on the environmental areas so that we can reduce the particle emissions and reducing by more than 90% of all those events, whenever we had any potential for reduction. Another aspect, which is very important is the coal and coke mix. And this is directly connected to the working capital. We developed a special team to control our inventories and all the supply system, and we have been able to simplify the number of suppliers as well as the quality of those suppliers, and we made a valuation and we made the reduction of the inventories. And we also improved the operational performance of the use of this raw material. Another important topic is related to the battery, which is being advancing according to the plan. And we have good expectations about this plan. Since we have reconfigured and we have been noticing an improvement in the execution of the project, since we have an expertise in execution that allow us to execute this plan in a more efficient way. And together, we have another project complementary, which is the Gasometer that will also improve the process. We have also made imported OpEx and CapEx investments to promote improvement in the utilities of the company. And we have reduced the natural gas consumption. We have been making other improvements in the utilities to make the proper monitoring of the costs. As we mentioned, as we mentioned previously, in all the previous calls, of the previous quarters, this is a process that has already been installed at Usiminas, and it's been successful. We have a strongly focused and engaged team. Antonio one of our main shareholders has been helping us so much in those areas. And thanks to this, we are confident that this improvement process will continue. And this will continue at a systemic level. All the changes are going to be sustainable and progressive. Leonardo Rosa: Thank you, Marcelo. So we ended our Q&A session. We would like to thank you so much for your participation. We would like to remind you that if you have any questions, our IR team is available to take any questions you might have. Thank you very much. Have a nice day, everyone. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Judy Tan: Good morning, everyone. My name is Judy, the Head of Investor Relations for Frasers Centrepoint Trust. Welcome to FCT's Second Half and Full Year Financial Results for the Financial Year 2025. With me today, we have got our senior management team, Mr. Richard Ng, our CEO; Ms. Annie Khung, our CFO; and Ms. Pauline Lim, the Managing Director for Investment and Asset Management. Without further ado, I'll pass it on to Richard to kick off today's briefing. Richard Ng: Thanks, Judy, and a very good morning to all of you. Thanks for joining us in this call. Okay. Just to start off with, maybe we can give all of you a quick recap of what happened for the full year financial FY '25. Of course, one of the key aspects is the acquisition of Northpoint City South Wing, which we announced in March of this year. And coupled with the divestment of Y10, that kind of helped us again to proactively reconstitute our portfolio. As we have shared before, the idea is for us to grow, but at the same time, to continue to strengthen the portfolio that we have, and we have done exactly that, right? As part of that acquisition, we also did EFR fundraising. We raised about over $420 million. It was a very successful EFR. And at the same time, we raised another $200 million via the perpetual securities. Financial position, very healthy at 39.6%, and cost of debt has come down on a quarter-on-quarter basis. For this quarter, it's at 3.5%. And later on, we'll talk a little bit more about cost of fund and also our refinancing plan. The operating performance continued to be very strong as demonstrated in the positive rental reversion, shopper traffic and also tenant sales. Hougang Mall AEI Is ongoing, and it's actually on track in terms of timing, in terms of cost. And happy to say that over 80% of the entire AEI spaces has already been pre-committed. Next slide, please. Okay. So again, very high-level numbers. DPU came in at $0.12113. That is 0.6% higher compared to full year FY '24 at $0.12042. Our aggregate leverage is below 40% at 39.6%. Cost of debt overall for the full year is at 3.8%. And if you compare that to FY '24 of 4.1%, so you have seen a downward trajectory for overall cost of debt. Net asset value came in at $2.23 compared to $2.29, a slight drop from FY '24. Okay. Operating highlights. Just wanted to stress a little bit in terms of the committed occupancy. Overall, the asset is again performing very well in terms of occupancy, but you could see on the slide there or the chart there shows a 1.8% gap, and that is partly contributed by the 2 -- or it's contributed by the 2 spaces that we have taken back from Cathay. That accounts to the 1.8% that you are seeing there. Otherwise, occupancy rate would have been at 99.9% again. Shopper traffic and tenant sales, you can see the next chart. Shopper traffic has gone up for the full year, year-on-year at 1.6%. And tenant sales, we grew by 3.7%. Again, quite a strong sales that is -- strong performance from our retailers as well. Rental reversion came in pretty strong at 7.8% versus 7.7% that you saw in FY '24. And as I mentioned just now, Hougang AEI is very much on track to complete by September 2026. Targeting an ROI of 7% based on $51 million CapEx, we are still again on track to achieve that. More than 80% of the spaces has already been pre-committed, as I indicated upfront just now. A little bit on the big picture, general macroeconomics. The advance estimates for Singapore economy came in at 2.9%. Of course, if you compare to the 4.5% in previous quarter, you could see a drop in that. But actually, the numbers came in higher than the market estimates. So actually, it's a positive note. What is also interesting is the inflation continuing to ease, down to 0.5% year-on-year in August. Again, this is helpful for us because easing of inflation is also helpful in terms of the cost perspective for our operation as well as also for our retailers. Overall market for retail sales seems to have kind of rebounded even from the overall RSI perspective. So for August, it's a 4.6% growth year-on-year, pretty strong. And if we take the RSI year-to-date from January to August, because they always release the numbers 1 month later. So we only have up to August. So we can only measure January to August. For RSI, the overall number came in at about 1.2% growth year-on-year. And if we were to take the same period for FCT's portfolio from January to August, our growth is actually at 4%. So we are ahead of the general market performance. Rental (sic) [ retail ] rents continue to track positively. Suburban prime rents grew by 0.5% quarter-on-quarter and 1.7% year-on-year. So this actually kind of bring us to the next slide also looking at the supply side of things. So overall, again, very limited stock that's coming on stream. From now to 2028, we are looking at about 1.2 million square feet of total spaces that's coming up. But if you just focus strictly on suburban, we are looking at about slightly over 340,000 square feet of space. And even for that matter, it's not looking at any significant mall. For example, you have Lentor Modern Mall coming up next year, 90,000 square feet; another one, Parc Point Neighbourhood Centre in Tengah, it's about 75,000 square feet. So there are pockets of neighborhood malls coming up. So nothing significant on this list at this point in time. Next slide, please. So this is the overall picture. Very limited supply, strong occupancy, and that's the reason why for CBRE in their forecast of rental trajectory is still on an upward trend or whether it be suburban or Orchard Road and of course, on an island-wide perspective. The next segment is going to -- we are going to go into the financial highlights. I'll hand over to Annie. Annie, please. Shyang Lee Khung: Thank you, Richard. Good morning, everyone. Let me take you through the financial highlights. Gross revenue for the second half is 14.3% as compared to corresponding period last year. This is mainly because of the Northpoint City South Wing acquisition, completion of the AEI at Tampines 1, partially offset by the Hougang AEI, which commenced in April 2025. If you exclude the effect of these 3 malls, gross revenue is about 2.1% higher, mainly due to the higher occupancy and a higher rent across all malls -- most malls. Property expenses for the second half is about 20.1% higher compared to same period last year. Excluding the 3 malls, property expenses is about 5.1% higher due to the higher property tax. The second half, the NPI is about 12% higher compared to last -- same period last year. If you exclude the effect of the 3 malls, it is about 1% higher, okay? Distribution from investment is 3.5% higher mainly because of the better performance from Waterway Point and NEX. DPU for the second half is 0.6% at $0.06059. Next slide, please. On a full year basis, the gross revenue is also higher mainly because of the same reason as previous slides. If you exclude the effect of the 3 malls, gross revenue is about 2.4% higher, mainly because of the higher pricing rent across most malls. Property expenses is about 13.5% higher compared to last year. If you exclude the effect of the 3 malls, it is about 4.7% due to the higher property tax, marketing as well as the higher net allowance of doubtful debt. NPI is about 9.7% higher than last year, and it's about 1.6% higher if you exclude the effect of the 3 malls. We recorded a higher distribution from investment by 37.1%, mainly due to the full year contribution from NEX, which was completed in March 2024 as well as some inclusion of the one-off distribution from JV during the year. With the 2 half DPU of $0.06059, it brings us a total of $0.12113, which is 0.6% higher than last year. Next slide, please. The higher balance in the total assets and liabilities as at 30th September 2025 is mainly because of the inclusion of the Northpoint City South Wing. Net asset value is lower at $0.0223, mainly because of the enlarged unit base following the equity fundraising during the year as well as the effects of the mark-to-market recognizing the derivative financial instruments. Next slide, please. Okay. As briefly mentioned by Richard, as at 30th September 2025, aggregate leverage is 39.6%, which is 3.2 percentage points lower than last quarter. This is mainly due to the repayment of loans from the proceeds from the issuance of the [ perps ] as well as the divestment proceeds from the Yishun 10 in the last quarter. The interest coverage ratio is healthy at 3.46x. And average cost of debt for full year is at 3.8%, but on a quarter basis, it has dropped to 3.5%. Average debt maturity stood at about 3.16 years. And the hedge ratio for the -- as at year-end is higher compared to last quarter at 83.4% due to the repayment of variable borrowings during the quarter. Credit rating remained unchanged at Baa2 stable from Moody's. Next slide, please. Okay. For the capital management front, we have diversified sources of funding where we issued a 7-year $80 million bond as well as the $200 million perpetual securities during the year. For the debt that is maturing in FY 2026, borrowings is in Q2 2026, and we are in the advanced stage of refinancing of these loans. Next slide, please. Aggregate appraised value for the total portfolio, including the 50% of NEX and Waterway Point increased by 16.8% as driven by the acquisition of Northpoint City South Wing as well as stronger performance. The cap rates adopted by the valuers remain unchanged as compared to last financial year, which is in the range of 3.75% to 4.75%. Next slide, please. DPU of $0.05963 will be paid on the 28th November 2025, and this is for the distribution period from 4th April to 30th September 2025. Yes. I will now hand over to Pauline for portfolio highlights. Thank you. Pauline Lim: Thank you, Annie. Good morning, everyone. I will just do a deep dive into the various performance metrics that Richard touched on earlier. So in terms of committed occupancy, the portfolio stands at 98.1%. It would have been 99.9%, if not for the re-entry of the 2 cinemas at Century Square and Causeway Point, right? And if we actually take into consideration the cinema space, the 2 assets, Causeway Point and Century Square, would actually be reporting at 100% occupancy as well. And we are in advanced negotiations and planning for the repurposing of this space, right, okay? And I think one of the observations is for the cinema space, because of the lower-than-average rent, it does give us certain opportunities to reposition the mall better. Next slide, please. All right. In terms of NPI, I think one of the key observations is that the NPI actually generally increased or improved on a year-on-year basis for all the assets. And that's with the exception of Century Square and Causeway Point, which maintained largely neutral compared to last year. And that's notwithstanding the fact that we had that vacancy as well as the arrears from the cinema space in these 2 properties. So very strong top line growth across the portfolio. And this is reflective of the strong operating performance in terms of footfall, in terms of sales, which allows us to achieve very good healthy reversion. Okay. Next slide, please. Okay. So now we cover reversions at 7.8%, which is a good reversion for the entire FY '25. I think one of the observations is that this reversion has actually maintained at the strong level over the 2 consecutive years. We do see reversions coming in at this level for FY '24 as well. The other observation is that we have achieved positive rental reversion across all our malls within the portfolio. Next slide, please. Okay. This slide shows the trending of the portfolio occupancy. I think a couple of observations. You will note that the occupancy cost of our portfolio at 16.1% for FY '25 is below the pre-COVID levels. And this is reflective of the fact that sales growth for our portfolio has been strong. And that enables us to maintain the healthy EOC and trading performance of our retailers, notwithstanding the good rental reversion that we have negotiated from our leases. And in a way, this is reflective of the success of our focus on driving footfall as well as sales conversion. Next slide, please. I think Richard touched on this earlier. So on a quarter-on-quarter basis as well as year-on-year basis, we do see the strong growth in the traffic, the footfall coming to our malls as well as the conversion into healthy tenant sales growth as well. Next slide, please. All right. Observations from this slide, we do not see any tall towers going forward over the next 3 years. So as you are aware, our average lease tenor is 3 years. So for the next 3 years, no concentration in terms of lease expiries. So this bodes well in terms of the cash flow from our portfolio. Next slide, please. Yes. Again, coming back to the resilience of our income and valuation. By AUM across the assets within the portfolio, we do not see any significant concentration risk, right? And also at the mall level in terms of the trade mix, there is no concentration or rather that we do see a higher proportion of essential services at 54% GRI. And I think over the course of the past few years, we've seen the resilience from the suburban retail sector, and that is largely due to the fact that it has a large component of essential services, which caters to the daily needs as well as the necessities of the population that we serve. So we see a resilience at both the balance sheet as well as the P&L level. Next slide, please. Okay. In addition to achieving good rents for our portfolio, we are also very cognizant of the sustainability of our retail offering. So there is a focus on refreshing our trade mix to delight and also to keep up with the latest retail trends. On average, we are looking at about 20% refresh rate for leases that comes up. And over the course of FY '25, we have brought 76 new-to-portfolio tenancies. The other observations are that this refresh is actually across all our malls, and it's a variety of trade. So no concentration -- no particular concentration in one particular sector, right? So it's, of course, F&B and the various retail offering. Next slide, please. Okay. For this slide, we wanted to showcase some of the promotions, events and placemaking activities that we had undertaken over the course of this year and in particular, the last quarter. So on the left-hand side, you see some of the promotions as well as the activities during -- for SG60 during the National Day celebration. And a large part of our focus is to actually work hand-in-hand with our retailers to magnify the outreach to our shoppers, right? And we are positioning our malls given its strategic location within the heart of the heartlands as the social hub within that particular catchment. And this is to build that loyalty and sense of place with our shoppers. Next slide, please. Okay. Update on Hougang Mall AEI. I'm very pleased to update that the progress of the AEI has been good in terms of timing, in terms of meeting the financial underwriting. So like what Richard mentioned earlier, 80% of the overall AEI spaces have been pre-committed to date. And if we look at Phase 1, which has just TOP and spaces are being handled over to the new tenants, we've achieved a pre-commitment level of close to 100%. So in terms of downtime, that has been mitigated. And also the focus on refresh is seen in the new-to-Hougang concepts that we have actually brought into. So out of the pre-commitment, we have brought in about -- this 40% represents about 30 new-to-Hougang concepts that we are bringing to HM post AEI, okay? And the other focus for the AEI would be refreshing some of the amenities. The mall is new. So part of updating the retail experience will also be refreshing some of the key touch points like the lobbies as well as the restroom. Okay. Next slide, please. So with this, I will hand over to Judy to take us through the ESG. Judy Tan: Yes. Thanks, Pauline. On the ESG front, we are pleased to share that in recognition of FCT's progress towards sustainability, we have been recognized as the Regional Sector Leader (Listed) in the Asia, Retail category in the 2025 GRESB Assessment, right? And this is also the fifth year in which we have attained a 5-star rating, and we have also increased our score from 91 to 93, okay. This slide showcases 2 of the initiatives that we have implemented actually in FY '24, both first of its kind, including the Singapore's largest single solarization for retail malls. And right now, we have got this program implemented across 8 malls, producing over 1,400 megawatt per hour of renewable energy, translating to, of course, savings as well as carbon emission reductions for us. And of course, on the Singapore's first-of-its-kind food valorization program as well, we have actually reduced about over 258,000 kg of food waste reduced. So all initiatives that contributes towards carbon emissions reduction. On the community engagement front, of course, Frasers Property is all about inspiring experiences and creating places for good. And this slide basically just shows my read of all the different activities, placemaking initiatives that we had during the year to engage and reach and excite our shoppers as well as the communities. And in particular, for the SG60 community campaign, we actually donated a total of $200,000, working hand-in-hand with our shoppers as well as tenants. We also wanted to highlight this initiative that we had where we actually ran a dive into sustainability campaign in our malls to actually encourage shoppers to come forth, donate their bottles, their used bottles. And we actually rewarded shoppers $2 FRx gift vouchers for every 5 bottles recycled. And during this period, not only did we do good, we also saw an increased traffic to our malls by over 20%, right? So for this initiative, that actually got the Frasers Property Singapore to be recognized as a Runner-Up by the Singapore Retailers Association Retail Awards under the Green Initiative Award of the Year. Next up, I will hand it over to Richard to give his concluding remarks, looking forward. Richard Ng: All right. Thanks, Judy. Next slide. Yes. Okay. So again, we have shared with you the set of results and how do we get there? Of course, from the perspective of our portfolio itself, both organically, AEI and also in terms of acquisition, we have done a lot of good work this year, and that, by itself, actually helps in giving us a boost in terms of our overall performance and also the DPU. The market has continued to be very strong, very resilient because of tight supply and at the same time, strong demand. And this is something that we continue to see, and we believe that the positive trajectory will carry us through to the FY '26 as well. We spent a lot of time sharing about placemaking, ESG and so on. And this is fundamental for us because our malls are located in strong catchment area with a very strong community feel, right? So we want to make sure that this is a place where we can continue to drive traffic, bring in more people, more shoppers into our malls. And ultimately, this will then help to result in a better sales performance for retailers and by itself will then give us a better performance for our overall portfolio, right? With that, I'll end my presentation and happy to take questions from you guys. Thanks. Back to you, Judy. Judy Tan: Thanks, Richard. Okay. Right now, we'll go on to question and answers. And then, of course, we've got a couple of analysts already raising up their hands. First up, can I invite Yew Kiang from CLSA to unmute himself and post his questions, please? Yew Kiang Wong: Can you hear me? Judy Tan: Yes. Yew Kiang Wong: Richard, can you share the tenant sales for this FY and this quarter for Causeway Point and Northpoint? Richard Ng: For Causeway Point and Northpoint specifically, okay, I will not be able to give you specific, but what I can share with you is perhaps I'm not sure, but maybe you're alluding to the impact and so on of people going to JV. But what we have seen is over the last -- from 2019 to now, both malls have actually -- in terms of sales has delivered more than double digit, right? For Causeway Point, I'm looking at slightly over the middle double digit, more than 10%. For Northpoint City, it's more than 20% from 2019 to this period. And if you look at the annual growth rate, it's about 3% to 4%. Yew Kiang Wong: Okay. So the double digit is over that since COVID, is it from 2019? Richard Ng: Yes, from 2019 to now, right? Yes, so despite -- there's a lot of talks about people -- more people shopping in JV, et cetera, but what we have observed at our most modern malls, they -- the sales continue to improve, right, between 3% to 4% annually. Yew Kiang Wong: Okay. Okay. And then any plans on Central Plaza? Richard Ng: Okay. Central Plaza is something that we have been talking about for a very long time. A couple of reasons, right? One reason is, firstly, it's an integrated development part of Tiong Bahru, right? It actually fits into Tiong Bahru very nicely, providing access for the people in the office to support the retail. And we get to control the type of tenants that comes into the office as well. That's one key aspect of having it as an integrated development. Secondly, we also recognize that there are still some potential for us to look at decanting some space, better utilization of space, right? So there's still some GFA that we probably could harness as part of an integrated development. Once you sell it off, you will lose some of this. Thirdly is, again, the management of the entire asset is important for us. If you do look at selling out Central Plaza, you lose control of the carpark because that is actually, again, a MCST -- it becomes an MCST asset, right? So certain component, we feel it's important for us to put it together as an asset -- an ongoing asset performance. On the other hand, we also recognize that Central Plaza is an office building, not really our core asset. But if you look at the asset itself, it's performing well, but we still feel that there's opportunity for us to continue to push the performance a little bit better, right? So we look -- we will always be looking at the possibilities of what do we do with the asset. But as of now, I would say that there's still room for us to further improve the performance, both in terms of occupancy and in terms of the rent. Yew Kiang Wong: Can you sell this to the sponsor and then technically, it's still under the family. So MCST issues and all, so we're more stricter then. Richard Ng: I can't speak for the sponsor whether this is an asset that they will consider. But we are always open. We are always exploring possibilities, alternatives, use and so on. But as of this time, we don't see this as something that is right on top of our agenda. Yew Kiang Wong: Okay. Last question. FY '26, what's your focus going to be? Richard Ng: Focus, of course, we acquired South Wing, right? We also mentioned there are certain things we want to do at South Wing. We want to improve the performance organically while we continue to look out for some AEI opportunities. So that's one, right, because we acquired this asset this year, we want to make sure that it delivers what we have set out to do. Secondly, there's actually a lot of opportunities in terms of AEI. One is the big one is NEX that's coming up. We have obtained the written permission. So we are still targeting our June, July commencement of AEI. That's a big one, right? It's talking about massive 50,000 type of square NLA square footage. That will take us for 2 years. The other one is, of course, focusing on repurposing or backfilling the cinema space as soon as we can, if possible. If not, then we look at the best alternative use for that space, and there could be some level of AEI required in order for us to repurpose the space. Yew Kiang Wong: So fair to say for FY '26, you are focusing on organic improvement operational rather than M&A? Richard Ng: Acquisition M&A is always opportunistic, right? It's something that we can't control what comes out to the market, what's available in the market. And even if whatever that's available in the market, whether it fits our portfolio structure, the type of assets that we want, whether the pricing is something that we can afford, right? But what we can always focus is something controllable, and those are the controllable aspects. Pauline Lim: Richard, can I supplement your response to Yew Kiang's first question in terms of sales growth. So Yew Kiang, if I may refer you to the circular or the presentation that was done for the acquisition of South Wing. So we did have a slide that actually shows the growth in the retail sales, the retail sales index of South Wing versus some of our dominant malls, which includes Waterway Point as well as Causeway Point. From there, you see that the growth trajectory, right, since 2019 to 2024 has been very strong, right? And 2024 can be taken as a reference point, right? I think Malaysia -- Singaporeans have been going through across the border all this time, right, and when the exchange rate was very favorable and so forth. So that's one point. I'll be happy to send you that slide for your reference, right? Yew Kiang Wong: Okay. I'll look for it. If I can't find, get Judy. Pauline Lim: Sure, sure. I think the other point is also if you look at the performance metrics, right, of Causeway Point and Northpoint City in terms of occupancy and all that, that has been -- that's at 100%, right? So in a way, it ties back to the sales performance. I think retailers would not be renewing or so keen to take up space if they are not trading at a healthy level. So I'll leave these thoughts with you. Judy Tan: Next up, we've got Geraldine from DBS. Geraldine Wong: Maybe just following on to Yew Kiang's question, strategy for 2026 is organic. But if the right asset comes along in the market that you like and thinking about how your share price has done really well to trade 10% above book, would you then want to be a bit more aggressive in taking on an acquisition at this point in time or still too early? Richard Ng: Okay. Geraldine, I think, again, going back to acquisition, there are many components to consider when we look at a specific acquisition. Of course, firstly, it's opportunistic, right, if there's opportunity available in the market. And then we have to evaluate the asset, whether we think that the asset is something that can improve the portfolio further. We look at the bottom line, whether there's opportunity to further improve the performance of the asset or if the asset has really been significantly optimized. And definitely, in terms of the pricing, I mean, we do note that there are instances where a seller bids very aggressively, right? I mean if you look back, for example, at Seletar Mall, nobody really knew what's the final price because it's not publicly available. Of course, you hear in the market and so on. But if those numbers were true, it was very, very aggressive, something that I think would be very difficult for ourselves to be part of it because we believe if we buy something, I mean, there must be value. It may not be immediate, but at least, over time, the performance of the mall must be commensurate with the pricing that we go into. So those are all the considerations. So there isn't a short answer to it and say, yes, we will do it or no, we wouldn't do it. But if all those factors, having taken into consideration, are favorable to what we have today and something that we believe is going to be positive for our shareholders, of course, we will be interested to look at it. Geraldine Wong: Okay. Everyone is taking a look at the current mall. Maybe a second question, if I may. The AEI opportunities at Northpoint as well as NEX, the increased NLA, so if you are thinking about ROI margins, are they going to be much meatier than the 7% that you have at Hougang Mall? Richard Ng: I think typically, we try to at least target that range, 7% to 8%. When it's meatier, it also comes with a meatier cost as well, right? So it's a balance about both. And when we upgrade the malls, we take the opportunity to also improve a certain component of the mall as well, right? So for NEX, it's a very big AEI. Not only we see it as an opportunity for us to improve the performance on a near term, but whatever that we are doing, we believe is going to be good for us on a longer term as well, improving circulation, making space available -- bigger space available for us to do other activities in the mall, et cetera. So by and large, we will still look around the between 7% to 8% kind of return. Geraldine Wong: Okay. Maybe just squeezing in a very quick last one. In terms of occupancy cost for Causeway Point, Northpoint City, our portfolio average is at 16%. But for these 2 malls, are we above at or lower than the portfolio average? Richard Ng: Okay. If I can remember, Causeway Point is below. I think Northpoint City is also below, if I remember correctly, but definitely not higher than what we have on the average. Geraldine Wong: Okay. So a very good place to do business. I hope the market dynamics will run its course. Judy Tan: Next up, we've got Terence from JPMorgan. M. Khi: Richard, congrats on the good set of numbers. I just wanted to ask on Cathay. I understand that on a year-on-year basis, actually, the NPI has been quite flattish for the 2 malls impacted by Cathay, Causeway Point and Century Square. But on sort of looking at the second half, we saw maybe like a 2% drop versus second half last year. So can I just get understanding that Cathay was not contributing to NPI in second half? Or was it only -- or was it for the full FY '25? Richard Ng: Okay. Cathay's contribution, I would say, kind of pretty much reduced significantly as we progressed through the year, right? When the first round when we came out with the -- serving the notice, et cetera, right, this is -- that's when they really stopped paying the base rent, but they were still paying some contribution. But that kind of slowed down and trickled down significantly. So by and large, I would say the contribution, it's very minimal, if any, towards the second half. And you're right, the drop that you saw is mainly contributed by Cathay. M. Khi: Okay. That's actually very -- that's a very good number to start with for second half NPI. I think it's not a very significant drop. I think it's -- most of the other malls will be able to carry it. Also asking about Cathay, I wanted to understand what are you looking at? Are you trying to bring in another cinema tenant? Or are you trying to repurpose for other users? Could you give us a sense? Richard Ng: Okay. I would say that we are currently exploring various options. If there are operators today that are prepared to consider the space and they can come in and operate very fast, that's one alternative that we could consider. But at the same time, that if we feel that certain -- okay, there are 2 spaces we are looking at, right? If the spaces presents a very strong opportunity for us to kind of repurpose the space and then can bring in a strong tenant, a strong anchor tenant to kind of anchor that space and that gives us a longer runway in terms of sustainability of the traffic, the mall and so on, then that's another consideration. So I would say, at this point in time, we are actually very excited with a few options that we have on hand. Some of them, because of the repurposing requirement, will take a bit longer because you need to engage authorities, et cetera, and so on. And we should be able to come back and give some sensing definitely by the first quarter in terms of the direction we are heading. And if, let's say, there's any opportunity to probably replace with an existing tenant on a one-on-one basis or that somebody can kick in faster, that will be even better for 1 or 2 of the space. M. Khi: Okay. That's great. Also, I noticed or I understand that there was a one-off distribution from JV this year, FY. Could you share on the amount of the one-off? Richard Ng: JV, I would hand over to Annie to give a little bit more color on that. Shyang Lee Khung: Yes. Terence, yes, the one-off distribution is from NEX is due to the excess cash at the entity level, which we assess that is no longer required and it is distributed as a dividend. M. Khi: And can you share the value? How much? And this came into DPU, right? Shyang Lee Khung: Yes, it's about $9 million, the one-off distribution. M. Khi: $9 million. And was that in second half or in first half? Shyang Lee Khung: Yes. I think most of it is in the first half. Some came in the second half. M. Khi: Okay. That's great. And maybe a final question for me, 3.5% fourth quarter funding costs, what's the expectation for next year, FY '26? Shyang Lee Khung: Yes. At the current rate level, we are looking at about 3.3%, 3.4% for the next year. Judy Tan: Next up, we've got Rachel from Macquarie. Lih Rui Tan: Can you all hear me? Richard Ng: Yes, Rachel. Lih Rui Tan: Congrats on this good set of results. Maybe just firstly, in terms of reversions, I saw that actually second half probably moderated a little bit. So if you could guide us what you're looking at on reversions for next year? Richard Ng: Okay. We did share that this number, again, is a very strong number that you could see. And first half was stronger compared to second half, partly due to the constituent of the leases up for renewal, right? Sometimes when you have more specialty, for example, that leases comes up in the quarter itself, probably the reversion could be a little bit more aggressive because smaller spaces and so on. So it's a combination of the profile of the expiry that we have between first half and second half. So going forward, and this is something that we shared before, we believe that going forward, on a more sustainable basis, we are probably looking at about mid-single-digit positive rental reversion. Lih Rui Tan: Okay. And can I just ask on -- in terms of the tenant sales, I think it's been very strong in the fourth quarter. But is there any impact from the Tampines Mall being included? If we were to still exclude Tampines, what kind of tenant sales will we be looking at? And what's your opinion? I know this year, we have a lot of government vouchers, but if government vouchers was to taper off, what's your view on tenant sales moving forward? Richard Ng: Okay. I -- first and foremost, I think definitely, Tampines 1 has also helped to contribute towards the strong sales that you saw. But even if we strip out Tampines 1, the sales were still positive for the rest of the portfolio. You're right, to some extent, this year, we had a lot of goodies, a lot of handouts, SG60, CDCs and so on. And we believe that even come, I believe, end of the year or January, there's another tranche right, CDC voucher that's not been distributed. And probably some of these so-called handouts or incentive goodies may last a little bit longer because I don't think it's easy for them to just wean off or cut off immediately. They probably have to wean off over time. But fundamentally, I think what's important, Rachel, is also looking at the big picture, right? So those one-offs and others, yes, you get it, it's fine. It's a bonus. But what's more important is the underlying macro perspective. What we are seeing is, firstly, it's increased population base, right? So -- and that actually is a fundamental, right? You have bigger numbers and also the income level of our people are growing, right? And this is largely supported by, again, your -- what do you call that, Judy, the progressive wage model. Judy Tan: Progressive wage model, yes. Richard Ng: Progressive wage model. So that, to me, is actually more significant and more sustainable, right? Because if you look at how the progressive wage model works is, there is a kind of minimum starting point and there is a fixed growth for the different sector of worker, right, that you see, whether it be cleaning, security, retail worker, F&B operators, landscaping, M&E engineers for the lift and escalators. So -- but if you just take an example, right, you just take an example of a general cleaner, from 2023 to 2029, the same person will likely almost double the salary, right, for this period itself. So to us, this is actually a very important aspect that is going to kind of underpin the growth that we expect from our suburban malls because, by and large, most of this progressive wage are targeted at the mass market, and that's the market that we are serving. So while we get the one-off, the goodies, that's good. It's helpful. But I believe the growth in population and also the growth in this ability to spend, that will again be the one that underpins the performance of our malls. Lih Rui Tan: Okay. And my next question really is on Isetan. I think we saw that they are exiting Tampines Mall. Could you give us -- remind us again when is the Isetan lease expiring in NEX? And has negotiations been going on? Are they talking about exiting or downsizing? Richard Ng: Yes. So for this, maybe I would ask Pauline to share some color. Pauline Lim: Rachel, I think because of some privy details, I cannot say much, right? But what I can say is we do have plans for this space, and it's positive plans. And you are aware that we are doing the AEI, right, for NEX as well. Lih Rui Tan: Even the lease, when they are expiring, like 1 year or 2 years? Pauline Lim: The lease will be coming up next year, next calendar year, yes. Judy Tan: Next up, we've got Terence from UBS. Terence Lee: Terence from UBS. Just using the closure of Gong Cha as an example, and I'm going to presume for FCT that any bad debt exposure is probably quite low. But more broadly, my question is, have we hit the point of saturation for certain trade categories, be it bubble tea, the coffees or even potentially even some of the Chinese restaurant chains? Richard Ng: Okay. Yes. Okay. The first part of the question, Terence, our actually arrears is very minimal, except -- the exception is cafe for a different reason and perspective. But by and large, we follow pretty strict guideline and processes, whereby if the tenants do not pay up within a certain period, we will actually engage them, send them certain notice and we will repossess the unit within a certain period of time. So that's how we managed to keep our arrears actually on a very thin level. If you look at Gong Cha or many other news that you have seen in the market of closure, people exiting and so on, I think this is part and parcel of F&BC, right? You do get certain products, certain brands that have been here for a while. And Gong Cha, in particular, I -- what I read was more because the brand itself -- I mean, the owner of the brand itself wanted to exit and then potentially come back again at some point in time, but that's news. But in terms of F&B operator, I think you see there are certain brands, certain products, they are probably very trendy at certain point in time, and that set can run out -- run its cost, and then they are no longer here. But then you see another new concept will pop up. And that's the beauty of F&B, right? Something that it's changing because the tastes change, the preference change, and competition is also there, right? So the stronger one, the better ones come in, and then you see those who are not able to keep up or their products are deemed less exciting or maybe in terms of taste and so on is not as good, they will then be the ones that has to review their product or they may exit the market. But then the new ones will come. So be it bubble tea is not new, we used to have -- back then, I used to say that Waterway Point has the most bubble tea operator. We have about 6 operators. But now you reduce to about maybe 3. That's one example. Coffee chains, similarly, you have different types of coffee, different operator, different type of taste that appeals to different shopper, right, a different customer. Again, is it too many? The market will dictate whether there is too many or they still see opportunity to grow new offerings. And that is no different, right? So the long and short of this is that what we see is a lot of movement, a lot of churn, but the demand for F&B space continue to be very strong. And that is from our own perspective as an operator, we see that is, again, a sector that has continued to develop, continued to evolve, but we see very strong demand. Terence Lee: Got it. And just circling back to the question on acquisitions. I mean now that Northpoint City is, I guess, underway, is it then reasonable to expect that FCT will have to start looking overseas to acquire? Richard Ng: Not really. We still have joint ventures partners in 2 assets, right, Waterway Point and NEX. So we'll continue to cultivate the relationship with our partners. And hopefully, at some point in time, they may look at redeploying their capital. They may look at exiting the malls at some point in time. And if you add those 2 together, it's close to $2 billion. So significant size opportunity that's still available for us in mid- to longer term. But what we are focusing a lot is just now they're talking about what do we focus on '26, FY '26, what's the main focus and concentration. There's a lot of areas that we think we can still harness a lot of value we can still create based on our existing portfolio. So there's actually a lot of work for the team on the ground. AEI, it's one big area that we are focusing on. And AEI is one that we believe will continue to, again, give us value. Tampines 1 has been proven to be very successful. Again, for Hougang Mall, Pauline has shared the performance in terms of the leasing commitment, very strong, which we will see contribution once it's fully completed. NEX is going to be the next one to go. And we are now looking at also plans for the other malls in the portfolio. So we are continuing to work on it. So we are actually kept very busy while at the same time, looking out, if there's any opportunity that comes to the market, we'll evaluate it and see if it makes sense. So the long and short of it is, we will stay pretty focused on what we have today. Terence Lee: Got it. And earlier, there was the guidance on where funding costs would trend towards, 3.3% to 3.4%. I just want to understand the thinking behind the fixed hedge profile. Is it a plan to keep it at a relatively high level such that the flow-through is rather, I guess, muted? Why is it this thinking? Richard Ng: Okay. Maybe I'll just give you a color, then Annie can chip in as well. I mean you are seeing a little bit of elevation in terms of hedge portion now at this point in time because when we bought over South Wing -- Northpoint City South Wing, we took over the debt for the asset, right? But we do have a refi coming out in January, February for the FY '26. Once that is done, we will probably review the hedging again and it is likely to come down from this level. Judy Tan: Next up, we've got Derek from DBS. Derek, would you like to unmute yourself. We can't hear you for now. Geraldine Wong: Judy, I think there's a problem with Derek's mic. So maybe I can ask his questions on behalf. So I think first is on tenant sales. If you can give us some color what is lagging? Richard Ng: You mean what trade is lagging, is it? Geraldine Wong: Yes, yes, the trades that are lagging. Richard Ng: Okay. Pretty much most of the sectors are actually performing positively with a few exceptions. Maybe to just give a little bit of color. Department store, I think it's a little bit of a drag. Books and gifts, it's a bit of a drag. Infocom, a little bit. Fashion accessories, it's seasonal. So by and large, I think these are the few sectors that we saw a little bit of a drag. But the rest seems to be pretty positive. Geraldine Wong: Okay. I understand. Yes. Maybe, Richard, the second part, maybe some idea on Metro, what to expect and when is the expiry? Richard Ng: Okay. Metro, again, it's a case of we are evaluating the options. We are working with the tenants to see what are some of the ideas, concepts that they could be able to introduce. I think there's a lot of news articles on the collaboration with Shinsegae and others, retailers in Korea. So we would like to find out what is it that they are able to bring to the market. And specifically, if we continue to work with them, what can they bring to Causeway Point. So it's an ongoing conversation. But at the same time, we also recognize that they take up a significant space. So it's a question it's about having Metro, not having Metro; having Metro, but maybe rightsizing Metro. So those are the possibilities that we are exploring. That's not a finality at this point in time. Geraldine Wong: Okay. Just one quick last one. For your leases expiring in 2026, where will it be and which malls? Richard Ng: It's pretty much cutting across all malls because our leases are on 3 years basis, right? So just now when we shared the lease expiry profile, it's quite evenly spread. So we do have expiry across the whole portfolio. Judy Tan: Next up, can I invite Brandon to unmute himself to ask the questions, please? Brandon Lee: Richard, I just want to ask you on the tenant sales growth, right, if you were to exclude the T1 and all the cinema, everything, what's the net growth for FY '25? Richard Ng: Okay. It's slightly below 2%. Brandon Lee: Slightly below 2%? Richard Ng: Yes. Pauline Lim: So that includes the drag from the cinema because we haven't taken out that. Richard Ng: Yes, yes, yes. When taken out the cinema. Pauline Lim: So probably about 2-ish. Richard Ng: Yes. Okay. Yes. Brandon Lee: So it's 2-ish percent? Richard Ng: Yes. Brandon Lee: Because if you are looking at your forecast on this reversion going to next year, right, and looking at your occupancy cost relatively flat, right, so basically, your outlook on tenant sales growth is quite muted. Is it -- can I sort of get a forecast on that, implied? Richard Ng: No, not really. I think we still continue to expect positive sales coming in from our retailers. But it's a case of, again, depending on the composition of your type of leases that's coming up for expiry. And of course, I would also like to say we typically will build in a little bit of conservatism when we look at the expiry or the reversion for next year, right? So which is why we say it's about mid-single. We have been doing 7.7%, 7.8% for the last 2 years, right? Pauline Lim: So Richard, maybe I'll supplement that point, right? So Brandon, I think we are not relying solely on organic growth, per se, right? There's a lot of proactive tenancy management, if I may say, right? Proactive tenancy management in terms of working with the tenants, existing tenants to drive their sales, right? I spoke about the refresh rate, which means that we are constantly looking at weeding out or changing out some of these weaker performances and bring in the more trendy and more sought-after brands, right? So that is also part of the active management as well. It's not so much just relying on the organic growth of our existing pool of tenants, right? And with the AEI, it gives us that opportunity to actually do more of that refresh, right? So I think we should take all of this into consideration. Brandon Lee: Okay. And just on the revaluation, I realize this second half, we didn't provide the cap rate. So what's the trajectory from FY '24? And also what's the revaluation loss of the $11.1 million due to? Richard Ng: Okay. You're talking about trajectory from FY '24 in terms of the cap rate or... Brandon Lee: Yes. Richard Ng: The cap rate stayed constant. Brandon Lee: Okay. So -- and I think all the malls saw partial [ wither out ], but then you still recognized a loss, right? So what's driving that? Richard Ng: Yes. Okay. Maybe Annie could give a bit of color on that. Shyang Lee Khung: Yes. Okay. Brandon, you can see that there's $11 million loss, but actually included in this $11 million loss is an accounting fair value loss of about $41 million, which arose from the acquisition of Northpoint City South Wing because of the accounting treatment of it treated as acquisition. So if you exclude that accounting item, there's actually a fair value gain from the investment property of $30.7 million. Maybe I should also add to say that the fair value loss accounting includes the transaction cost that was also capitalized. Yes. So you should strip out the accounting loss and look at the true fair value gain of the investment property, which is about $30.7 million. Brandon Lee: Okay. Okay. So basically transaction costs of Northpoint. Okay. And just last one, right, which I think if you look at your portfolio today, right, just looking at it from a divestment and acquisition standpoint, right, would you be open to still owning or acquiring more or divesting malls where the size is like below sort of a 200,000 square feet kind of range? Richard Ng: Okay. By and large, our preference is definitely moving towards stronger, bigger, more dominant mall as what we have been doing for the last couple of years. So today, we have 4 of the top 10 largest mall in Singapore. But those opportunities comes far and few in between, right? Then the next level we look at is probably the likes of our 200 over 1,000 square feet malls. And then the last category will be the 100 over 1,000 square feet malls. So again, if we have an opportunity to reconstitute, to replace something stronger, of course, that is something that we would seriously look at as part of the overall reconstitution and strengthening of our portfolio. Judy Tan: We've got Jonathan from UOB Kay Hian, who has got a question. Jonathan Koh: Congrats on the good results. Could you touch on AEI for Northpoint City? In the past, you've talked about a holistic AEI. Could you touch on some of the key enhancement that you are planning? Next, right next to it, Yishun 10, would that be redeveloped into residential? And how does that impact your AEI and give us some sense of timing? Richard Ng: Okay. So maybe we can look at the 2 questions there. The first one is probably easier to explain that Yishun 10. Yishun 10, we have divested to Frasers FPL. So they did have some announcement in terms of their plans on that. You can look that up. We are not sure exactly what will be undertaken. What we know is that in the past, we have kind of engaged the authorities before. It's not going to be another mall that's coming out. So it's not going to be a fully new mall that's going to be developed. So that's one thing we know. But beyond that, we do not really know what ultimately will come out there, right? So that's for Y10. And it will not affect any of our decision as to what are we going to do with South Wing. So for South Wing, when we did the acquisition, we spoke about a couple of pockets of opportunities that we saw and something that we're going to take -- undertake over a period of time. So one of them, which is organic, something that we feel that we could improve in terms of the performance at the mall level, whether it be OpEx or revenue. So this is something that is work in progress. We also identified some opportunities for maybe re-leasing about 5,000 square feet of NLA. That is work in progress because in order to do that, we need to go through several rounds of approvals and getting agreement and consensus from the various authorities. So that's work in progress. So that will take a little bit longer, but the work in progress now really is to tighten up any bulk purchase arrangement and getting the best outcome in terms of the mall performance at this point in time. Jonathan Koh: I presume timing-wise, more likely FY '27? Richard Ng: For the AEI itself, the 5,000 square feet we talk about? Yes, slightly. I don't think we will get everything through in FY '26. Jonathan Koh: Okay. And just... Richard Ng: It will commence probably in FY '27. Jonathan Koh: And just a brief follow-up. Isetan, what is the square footage that they occupy at Tampines 1? Richard Ng: Isetan is not in Tampines 1. Isetan is in Tampines Mall, which we don't own. Jonathan Koh: Okay then. So I thought -- it was mentioned, I thought maybe related. Okay. No worries. Thank you. Judy Tan: We've got from Rayson from HSBC, who's got questions. Rayson Khoo: Just a few questions. Firstly, just looking at the Hougang Mall AEI, more than 80% committed. I think it probably moved about like 6% or so versus the last quarter. And then if I recall correctly, for Tampines 1's AEI, you were actually more than 90% committed before the works commencement. Just comparing this to pre-commitment rates, is sentiment getting a little bit weaker for the Hougang space? Are you reserving some of the space tactically for like certain trades? And then just on top of this, if you can just share how your tenant curation strategy takes into consideration the upcoming mall beside it? Richard Ng: Okay. So maybe I'll share my perspective and then Pauline can also jump in. So if you look at the overall pre-commitment, I think it's very strong because we kind of have different phases, right? So the first phase that's going to be opening at the end of this year is actually almost 100% short of one small lease that's currently under negotiation, which I think probably negotiation is really done, probably documentation. So the first phase is fully committed. The second phase is going to go on until towards the later part of FY '26. We still have a bit of time. So the question is sometimes you want to make sure that you also get in the type of trade that you want, and that negotiation can take a little bit longer than usual. But getting over 80% pre-commitment, I think it is still a very healthy, strong kind of indication in terms of demand for the mall, right? The second question you have is in terms of what is going to come up. We don't really know what the final form product that's going to come out in the new GLS. But what we can do is look at ourselves and how we can, in a way, strengthen Hougang Mall. And that's part of the reason why we are doing this AEI. We have expanded one of our key anchor that's a library. We brought them up to the highest floor. We gave them more space because for library to stay, it's an important component because library, despite whatever people talk about reading and so on, they actually bring in a lot of traffic. They also help us in terms of placemaking activities and so on. So it's a very ideal case for us to strengthen our positioning by also locking in some of our anchor tenants. We are also working with another anchor, our supermarket operator to see how we can improve the supermarket itself. So those are various components that we look at positioning ourselves with to complement whatever that's going to come out in the future on the GLS side. Rayson Khoo: Okay. And right. Just another question on the management fees in units because I think it's about 50% for this FY. And then if we're just looking at FY '26, which is going to be very AEI focused, should we expect the management fees in units to exceed 70%, which was when T1 was undergoing the AEI? Or would you like prefer to just phase out the AEI instead? Richard Ng: Okay. I don't think it will reach that level. Probably it will be higher. We could expect it to be higher than this year, but maybe not that level. But then again, it depends on, again, at which point in time we're going to commence our next AEI, right? Say, for example, at NEX, that will bring into play again in terms of our requirement to use some of our AM fee in unit. Where we can, we, of course, try to spread it out, but sometimes because of timing, because we believe that we want to capitalize on the opportunity faster as well. So there could be an overlap, right? Because the faster you complete, the faster you can also generate the income, right? And especially when there are strong demand of retailers wanting to come to a mall like NEX, we want to get it done. We want to start fast because we see a lot of opportunities coming up there. So -- but by and large, I think it's likely to be slightly higher than what it is for FY '25, but may not reach the level -- may not reach that level that you mentioned. Judy Tan: Okay. Next up, we have Vijay from RHB. Vijay, if you like the ask the questions? Vijay Natarajan: A couple of quick questions from me. Can I know what is the outstanding rental arrears from Cathay at this point of time? And should we have to assume that this won't be recovered? Also, earlier, you mentioned in the plans of repurposing the space, if somebody can take it up as it is, then it would be a faster way to recover the space. So are you looking at a cinema operator to replace the Cathay? Richard Ng: Okay. Maybe I will tend to answer the first part first. I think it's something that it's out in the market that we actually sent in an SD probably about 2 months ago. Pauline, was it 2 months ago? Pauline Lim: About July. Richard Ng: Yes. Okay. Yes. So about maybe slightly over 2 months ago. And the SD amount amounted to $3.3 million, if I get the number correctly. Pauline Lim: $3.3 million. Richard Ng: That is official. So we are going through a legal process, a legal proceeding to recover that amount. We have to let the process run its course before we could comment as to if we could recover the amount? Or if we could recover, how much of the amount? Is it partial? Fully? Or what's the amount, right? So we don't have that response for you today. But definitely, we are going through the legal process to recover as much as we could, right? Pauline Lim: Richard, if I may add on to that, right? So the quantum $3.3 million also includes a portion that relates to the outstanding security deposit from this tenant. So what is really owing is actually lower than that $3.3 million that's out there in the market, right? So that's one point. I think the other thing is we are also -- we have other various -- or we have other legal recourse, right? So to answer your question, Vijay, are we writing off this amount? At this point in time, no, we are still pursuing the various legal recourse that we have. Vijay Natarajan: Okay. Okay. I mean repositioning the space, are you looking at a cinema operator? Or if not, what other types of segments you are looking at, at this point of time? Richard Ng: We are looking at various options on the table right now. We have cinemas, we have non-cinema operators. So there are a few options that's available to us to consider. Vijay Natarajan: Okay. But what would be a preference at this point of time? Richard Ng: It depends on what is the offer and also what is likely contribution that the tenants can bring, right, whether it be -- we think that a certain trade may be able to bring in more or drive stronger shopper traffic as opposed to the other. So those are considerations, and of course, the economics as well. Vijay Natarajan: Got it. Second question is, what is the proportion of variable rent as a percentage of total rents in your portfolio at this point of time? And is there a change in terms of variable rent mix, especially for sectors like F&B, which are facing a bit more challenges at this point of time? Richard Ng: Not really. GTO is about 5% of our total revenue. So it's still a very small proportion of our overall rental structure. I have not seen really a significant change in terms of the overall GTO proportion, whether it be F&B or the other trades. Judy Tan: We'll just accept one last one from Derek from Morgan Stanley. Derek, can you unmute yourself? Richard Ng: Hey, Derek, hi. Judy Tan: Hi, Derek? Otherwise, we'll take one question from the chat as well. There's a question coming from one of them. It appears cost pressures have built in 2025, while other SG REITs saw utility cost decline. Why is there this difference? Richard Ng: Okay. Again, it depends on the base, right? So some of the other operators, they actually had a higher cost base before that, but we have been quite active in hedging our utilities over time, right? So if you look at -- we have managed to bring it down in the previous year. So that movement may not be as significant because for the last 12 months, 15 months, it has been quite steady. The rates has been quite steady. So when we hedged it, we hedged forward, right? So we capitalize on that as well to make sure that we are not exposed to any significant risk because you don't know there's a lot of dynamics that's going around, whether Middle East, Russia, Ukraine and so on, right? So there's a lot of uncertainty. So we took that position. But you have to look at the starting point, right? Did they come off from a higher base or they were already lower than us and they got lower. So that's the question. Judy Tan: Thanks, Richard. Derek, are you able to ask your question? Okay. Maybe some issues with his sound system. But anyways, I think we are out of time. So thank you so much, everyone, again for joining us in FCT's results briefing. If there are any further questions to follow up, please feel free to reach out to me. And thank you so much again for joining us today. I'll end the call right now. Thank you. Richard Ng: Thank you. Judy Tan: Thanks, Richard and team as well. Shyang Lee Khung: Thank you.
Operator: Greetings, ladies and gentlemen. Welcome to the Vesta Third Quarter 2025 Earnings Conference Call. [Operator Instructions] And as a reminder, this call is being recorded. It is now my pleasure to introduce your host, Fernanda Bettinger, Vesta's Investor Relations Officer. Please go ahead. Fernanda Bettinger: Good morning, everyone, and welcome to our review of third quarter 2025 earnings results. Presenting today with me is Lorenzo Dominique Berho, Chief Executive Officer; and Juan Sottil, our Chief Financial Officer. The earnings release detailing our third quarter 2025 results was released yesterday after market closed and is available on Vesta's IR website, along with our supplemental package. It's important to note that on today's call, management remarks and answers to your questions may contain forward-looking statements. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ. For more information on these risk factors, please review our public filings. Vesta assumes no obligation to update any forward-looking statements in the future. Additionally, note that all figures were prepared in accordance with IFRS, which differs in certain significant respects from U.S. GAAP. All information should be read in conjunction with and is qualified in its entirety by reference to our financial statements. Including the notes thereto and are stated in U.S. dollars unless otherwise noted. I'll now turn the call over to Lorenzo Berho. Lorenzo Dominique Berho Carranza: Good morning, everyone, and thank you for joining us today. While we entered the year facing macro uncertainty and slower market activity, I'm pleased to note we're now seeing encouraging signs of improvement as clients start to make decisions. Leasing momentum is returning. Tenant demand is intensifying and the fundamentals behind Mexico's industrial real estate market remain intact. We are particularly encouraged by the uptick we're seeing in leasing absorption, a signal that companies are regaining confidence and moving forward with their long-term commitments. Third quarter was a solid quarter for Vesta. We delivered strong operational execution in a market which has begun to normalize from earlier year softness, as I have described. Vesta's rental revenues increased, supported in part by the rent-generating buildings we delivered last quarter and will continue to drive revenue growth through the end of the year. Our retention rate remains high and rents on rollovers continue to trend upward, demonstrating both the quality of our assets and the strength of our tenant relationships. Meanwhile, our stabilized portfolio continues to perform well. Total income for the third quarter reached $72.4 million, which is a 13.7% year-over-year increase. And total income, excluding energy, reached $69.9 million, a 14.5% increase. We delivered an adjusted NOI margin and adjusted EBITDA margin of 94.4% and 85.3%, respectively, for the third quarter 2025. Let me now walk you through leasing activity and market conditions across our core regions. Total leasing activity for third quarter 2025 reached 1.7 million square feet, 597,000 square feet in new leases with new and existing tenants and 1.1 million square feet represented renewals with an average age of 6 years and a trailing last 12 months weighted average spread of 12.4%. Vesta's third quarter 2025 total portfolio occupancy, therefore, reached 89.7%, while stabilized and same-store occupancy reached 94.3% and 94.8%, respectively. As expected, our overall portfolio occupancy dipped slightly during the third quarter, primarily due to the delivery of new buildings currently in the lease-up phase as a result of the robust development pipeline we executed throughout the year. We're confident that absorption will follow, and this positions us exceptionally well to capture the demand we anticipate later this year and into 2026, given improving demand indicators, which I'll touch upon today. Let me share some color on what we're seeing across our markets. In Monterrey, we completed construction of our Apodaca park with 3 new state-of-the-art facilities now in the marketing phase. We're seeing strong interest, particularly from advanced manufacturing and logistics companies. We will be highly selective in determining our future tenants given the quality of our parks and Monterrey's role as a key near-shoring destination. Apodaca stands out as Monterrey's most strategic submarket, offering direct access to major industrial corridors and proximity to the Monterrey International Airport. And after the quarter closed on October 2025, we announced that we have acquired 330 acres of land in Monterrey in the high-demand Monterrey-Apodaca Airport Highway corridor. The site benefits from strategic location next to the Monterrey International Airport and Nuevo León’s Research and Technology Innovation Park, offering exceptional connectivity and direct access to a highly skilled labor pool. The deal included attractive 24-month seller financing, providing flexible capital deployment. And importantly, with this acquisition, Vesta's land bank is nearly complete to deliver on the Vesta Route 2030. In Ciudad Juarez, we saw early signs of a market turnaround in the third quarter. According to CBRE, overall vacancy contracted by 130 basis points and Class A vacancy retreated by 190 basis points for this market. This was underpinned by 1.3 million square feet of net absorption during the quarter. Vesta secured a lease with a global electronics company of 500,000 square feet during the quarter, a transaction which boosted third quarter absorption and reinforced the vacancy decline in this market. Juarez continues to draw international manufacturers, especially in electronics and high-precision goods. We believe the third quarter marks an inflection point in Juarez's industrial recovery and Vesta is well positioned to capture the next cycle of demand. In Tijuana, we're seeing slower recovery with market dynamics still adjusting to a recent influx of supply in this market. High vacancy is a result of a wave of spec deliveries that enter the Tijuana market. That said, there are early signs of reactivation. CBRE highlights that 67% of leasing demand continues to come from manufacturing users, which reinforces Tijuana's ongoing strategic relevance in the broader nearshoring landscape. Vesta has been actively engaging with a strong pipeline of tenants in the region, which give us confidence that dynamics are improving. Tijuana is a constrained market with limited land availability and physical barriers that make long-term overbuilding less likely. These fundamentals, combined with recovering demand should gradually support rebalancing as the year progresses. And while Tijuana's pace of recovery is lower than in markets like Juarez or Monterrey, Vesta's competitive position remains strong. Our portfolio benefits from institutional grade quality, reliable infrastructure and access to key logistic corridors. As always, we will approach this market with discipline and a long-term view grounded in data and in a deep local understanding of our markets. We have seen sustained strength in Guadalajara and Mexico City. Both markets stand out not only for their debt in scale, but for the diverse tenant basis and consistently high retention, which is underpinning our overall portfolio. CBRE reports that the Guadalajara industrial market maintained a healthy 2.8% vacancy rate in the third quarter. Despite new deliveries, importantly, Guadalajara, is a key recipient of foreign direct investment, particularly in advanced manufacturing sectors like electronics, automotive and aerospace. In Mexico City, industrial fundamentals have remained remarkably strong as can be expected. CBRE reports record absorption year-to-date at the highest absorption in the last 5 years, driven by pre-leasing and long-term renewals. Vacancy remains low at just 2%, supported by steady demand from logistics and e-commerce tenants. More broadly, we're seeing that activity has stabilized in the automotive sector, and our tenants in the sector have continued to renew leases and deepen their long-term commitments. Mexico is deeply integrated into the supply chain that supports the North American automotive industry. We believe it's virtually impossible to decouple. In fact, we're seeing continued and growing integration across the region as manufacturers double down on resilient near proximity production strategies. At the same time, we're seeing a shift in momentum toward other high-value manufacturing segments with strength in electronics, scientific equipment and industrial machinery. Mexico has now overtaken China as the largest exporter of electrical and electronic equipment to the United States. Companies are investing ahead of current demand, which reinforces the importance of being ready when they're ready through land acquisitions, as I have described, but also energy supply. The Mexican Association of Industrial Parks recently announced that the federal government is advancing targeted initiatives to support industrial parks, particularly to meet the growing energy needs of new facilities and industries. We're confident in our ongoing collaboration with both federal authorities and energy regulators. As new energy legislation takes shape, we believe industrial parks, in particular, will stand to benefit. The proposed framework includes provisions for energy generation through public-private collaboration, which we see as a positive step toward enhancing reliability and long-term capacity for industrial users. This enables us to serve even energy-constrained regions without compromising on service or delivery. Juan will discuss our financial strategy and related capital deployment, but let me make just a few related comments. During the third quarter, we successfully completed a senior unsecured notes offering that enhances our liquidity position, extends our maturity profile and gives us the financial flexibility to fund future growth under attractive conditions. This also enables us to refinance upcoming maturities without disruption, supporting both stability and expansion. Vesta's capital allocation has remained conservative and focused. We currently have only one project under construction, a direct result of our cautious approach at the start of the year in response to low absorption. That discipline is now enabling us to move with confidence as we prepare for new development starts for the end of 2025 and beginning of 2026. We are prioritizing markets where tenant demand is most visible, and we'll continue to direct capital toward land and infrastructure readiness, ensuring our growth is tied to quality, timing and market visibility. Asset recycling is a key part of our capital allocation strategy, enabling us to monetize stabilized assets and reinvest in higher growth opportunities. During the third quarter, Vesta sold an 80,604 square feet building in Ciudad Juarez for $5.5 million, an approximately 10% premium to appraised value aligned with Vesta's strategy to opportunistically recycle assets. Considering our progress this quarter, we revised Vesta's full year 2025 guidance. Juan will discuss in more detail. In closing, our third quarter results underscore a clear and consistent message for Vesta. Resilience and solid fundamentals ensure Vesta is well positioned for what's ahead. This quarter also reaffirms our ability to execute on Route 2030, our long-term vision to build a scaled, diversified industrial platform serving the most important corridors in Mexico. With that, let me turn our conversation over to Juan to review Vesta's financial results in more detail. Juan? Juan Felipe Sottil Achuttegui: Thank you, Lorenzo. Good day, everyone. Let me begin by highlighting our strong financial results for the third quarter. As a result, Vesta has revised our full 2025 guidance. We now expect our EBITDA margin to reach 84.5% by year's end, up from our prior guidance of 83.5%, underscoring our continuous focus on expense control and on delivering strong results. We expect to solidly achieve revenue growth between 10% and 11% for our full year with an adjusted NOI margin of around 94.5%. Now let me walk you through our third quarter results. Starting with our top line, total revenues were up 13.7% year-over-year, reaching $72.4 million, primarily driven by rental income from new leases and inflationary adjustments across our rented portfolio. As per our current mix, 89.4% of third quarter rental revenues were denominated in U.S. dollars, slightly up from 89.2% in the third quarter of 2024. On the profitability front, adjusted net operating income increased 14.7% to $66.1 million. Our adjusted NOI margin remains strong at 94.4%, up 16 basis points from the prior year, reflecting higher operating leverage as revenue growth outpaced costs. Adjusted EBITDA totaled $59.7 million, a 15% increase year-over-year with a margin expansion of 34 basis points to 85.3%, driven by a lower proportion of administrative expenses in relation to revenue during the third quarter 2025. Vesta's FFO, excluding current tax, increased 16.5% year-over-year to $47.4 million compared to $40.7 million in the third quarter 2024, while FFO increased 20.1% to $0.055. We closed the quarter with pretax income of $52.4 million compared to $62.7 million in 2024. The decrease was primarily due to lower gains on revaluation of investment properties as well as lower interest income, reflecting a reduced cash position during the period. Turning to our capital structure. On September 30, 2025, we successfully completed a $500 million senior unsecured notes at a 5.5% interest rate due in 2033, further strengthening our balance sheet, enhancing financial flexibility and advancing our goal for a fully unsecured capital structure. The notes received a BBB-/Positive rating from both Standard & Poor's Global Ratings and Fitch Ratings. The proceeds were used to prepay the existing debt and shortly after quarter's end, on October 9, we repaid in full our Metlife II credit facility and related incremental facility for $150 million and $26.6 million, respectively. As a result, we ended the quarter with $587 million in cash and cash equivalents and a total debt of $1.45 billion as of September 30, 2025. Our net debt-to-EBITDA ratio increased to 4x, and our loan-to-value ratio was 31%, which temporarily reflects the outstanding balance of the facilities that were repaid shortly after quarter's end. On capital allocation, Loren has noted that we sold an 80,000 square foot building at a 10% premium to appraisal value in Ciudad Juarez during the quarter, consistent with our strategy of opportunistically recycling of assets. At the same time, we continue to strengthen our land results, as Loren mentioned before, with the acquisition of 330 acres of land in Monterrey. Moreover, reflecting our balanced approach to capital allocation, on October 15, 2025, we paid a cash dividend for the third quarter of $0.38 per ordinary shares. This concludes our third quarter 2025 review. Operator, could you please open the floor for questions. Operator: [Operator Instructions] Our first question comes from the line of Juan Ponce with Bradesco BBI. Juan Ponce: It seems clear that demand signals are going in the right direction. When do you think -- when you think about your long-term development pipeline, are you comfortable accelerating Route 2030 projects in the first half of 2026? Or do you think it is prudent to move slower ahead of the USMCA review in June? I ask because although vacancies have declined a bit in some of the northern markets, Tijuana still remains elevated. So I just want to get your thoughts on how you're thinking about this growth. Lorenzo Dominique Berho Carranza: Thank you, Juan, very much for your question. Definitely, we have seen positive demand signals pretty much across most of the markets. I would probably like to highlight that Mexico City and Guadalajara have remained very solid throughout the whole year with vacancy rates at record low levels and still strong demand, mainly coming from sectors such as logistics, e-commerce and electronics, but also other markets have also shown some positive signals. Now how does that translate into our long-term plan? Well, as you know, we analyze carefully market-by-market, and that's when we analyze internally at the investment committee, where do we want to resume and start new operations and new development. As you could see this quarter, even that we have had a slower year on construction starts, we were able to start -- we did resume in Guadalajara with one building. And over the rest of the year, 2025, we will continue to start in other markets where we have recently acquired land and when we think there's already strong demand so that we can continue developing. I wouldn't think -- I think that we should still focus on the mid- to long-term plan for the 2030 Route. And we will be analyzing carefully the progress on demand from next year. We will analyze carefully the trends on different sectors. We definitely think that in relative terms, Mexico is still very well positioned for many global companies. But as you stated, we'll have the USMCA review next year where other countries are getting tariffs. So we will analyze carefully. And with that, I think that we will resume whenever needed. Juan Ponce: And just as a follow-up, these positive demand signals, are they coming from existing tenants or companies that already have operations in Mexico? Or are you seeing this already from new tenants? Lorenzo Dominique Berho Carranza: That's a good question. I think it's both. I think it's existing tenants, but also new tenants. And we've seen more visits from companies from all over, from North America, from Asia, from Europe. And actually -- and interestingly, it's coming from -- also from different industries, not only the traditional industries such as auto industry, but also -- which is strong and integrating supply chains, but also coming particularly from industries like electronic sector, which is growing rapidly. It's also coming in the aerospace sector, for example, and of course, logistics, which continues to be quite strong. Operator: Your next question comes from the line of Pablo Ricalde with Itaú Pablo Ricalde Martinez: Congrats on the results. I have 2 questions, maybe one for [indiscernible] the first one is on the leasing activity that have been seen in October. I don't know if you can provide an update if you have leased some of the industrial parks that were vacant in September. That's my first question. And the other one is coming on the balance sheet. I don't know if you can provide what are you thinking in terms of net debt to EBITDA by year-end given all the lands which you are acquiring. Lorenzo Dominique Berho Carranza: Pablo, thank you. Juan, why don't you -- okay, let me elaborate on the first question and then you give more detail on the net debt to EBITDA for the year-end. I didn't understand quite the question from -- we're getting a little bit of back noise, Pablo, but I think it was related to leasing. We were able to lease up a few buildings, one of them for our logistics operation for the electronic sector in Ciudad Juarez. Also, we were able to lease up in the Bajio region as well as Tijuana in food and beverage, logistics and auto industry. We think that this is -- we think that eventually, over the next quarters, we will continue to see this particular industry striving, and we're getting more absorption for -- in different -- actually in different regions. Again, we see the pipeline picking up pretty much across the board. And I think that Vesta has good quality buildings in the right locations, brand-new buildings. And I think that's key when it comes to clients looking for space. Remember that many of our buildings already have energy, which is another key advantage. And for that reason, even that there might be also some competition, we think that Vesta is very well positioned in the right locations, brand-new buildings and the right utilities and infrastructure required to establish operations in light manufacturing and logistics. So we are very positive on the next quarter, end of the year, and we hope to see a good recovery for 2026, too. Juan Felipe Sottil Achuttegui: Okay. As for the balance sheet, let me say that what you see in our leverage today is just a result of the issuance of the bond and the interim period between the issuance and the payment of the liabilities. So leverage will come down as we pay down the -- as the Metlife liabilities are reflected on our balance sheet. And then net debt to EBITDA as well as leverage will come down to what our good objectives, not that the ratios that we show right now are particularly worrisome. I mean we are exactly where we need to be. We have a strong balance sheet, and we can continue to -- I mean, we have ample borrowing capacity. So... Lorenzo Dominique Berho Carranza: For end of the year, Juan, are -- is it -- are we going to be a net debt to EBITDA close to, what, 25% loan-to-value and net debt to EBITDA below 4.6 maybe? Juan Felipe Sottil Achuttegui: 4% -- around 4x. Operator: Your next question comes from the line of Francisco Chávez with BBVA. Francisco Chávez Martínez: Question is regarding the improvement in guidance for EBITDA margin. How sustainable is this new margin? And what can we expect once you resume the start-up of new projects? Juan Felipe Sottil Achuttegui: Well, look, we have been -- this year -- as we have pointed out beforehand, this year have -- we have focused a lot in maintaining a low-cost base and of course, the growth in our revenues have helped us a lot maintaining quite an attractive EBITDA margin. As we continue to grow the company, EBITDA will continue to be strong. And I think that EBITDA will continue to be in the 83%, 85% level as we continue to grow. Lorenzo Dominique Berho Carranza: And maybe related to the development question, I think that we have the appropriate -- remember that we are a vertically integrated company with -- where we have -- management is internalized. So we have the right headcount to run the operations for the existing portfolio as well as the development part of the portfolio. So since we are in -- developing in the same markets where we already have presence, we do not foresee any major increases in costs. Actually, the opposite. I think that going forward, we will become even more efficient and benefit from being an internally managed company and vertically integrated. And for that reason, we even think that operational margins will continue to be playing in our favor. Operator: Your next question comes from the line of Adrian Huerta with JPMorgan. Adrian Huerta: Congrats on the results and also on the land acquisitions. Just going back to the first question on demand. What else can you share with us in terms of how quick the recovery could come, meaning tenants looking and willing to sign contracts. Is there a backlog or is there a backlog of companies that you've been talking to that they basically have said that once there's more clarity on the USMCA, they will be coming. Anything else that you can share with us on that to give us an understanding of how quick these companies could start signing new contracts? Lorenzo Dominique Berho Carranza: Thank you for your question. And I think that -- I mean this has been a very -- this has been a transition year. And as you remember, early in the year, we see a major slowdown in terms of new absorption and many of the companies were pencils down, not only in Mexico, but also in the U.S., for example. There was a lot of uncertainty. And for that reason, we understand that companies were just not making any decisions. However, the year has evolved differently, and we are definitely seeing a major backlog on companies that want to establish operations in the North American region. And for that reason, we're in constant communication with potential clients. We're actually making -- we're traveling to other regions of the world. We've had people currently in the U.S., in Canada, in Europe, even in Asia, in China and in Taiwan, been participating in conferences and trying to understand what -- how companies are analyzing their manufacturing global footprint. However, all of the companies make decisions based on different drivers. Some of them are making them based on the technology -- the new technology revolution based on AI, and that's why we've seen electronic sector jumping so rapidly, even despite of uncertainty on tariffs. But there might be others, for example, auto industry that are just waiting to see what the final end game might be. However, I think, that companies want to be still in the most dynamic economic region in the world, and Mexico is playing a very important role in North America. We just -- we're seeing every quarter and every year just new numbers regarding exports to the U.S., our trade balances with the U.S., particularly some countries diminishing their positioning and trade participation with the U.S. So for that reason, we are confident that -- we think that we will continue to thrive as a main partner to the U.S. And for that reason, many of the industries that we already have had since NAFTA will continue to be well positioned. Adrian Huerta: Understood, Loren. And if I may add just another quick question. So we should expect some new construction to start over the next 2 quarters. And regarding the land acquisitions, we shouldn't expect much to happen in the next 2 to 4 quarters? Lorenzo Dominique Berho Carranza: Sure. Well, we are -- as we have stated before, when we need to accelerate the development, we do, but when we need to slow down, we also do. So right now, I think that we're just being very cautious on where we start. We will continue to monitor demand in each of the markets. So yes, we'll have some starts for the end of the year. And next year, we'll analyze carefully. And the good thing is that we currently have been able to acquire land throughout the year that will position us very well for the mid- to long term. We were able to buy land throughout this year in the strategic markets, and I will repeat the land that we have recently acquired, which was in Guadalajara where we started the building next to our site. We bought a second site in Guadalajara, which will be helpful for the Route 2030 strategy. We also bought land in Ciudad Juarez, in Mexico City, in Monterrey, in San Nicolás which is -- has more attributes for last mile and e-commerce. And recently, the one in Apodaca, which is going to position us with probably the best piece of land in Monterrey. And I think that's going to be incredibly helpful for the Route 2030 strategy, and that will continue positioning Vesta as a leader developer in the market of Monterrey. So with the land that we have already acquired that we will start doing improve -- and also in Tijuana, sorry for that. We're doing the improvements. We're doing the earthworks, putting the utilities, energy and everything so that eventually we can resume and develop whenever we see demand getting stronger. So we already have, as of today, let's say, approximately 90% of the land required to fulfill the 2030 strategy. Operator: Your next question comes from the line of Alejandra Obregon with Morgan Stanley. Alejandra Obregon: Congratulations on the numbers. My question is on the energy front. You have now the land and you were talking about the utilities. I was just wondering if you can talk about how the electricity part is playing out. The new government announced 5 packages for industrial real estate, utilities, plants. So I was wondering if you think that will help your plans going forward? And then also your investment in associates line appears to be gaining traction. So just wondering if you can talk about this energy investment and how should we be thinking of it forward -- going forward? Lorenzo Dominique Berho Carranza: Alejandra, thank you very much for your question. Definitely, being able to anticipate to the energy requirements for our clients has been key. And that's why we have followed very carefully the different alternatives that we can provide for our clients in the different regions. We think that the government is in the right track -- on the right track to keep on supporting investment or foreign investment in manufacturing, and they are -- and we have been working close by with them so that together with the association of industrial parks, so that industrial parks can have the right packages, the right incentives and the right amount of energy so that we can continue attracting investments. So we're very positive on the work that the government has done with providing these packages and the support. And I think Vesta is a key example on how things can be established in order for companies to -- in order to anticipate we start the feasibilities and the processes to engage on energy when -- as soon as we start to buy the land. So when we develop the parks and the buildings, at the same time, we are investing in the energy infrastructure so that when companies do the ramp-up of operations, there's already some energy in place. We know it takes time, but I think that we have had great results by getting some energy, and that's why our parks have already the energy, and we are very -- we're confident that, that's going to be a huge benefit now that demand will continue to pick up. Regarding -- and regarding your question on associates and energy, that's basically some renewable energy investments that we have recently done. We just closed one in Monterrey, and I think that's going to be also key to continue focusing on solar panels, renewable energies in all of the buildings that we have had in line with our 2030 Route to comply with a certain amount of renewable energies in our portfolio. Operator: Your next question comes from the line of Jorel Guilloty with Goldman Sachs. Wilfredo Jorel Guilloty: I have 2 quick ones. So I don't want to belabor the point on development, but just I wanted to get a sense of what are the more quantitative indicators that you look at when you make a decision to launch a development. So I mean is it the occupancy trends you see in your own portfolio? Is it the occupancy or net absorption trends you see in the market? Is it an increase in leads that you might get from external brokers or your own internal commercial team? So I just wanted to get a sense just like put numbers to this, like what exactly do you look at when you make a decision of going forward with a new project like what you announced with Guadalajara? And then the other question is around leasing spreads. So looking at the LTM leasing spreads, we saw that there was a slight decline. So it was 13.7% in 2Q '25. It was 12.4% in 3Q '25. So I just want to get a sense of what drove this? What -- is it lower rents in a certain market in order to drive occupancy. So I just wanted to get a sense of where these lower leasing spreads or leasing spread trends are coming from. Lorenzo Dominique Berho Carranza: Thank you, Jorel, and thank you very much for being on the call. I think that Vesta has a very unique investment approach. First of all, we already have more than 43 million square feet of industrial buildings that we have developed in the last 25 years. And that, together with outstanding clients where, as mentioned before, we have -- we do not rely on external brokers for our property management, we do it internally. So we have firsthand information from our clients. We have firsthand information from the sector. And remember that also as part of our strategy to have a local leadership and regional marketing officers in each of the markets where we operate. So that's why we have, again, firsthand information of what's going on, what are the main drivers of demand. And that's why we rely on our own data and analysis when it comes to making a decision on how to invest and when to invest. Of course, sometimes we listen to third parties, but I think that it's more -- the secret sauce is pretty much inside of the Vesta offices as to when to start and where to start, and it has been quite successful. Guadalajara -- the example in Guadalajara, well, this is the third expansion we do to the Guadalajara Vesta Park. As a reminder, we have as clients, Amazon, we have Mercado Libre, we have O'Reilly, we have DSV Logistics, and we have Foxconn as our main clients inside of that park. So we have a close connection with them. And by being close to them, we understand where the trends are heading. And that's why we believe that starting new buildings when you're close to great companies that tend to grow, we think that it's -- that's kind of the bread and butter of Vesta, and I think we're going to be very successful, and we will continue to follow that trend in other projects in other regions where we have recently acquired land. And regarding your leasing spread question on the last 12 months, it's -- I think that it's not a material drop. I think that eventually going forward, it's more maybe on the -- they should be hovering. I think that the trend is actually upwards if you look at the last 4 quarters. And I think that as long as we continue to see the spreads being on an upward trend in the low teens, high double digit or double-digit numbers, I think that, that's going to be quite attractive and appealing. The important thing is to have this as a sustainable number going forward, which is exactly we think. Vesta's current portfolio is -- has a good opportunity to catch up in terms of leasing spreads, and that's what we can see even with a 12% spread on the trailing 12 months, which is way higher than inflation. And remember that most of our leases are -- is above inflation and most -- and all of our leases are linked to inflation, which adjust annually. And in many cases, we're able to catch up. That's why if you look at today's CPI numbers close to 3%, considering a 12.4%, that's material. Wilfredo Jorel Guilloty: A quick follow-up, if I may. So just based on the development pipeline and how you get to the decision to launch, you mentioned conversations with existing tenants. Does that imply that future launches could be for these existing tenants for them to expand? Or is it more that you get color on the demand from them and that gives you the confidence to go forward with a new development? Lorenzo Dominique Berho Carranza: Well, I can only tell you that more than 60% of our growth comes from existing tenants. So we like to grow with existing tenants, particularly because they are outstanding companies. So that's why we continue to develop close to them. And if there's an opportunity to grow with them, it's fine. But if we continue to find other great companies that need to open up operations in Mexico, we will continue to do so. And I think that for that reason, we focus a lot in trying to be close with good companies and keep and support their growth and become the real estate partner in Mexico. And I think that has played out well in the past, and we think that, that will continue playing out well in the future. Operator: Your next question comes from the line of André Mazini with Citi. And since we have no response from Mr. Mazini, we are moving on to the next question from Francisco Suarez with Scotiabank. No response again, moving on to the next question. Next question is from Anton Mortenkotter with GBM. Ernst Mortenkotter: Congrats on the results. We've been hearing that some private developers under pressure to deploy committed capital are starting to buy stabilized assets rather than take on new spec projects given the softer demand backdrop. Are you seeing that trend as well? And would you think that this environment actually plays to your advantage, I mean, being able to preserve liquidity and deploy when demand dynamics are more favorable? Lorenzo Dominique Berho Carranza: Anton, thank you very much for your questions. Well, I think that one of the greatest benefits of this industry is that there's still plenty of liquidity in the market. And that plays very well to our favor, and we are seeing players in the private markets that are willing to take acquisitions of stabilized assets. We recently made an asset sale, for example. It's not very large, but I think it signals that there's appetite also for owners to get buildings and also from -- on the institutional front. However, I think that our focus will continue to be on the development front, particularly because at the cost that we are buying land, we are investing in infrastructure, and we invest on brand new buildings. We think that development yields that continue to be in the 10% ranges vis-a-vis building cap rates or acquisition cap rates in the 6% to 7%, there are still huge spread investment opportunities, and that's why we will continue to focus on -- in terms of capital allocation to the highest returns, the ones that create the most value. And I think liquidity, it generates value for all of us. We have seen that not only coming from private markets. We recently saw a transaction being an IPO of FIBRA in the industrial sector being launched at -- also at compelling cap rates. And we think that, that sets the -- it sets valuation standards, and it sets a tone into what we might be expecting going forward in terms of valuation, Vesta -- so -- for Vesta, that's why we think that there has a good opportunity to reprice, particularly given the major discount we are still trading to net asset value. So those are great references and that gives us also the opportunity in some cases that if we want to buyback stock, we have a buyback program in place. So when we have -- when we see that there's a major discount to net asset value, we will continue to be using it, as we have done in the past and create value for shareholders. Operator: [Operator Instructions] The next question comes from the line of [indiscernible]. Unknown Analyst: Congratulations on the results. I have a couple of questions. The first one is a follow-up on lease spreads. I mean we did see like a small decline quarter-on-quarter, but they're still really above 2024 levels where they were around like 7%, 8%. Do you think like going forward into the fourth quarter and next year, you will be able to sustain this double-digit increase? And the second question is on same-store portfolio occupancy. Could you give us like a little bit of color on why the occupancy in Tijuana dropped from like 97% in the second quarter to 85.6%? Lorenzo Dominique Berho Carranza: Great. Thank you, [ Elena, ] for your question. Yes, and I will start maybe with the second one. The second one, we saw a slight drop in the same-store occupancy given the fact that we addition new buildings to the same store. And actually, these were buildings that are currently -- we're in the marketing stage. They're still vacant. These are 2 buildings in Tijuana mega region, which are large and one of them in -- I think, in Ciudad Juarez. But I think that's why we saw that major -- that slight drop. However, since these are new buildings and we are in marketing stage, we are confident that, that particular decrease might not affect or it's something that will -- eventually will be able to recover. And then on your -- on your first question, well, I think that we will continue to see a sustained growth in terms of leasing spreads in the double digits, probably. I think so, particularly because we've seen that market rents have held steady in most of the markets, which is very positive. And that's why renewals have come at a major increase in -- and leasing spread in most of the markets, and we've been able to capture value from that. And that will be -- that will continue to be the trend going forward to capture leasing spreads on top of inflation. And that we're very optimistic on that. Operator: Your next question comes from the line of Alan Macias with Bank of America. Alan Macias: Just can you share the cap rate of the building you sold recently? And are you seeing more demand or more offers for -- to buy buildings? And the second question is, what are you seeing in the trend in real estate taxes and insurance costs? Any indication what the government will be looking for tax increases next year? Lorenzo Dominique Berho Carranza: Thank you, Alan. Let me work first on your second question. So currently, we have secured our insurance costs for the next, I think, it's a couple of years or 18 months. So we have not seen any major adjustments for the moment. Eventually, when we get back to renegotiate that, we will eventually see. And we have not seen any major adjustments in real estate taxes. Now more importantly, even that we burden part of the cost, remember that we transfer part of that cost to our tenants. These are -- in most of the cases, we have triple net leases, and that's a cost that can be absorbed by tenants. And even with that, we believe that it's not a major cost still to their total production cost to many of our tenants. So the rent together with some of the operation costs, it's still very competitive vis-a-vis other regions. In some of the cases, rent and some of the real estate-related costs represent only 7% to 9% of total production costs or in terms of logistics, total operation cost. That's still a very competitive number. So even that we will continue to look into reducing costs. I think that all-in-all, that could well be absorbed by tenants, and they will continue to be competitive. Secondly, to your third question regarding I'm sorry, the cap rate. Sorry, yes. Well, first, yes, we will continue to do asset sales. And this is a good example of an asset, which was a vintage asset that we acquired, I think it was more than 15 years ago. This was not developed by Vesta. And I think -- and the cap rate to in-place rent was 6.2%. And it was a $68 per square foot as a sale and a premium to a price of almost 10% but again, I think this is a good example because we -- there are some vintage assets that eventually we would like to sell and crystallize value from asset sales, sell at a premium and focus on capital allocation and allocate that capital to higher return investments, new buildings, for example, in terms of development and through that close the cycle on investment. Operator: The next question comes from the line of Francisco Suarez with Scotiabank. Francisco Suarez: Congrats on the great quarter. The question that I have is on Mexico City, it's -- why La Villa has taken so long to lease up? Is there any difference compared to what we saw on Punta Norte? And the second question that I have is related with the overall trend behind, for instance, concessions in the market, say, 3 months of rent or step-up considerations or any CapEx. Has anything changed when you renew leases or offer new leases to new clients to what has been the case in... Lorenzo Dominique Berho Carranza: Thank you very much for being on the call. La Villa, it's an outstanding project. It's a smaller building compared to Punta Norte. Punta Norte is a major fulfillment center for e-commerce. And I think on that one, it was a very unique opportunity for a larger e-commerce player to -- and for us to have a long-term lease in U.S. dollars. And I think that that's why that one was very, very particular. La Villa, it's the last mile. It's smaller. We have been having some potential clients. However, as maybe we are -- we have waited to finalize and find the right tenant to it. Even that it takes -- it took -- it has taken maybe a bit longer even than expected. The positive to that is that we have seen rents grow in the region. So even some downtime in terms of rents, we are going to be able to capitalize through a better rent going forward with a better client. So we're positive that -- we're optimistic about being able to lease that building up. And I think that eventually, at some point coming into next year, we are -- I'm pretty sure that that's going to be well leased. Actually, we are -- we -- Mexico City has had very strong dynamics. And actually, we recently acquired land last quarter, second quarter. And hopefully, we can start construction again soon. And then regarding concessions, well, I think this one plays out differently market-by-market, tenant-by-tenant. Remember that we do have -- when we establish a lease, we establish a relationship with the tenant. So our focus continues to be long-term leases in U.S. dollars with investment-grade, high-grade companies that we believe can add value to the buildings. And that's why there's always things to negotiate. There could be some concessions sometimes for -- in terms of rent. But in other cases, we get things in exchange to that. So I think that on that, we will continue to be creative but trying to collect rent as soon as possible and keep on focusing on the total return of the asset, not necessarily an immediate income. One of the things that we have stated in the past, and I think plays out even more today is that we rather have a vacant building than a lousy client just because they will be paying out rent. And I think we will maintain that discipline even if it takes a bit longer. Francisco Suarez: Yes, I love that. So no changes in your underwriting policies. Good to hear. Operator: Your next question comes from the line of André Mazini with Citigroup. André Mazini: Sorry for my connection issue. So my question is around your land strategy on a high-level basis, of course, now you have probably more than 90% of the land to reach the 2030 growth plan. So how do you think about maybe a trade-off, if there is one, a risk return trade-off. On the one hand, I think you don't want to have like a huge land bank because, of course, land does not generate cash flows, right, by definition. But on the other hand, if it's too little of a land bank, your growth plan would be jeopardized. So how do you think about that trade-off of having the exact -- the kind of the optimal land bank in order to not jeopardize cash flows, but not to jeopardize growth plans as well? Lorenzo Dominique Berho Carranza: Thank you, André. And that's -- I think that's a key question to Vesta's overall strategy, and that's why for us, it's key to have a strategy going forward. And we are pretty much relying on how successful we have been in the past. Remember that when we established Level 3 strategy, we focus also on investing in certain regions and certain markets. We were able to invest over the Level 3 strategy, approximately $1.1 billion in development in Guadalajara, Monterrey, Mexico City, Tijuana, Juarez and some other markets in the Bajio. And it was very successful. And -- but the only way -- and we were able to achieve on that period returns in excess of 10% in U.S. dollars. And that -- you can see all of that in our Investor Day presentation, and I'm actually looking at Page 22, where we were able to make returns of 10% in Mexico City, 10.1% in Monterrey, 10.5% in Guadalajara vis-a-vis relevant transactions in those markets between 6% and 6.7%, which we believe that will continue to be a huge opportunity for -- in our investment strategy going forward, where we, again, anticipate on buying land, focus on the right markets and eventually we will be able to develop a -- we identified $1.7 billion investment for the Route 2030 strategy. And the markets where we will continue to focus is, the 3 main markets being Monterrey, Guadalajara, Mexico City, Juarez, Tijuana and Querétaro. So I think that there's really very few companies that have a strategy going forward that have the land -- the right amount of land. I agree with you, it's more an art than a science how much land we should use. But I think that today being well capitalized and being global in the market [Technical Difficulty] Monterrey, recent land acquisition, it's the right approach so that we can secure land, put infrastructure in place and be ready when demand might comeback. These are going to be very successful projects and [Technical Difficulty] so that you can see [Technical Difficulty] yourself. And again, I think that is unique in the type of [Technical Difficulty]. Operator: And it seems that we have no further questions for today. I would now like to turn the call back over to Mr. Berho for closing remarks. Lorenzo Dominique Berho Carranza: Thank you, everyone, for joining us today. Vesta's focus has been on ensuring we're well positioned to capture resurging demand. We are entering the final quarter of 2025 with a strong balance sheet, high-value operating portfolio and the strategic priority to continue executing on our long-term Route 2030 growth plan ahead of what we expect to be a strong 2026. Thank you. Operator: Ladies and gentlemen, this concludes today's conference. You may now disconnect your lines. We thank you for your participation.
Operator: Good day, and welcome our quarter 2 fiscal year 2026 [indiscernible] Limited. I'm Aishwarya Sitharam and I'm part of the Dr. Reddy's Investor Relations team. [Operator Instructions] I now hand over the conference to Richa Periwal. Richa Periwal: Thanks, Aishwarya. Good morning, good evening, and a warm welcome to all. We hope you had a joyful and safe Diwali celebrations with your loved ones. Thank you for joining us for Dr. Reddy's Laboratories Q2 FY '26 Earnings Conference Call. We truly value your time and participation. Joining us today are members of the leadership team. Mr. Erez Israeli, CEO; Mr. MVN, our CFO; and the Investor Relations team. Earlier today, we released our quarterly financial results. These are now available on your website for your reference. We will begin today's session with MVN providing an overview of our financial performance for the quarter. Following that, Erez will share his insights on key business highlights and our strategic outlook. We will then open the floor for questions. Before we proceed, please note that this call is the proprietary material of Dr. Reddy's Laboratories and may not be rebroadcasted or quoted in any media or public forum without prior written consent from the company. This session is being recorded, and both the audio and the transcript will be made available on our website shortly. All commentary and analysis during this call are based on our IFRS consolidated financial statements. Please note that certain non-GAAP financial measures may also be discussed. Reconciliations to the corresponding GAAP measures are included in our press release. Finally, a reminder that the safe harbor provisions outlined in today's press release apply to all forward-looking statements made during the call. With that, let me now hand it over to MVN to present the financial highlights for the quarter. Over to you, MVN. Mannam Venkatanarasimham: Thank you, Richa, and Aishwarya, good evening, and a warm welcome to all. Thank you for joining us on our Q2 FY '26 earnings call. I'm delighted to take you through our financial performance for the quarter. We delivered a steady performance in Q2, achieving near double-digit growth despite lower Lenalidomide renamed sales. The acquired consumer health care business supported the top line momentum. EBITDA margin stood at 26.7% for the quarter. All financial figures in this section are translated into U.S. dollars using a convenience translation rate of INR 88.78, the exchange rate prevailing as of September 30, 2025. Consolidated revenue for the quarter stood at INR 8,805 crores which is USD 992 million, a growth of 9.8% year-over-year and 3% on sequential basis. While U.S generics faced product specific price erosion and lower Lenalidomide sales, overall growth was supported by the integration of consumer health care business and double-digit growth delivery across other markets aided by favorable ForEx. Consolidated gross profit margin for the quarter was 54.7%, a decrease of 492 basis points year-over-year and 223 basis points sequentially. The decrease in margins during the quarter was due to lower Lenalidomide sales and product-specific price erosion in the U.S. generics. Onetime inventory provisions from the discontinuation of the certain pipeline products due to technical challenges in the lower operating leverage in PSAI business. Gross margin was 59.1% for global generics and 18% for PSAI. The SG&A spend for the quarter was INR 2,644 crores, which is USD 298 million, an increase of 15% on year-over-year and 3% on a sequential basis. The year-over-year increase was primarily driven by focused investments in the acquired NRT consumer healthcare business and in branded generics, which are key to driving sustainable growth. SG&A for the quarter includes a onetime provision of INR 70 crores for a VAT liability in one of our subsidiaries and charges related to a discontinued pipeline product. SG&A spend accounted for 30% of revenues during the quarter and was higher by 132 basis points year-over-year and similar levels on a sequential basis. Excluding the one-offs related to VAT provision, SG&A expense as a percentage of revenues was at 29.2% in Q2 FY '26. The R&D spend for the quarter was INR 620 crores, which is USD 70 million, a decline of 15% year-over-year. And broadly, flat sequentially. The decrease was due to reduced development spend on biosimilars during the quarter as major investments for abatacept have already been completed. We continue to make focused R&D investments in complex generics, APIs and biosimilar pipeline while pursuing strategic collaborations to bring innovative assets that support sustainable long-term growth. The R&D spend was 7% of revenues for the quarter, lower by 203 basis points year-over-year and 26 basis points on a sequential basis. Other operating income for the quarter was INR 267 crores, higher than INR 98 crores in the corresponding quarter last year. This was mainly on account of product-related IP settlement income in the United States and onetime reversal of INR 88 crores in liabilities related to discontinuation of the pipeline product. EBITDA for the quarter, inclusive of other income, stood at INR 2,351 crores which is USD 265 million, an increase of 3% on year-over-year and a sequential basis. The EBITDA margin stood at 26.7%, lowered by 174 basis points on year-over-year and flat sequentially. Adjusting for the onetime VAT provision mentioned earlier, the underlying EBITDA margin was at 27.5%. Impairment charge was INR 66 crores, including INR 54 crores for property, plant and equipment at our Middleburg facility following the discontinuation of the pipeline product, conjugated estrogen. The remaining charge pertains to product related to intangibles impacted by adverse market conditions. The net finance income for the quarter was lower at INR 77 crores as compared to INR 156 crores for the same quarter last year. The decline in net finance income reflects lower returns from financial investment following the deployment of cash reserves towards acquisition of consumer health care business and other intangible assets in line with our capital allocation strategy. As a result, profit before tax for the quarter stood at INR 1,835 crores, that is USD 207 million. PBT as a percentage revenues was at 20.8% on an adjusted basis, excluding the onetime VAT provision, the PBT margin was at 21.6%. The effective tax rate for the quarter was at 22.2% compared to 30% in the corresponding period last year. The ETR for Q2 FY '26 was lower primarily due to favorable jurisdictional mix for the quarter. The ETR in the corresponding period last year was higher due to reversal of previously recognized deferred tax assets related to land indexation following amendments introduced through the Finance Act 2024 to Income-Tax Act 1961. Profit after tax attributable to the equity holders of the parent for the quarter stood at INR 1,437 crores, which is USD 162 million, a growth of 14% on a year-over-year, flat on Q-o-Q basis. This is at 16.3% of revenues, Diluted EPS for the quarter is INR 17.25. Operating working capital as of 30th September 2025 was INR 13,331 crores, which is in USD 1.5 billion, an increase of INR 3 crores, which is like USD 0.4 million over 30th June 2025. CapEx cash outflow for the quarter stood at INR 511 crores, which is INR 58 million. Free cash flow generated during the quarter was INR 1,046 crores, which is USD 118 million. As of September 30, we have a net cash surplus of INR 2,751 crores which is like USD 310 million. Foreign currency cash flow hedges executed through derivative instruments during the period are as follows: USD 502 million hedged using combination of forward structured derivative contracts scheduled to mature through December 2026. These contracts are hedged at the rate of INR 86.9 per U.S. dollar, RUB 4.28 billion hedged at a fixed rate of 1.03 per Russian ruble with maturity falling within next 4 months. With this, I request Erez to take us through the... Erez Israeli: Thank you, MVN. Good day, everyone, and thank you for joining us today. We are pleased to report a consistent performance in Q2 FY '26, marked by a double-digit growth and steady profitability. This performance was driven by contributions across all key markets except for the U.S. generic business. During the quarter, we continued to make a meaningful progress across our strategic priorities namely growing the base, scaling our presence in consumer health care, innovative therapies and biosimilars. We advanced our key pipeline programs, including semaglutide and abatacept. In addition, we have been driving initiatives to enhance cost efficiencies across our operations while simultaneously pursuing business development activity to support sustainable growth in the coming quarters. Let me now walk you through some of the key highlights of the quarter. Revenue grew by 10% year-on-year driven by broad-based growth across businesses, benefiting from acquired consumer health care and supported by a favorable ForEx. Growth was partially offset by lower contribution from Lenalidomide and some price erosion in the U.S. in some select products. The EBITDA margin stood at 26.7%. The ROCE for the quarter was around 22%. The cash flow from operation was utilized to our plant expansions and acquisition of strategic brands and securing rights for distribution in defined markets. We closed the quarter with net cash surplus of $310 million reinforcing the strength of our balance sheet. We strengthened our innovation-led portfolio to strategic collaboration and launches. We entered the anti-vertigo segment with the acquisition of Stugeron and related brands across 18 markets in APAC and EMEA from Janssen Pharmaceutica. In India, we strengthened our gastrointestinal portfolio with the launch of 2 novel drugs Tegoprazan under the brand name of PCAB and Linaclotide under the brand name of Colozo. In partnership with Unitaid, Clinton Health Access Initiative & Wits RHI, we are working to make Lenacapavir, a long-acting HIV prevention tool accessible and affordable in low and middle-income countries. We continue to make progress on our key pipeline products. The subject expert committee, the SEC under Central Drug Standard Control Organization has recommended approval for semaglutide injection in India. We received a positive opinion from European Medicines Agency Committee for medicinal products for human use for denosumab biosimilar candidate. The U.S. FDA accepted our investigational new drug's IND application for COYA 302, a partner novel drug for the treatment patients with ALS. We also made a steady progress on integrating the acquired nicotine replacement therapy business. We have successfully integrated 2/3 of the business by value, including Canada, Australia and selected key Western European markets. The next phase will include Southern Europe, Israel and Taiwan. On the regulatory front, several inspections were completed across our global facilities. In September 2025, the U.S. FDA conducted a pre-approval inspection on our Bachupally biologics facility and issued a Form 483 with 5 observations. The agency recently issued a complete response letter in reference to the ongoing resolution of observation pertaining to the biologic license application, the BLA of our rituximab biosimilar candidate. We are actively working to address these observations. The U.S. FDA conclude a GMP inspection at our Mirfield API facility in the U.K., resulting in issuing a Form 483 containing 7 observations. Additionally, our API site CTO-5 in Miryalaguda, in Telangana as well as our Middleburgh facility in New York were classified as VAI following successful GMP inspection by the U.S. FDA. The GMP and pre-approval inspection PAI conducted by the U.S. FDA in July 2025, at our formulation manufacturing facility, FTO-11 has been formally closed. We have received the EIR establishment inspection report with the inspection outcome categorized as VAI. We continue to be recognized for our industry-leading performance in sustainability. We retained our MSCI ESG Rating for A for the second consecutive year. Our ESG Risk Rating from Morningstar Sustainalytics improved from 23.6% to 18.4%, representing a lower ESG risk profile. Our waste management practices were recognized with the Diamond Standard for achieving 99.9% of waste diversion from landfills. Further our formulation facilities at Srikakulam FTO-11 became India's first pharmaceutical facility to receive a Leadership in Energy and Environmental Design, Platinum Certification for existing buildings from U.S. Green Building Council. Let me take -- let me take you through the key business highlights for the quarter. Please note that all financial figures mentioned are reported in their respective local currencies. Our North American generic business generated revenues of $373 million for the quarter, a decline of 16% year-on-year and 7% sequentially. The performance was impacted by price erosion in selected key products, primarily Lenalidomide. During the quarter, we launched 7 new products and expect launch momentum to continue in the second half of the fiscal. Our European business reported revenue of $135 million for the quarter, growth of 150% on a year-to-year basis and 3% on quarter-on-quarter. The year-on-year performance was primarily driven by contribution from the acquired nicotine replacement therapy portfolio and new product launches, which offset the price erosion pressure -- the pricing pressure. Excluding the NRT, the growth was 6% year-on-year and quarter-on-quarter. During the quarter, we launched 8 new generic products across European markets, further strengthening our portfolio. Our emerging market business delivered revenue of INR 1,655 crores in Q2 reflecting a growth of 14% year-on-year and 18% sequentially. Growth was primarily driven by new product launches across markets and aided by favorable ForEx. During the quarter, we introduced 24 new products across multiple countries, reinforcing our commitment to expanding access and strengthening our market presence. Within this segment, our Russia business delivered a growth of 13% year-on-year and 18% sequentially in constant currency terms despite prevailing macroeconomic challenges. Our India business reported revenues of INR 1,578 crores in Q2, delivering a double-digit year-on-year growth of 13% and 7% increase sequentially. This performance was driven by contribution from new product launches, improved pricing and higher volumes. According to IQVIA, we have moved up one place to the 9th position in India pharmaceutical market for the month of September and continued to outpace market growth. With moving annual total MAT growth of 9.4% compared to IPM 7.8% growth. During the quarter, we launched 11 new brands in addition to the acquired Stugeron portfolio, further strengthening our domestic franchise. Our PSAI business reported revenue of $108 million in Q2 FY '26, registering growth of 8% year-over-year and 13% sequentially. During the quarter, we filed 37 Drug Master Files globally. We have further sharpened our R&D focus on programs that offer clear differentiation and strong commercial potential in alignment with our strategic priorities. We have rationalized few pipeline products that face extended regulatory uncertainty limited market opportunity or increasing competitive intensity. Our focus is anchored around company generic GLP-1 molecules and biosimilar. In addition, we are actively pursuing strategic collaboration and partnership to enhance our innovation ecosystem, accelerate development time lines and expand our capabilities in emerging therapeutic areas. During the quarter, we completed 43 global generic filings. For the quarters ahead, we are focused on robust execution to deliver on our strategic priority, meaning grow our base business, focus on our key pipeline assets like semaglutide and abatacept improving operational efficiency and productivity across the value chain. And we continue to actively explore partnership and value-accretive acquisitions that support our strategic vision and innovation momentum while enhancing our capabilities. These efforts are aimed to driving sustainable growth and delivering long-term value for our stakeholders. And with that, I will welcome your thoughts and questions as we move into the QA session. Operator: [Operator Instructions] The first question is from the line of Neha Manpuria from Bank of America. Neha Manpuria: My first question is on the U.S. business. While I know you talked about product specific erosion and REVLIMID quarter-on-quarter. One, should we expect any REVLIMID all in the third quarter? And second question on the U.S. business. You've seen a product discontinuation this year. Last year, we saw NuvaRing being discontinued. You continue to spend a fair bit on R&D. How should we think about the U.S. product pipeline? Because if I look at Reddy's approval history while we have got a fair bit of approvals, we haven't really got any meaningful large launch approval outside of REVLIMID and probably Vascepa was the last one that I can think about. So I just wanted your thoughts on how we should look at some of these more meaningful launches coming through now that conjugated estrogen has been discontinued. How do you think about the U.S. growth. Erez Israeli: So just, Neha, I think there was some thing with the voice. Just the beginning of your question, I got the rest of it. Since the beginning of the question, I could not hear it sorry about it. Neha Manpuria: Yes. No problem. I was asking that, is it fair to assume that there would be no REVLIMID limit in the third quarter? Or would we still see some bits of REVLIMID as a part of the settlement in the third quarter? Erez Israeli: So we should assume that we will have and -- but less than what was in this quarter. So -- and likely that it's either going to be the last quarter or maybe some tail that will go into Q4. But by and large, Q3 will still have REVLIMID in it. On the R&D question, first, I agree with you. We -- there were certain products that we tried for a while to get an approval. And as we did not get, we kind of pull the trigger on them. We kind of gave ourselves a certain time lines that if we don't we just move on. As we speak, the main products in the United States as related to R&D will be the biosimilars I think the main products in terms of significant growth in the United, which will be abatacept. On the small molecules, we do have meaningful products that are coming primarily peptides, long-acting peptides. Some of them we missed the first to file, but they are still meaningful. The overall pipeline is about 100 products as we speak, we will tick in the pipeline. And out of that about, I would say, around 20 that will be considered what we call the complex generics. But as we discussed many times in the past, it's hard to predict on this product. So your observation is correct. What we absolutely did is that we're relooking our portfolio, and we are focusing on products that we believe that we have a good chance to be first to market as time will come. Neha Manpuria: Understood, Erez. Erez, if I were to just extend this question then to, let's say, a sema filing or abatacept filing. What gives you confidence on getting approvals on those filings? Even in case of abatacept, now that Bachupally, we have got a CRL on rituximab. I'm just wondering if -- I know there's always risk to approval, but how should we think about management's confidence in getting approval for sema in Canada or next year as we think about the abatacept? Erez Israeli: So on abatacept, let's go with abatacept and I'll go to sema after. On abatacept, we are supposed to submit the BLA, and I'm very confident about it in the end of December of this year -- calendar year, end of end of December 2025, which is exactly the date that we aim to. Here, I have a high level of confidence. It's also important to us because it will open the door for us to launch also the subcu, which is the more important SKU at the beginning of 2028, subject to settlement, of course, of the IP. The confidence comes that we are not doing only with Bachupally, but we increased the chance because we will have also for the United States, CMO that will make it, the product. I'm less concerned about the European approval because Bachupally was already approved by European, but not yet by the U.S. FDA. And also, in the case of the U.S., we don't yet know what will happen with the tariff on biologics, while we feel now more comfortable giving all the press that likely there will be no tariff. We need to see when the guidelines will come. But as a balance sheet, we don't know, and we felt the need to have a backup also there. So we will -- if we will not be able to launch from Bachupally we'll be able to launch from the United States. And this will enable us also a potential challenge, if will happen on tariff. On the sema, we are expecting the feedback from Health Canada in the next few weeks. It can be any day, but it can be within the next few weeks. And we know if we get that efficiency or not. I'm certain that we will launch all the 12 million pens that I discussed with you last time, obviously, if it will not be in Canada, it will be in other places. So the launch is going to happen. The question, of course, if we get a CRL or we'll get something in Canada, obviously, the pricing may be different. But I'm confident that we will sell the product. The question is which market they would come. Can I guarantee that we'll not get the CRL, though I cannot, I wish. Operator: The next question is from the line of Damayanti Kerai from HSBC. Damayanti Kerai: My first question is again on semaglutide. So Erez, can you remind us the legal status, which was underway in India, litigation with Novo on semaglutide? Erez Israeli: Sure. We are challenging the patents in India. And it's in the -- currently in the high court in Delhi. All the hearings were done, and we are waiting for the decision of the judge. We don't know exactly when she will submit her decisions. And likely that we ever will not like the decision will appeal. So likely that it will continue after but at this stage, the hearing are done, and we are waiting for the outcome of the decision of the judge. Damayanti Kerai: Sure. And just to clarify, this outcome should not be impacting your plans in the ex-India market, right? The markets outside of India? Erez Israeli: Depends what will be the decision of the judge. What we are seeking, we believe that the patent is invalid. And in any case, as we speak today, by the decision that was done in May, we are -- we can produce an export, not to do it in India, but the court in the decision back in May on the -- allowed us to continue to make the product and to export it. In terms of -- in the current state, we can launch in India only at patent expiration, which is right now dated to March '26. Damayanti Kerai: Okay. That's clear. My second question is going back to abatacept. So just clarifying earlier discussions. So did you mention you have a CMO in place to manufacture that product in case Bachupally takes some time to get the clearance from the FDA? Or what is the arrangement? Like what kind of risk mitigation strategies are in place? Erez Israeli: Sure, correct. So we will have -- I did mention that we will have a CMO in the United States to produce abatacept, in addition to our capacity that is built in Bachupally, India and it's mitigating 3 risks. Damayanti Kerai: Hello. Erez Israeli: Can you hear me now? Damayanti Kerai: Yes, I can hear you now. Erez Israeli: So it's addressing 3 risks. One is in a case that it will be again, CRL or any regulatory challenges that we will be able to launch from already approved FDA sites in America. Second, if there will be any tariff or any other potential restriction or regulatory burden assets related to make or sell biosimilar in the United States. And number three, to increase capacity. It's allowing us more capacity in the case that we will get nice market share. So we're absolutely going with the CMO option in the United States. Damayanti Kerai: Okay. That's helpful. And my last question is for semaglutide, I understand you're working on your in-house fill and finish capacity. So can you share the update on that project? Erez Israeli: It's going on. It will not impact the launches in the next 12 months because by the time that we will have to submit and qualify it, it will be post approval in all the countries. So the -- working with the partner that we have today. This is the famous 12 million units that we discussed in the past. This is still relevant and maybe with some upside. But right now, I think we are about the same range. And this will happen with the current partners, but we will have two cartridge lines in FTO-11. And this will be significantly expanded capacity to many, many more millions. But let's see that we let's say, in that respect, it can go to even up to $50 million, but it's all theoretical at this stage. It will be relevant not for the next 12 months, but for the period after that. Operator: The next question is from the line of Dr. Bino Pathiparampil from Elara Capital. Bino Pathiparampil: First question on the India market, India business had a strong growth in the quarter. Is there anything in particular that helped you? And was there any impact related to the GST disruption in the quarter? Erez Israeli: Yes. So we manage well the GST. So the GST was not a significant obstacle for us. We manage that well. It's just execution of our strategy, the way we discussed it for many quarters. We identify the therapeutic areas that we want to focus on. And we made several inorganic moves to buy brands that allow us relevant access. So as well as licensing of innovative products. and just working well and it's likely to continue. We said all along that we believe that innovation will allow us to outpace the market, and we feel very, very comfortable now about that strategy. I think more and more people see that now. Bino Pathiparampil: Understood. You have recently done this acquisition of the Stugeron brand from Janssen. Can you give some idea about what sort of revenues does that business have in its acquired form. Erez Israeli: So it's 100 plus in terms of size, something like that. Bino Pathiparampil: $100 million? Erez Israeli: No, INR 100 Cr, this is in India. Richa Periwal: In Delhi, in India. Erez Israeli: Yes, India. Bino Pathiparampil: That is India. Richa Periwal: Bino, India and emerging markets put together. Bino Pathiparampil: Is INR 100 Cr. And for that, if I'm right, you paid USD 15 million. Erez Israeli: Correct. Bino Pathiparampil: Okay. Understood. And any benefit of that in the growth for the quarter is some 20 days of that part of India business? Mannam Venkatanarasimham: Not much. Erez Israeli: No, no, it was very... Mannam Venkatanarasimham: Insignificant. Erez Israeli: Yes. You can take it as no real impact. Bino Pathiparampil: Got it. And my last question on the margin outlook beyond REVLIMID. Of course, we keep asking this every quarter. But if you look at current quarter, even with Lenalidomide, if we remove the other income from the EBITDA margin, it is below 23% and with Lenalidomide further coming down in the next quarters, it may fall even further. So do you still fully stick that for full year FY '27, you will get back to 25% EBITDA margin? Erez Israeli: I'm not sure how did you get to the 23%. I'm aware of 26.7%. But nevermind. Yes, absolutely. Lenalidomide is with higher margin, everybody knows that. And naturally, it's impacting and anticipating that we are discussing for 4 years. We knew exactly when Lena is going to go. And it's happening exactly as we discussed. We are addressing it with a lever that I mentioned, growing the base, contain the cost of BD and focus on these key products. I absolutely believe and I'm maintaining it that in the next 2 years we will absolutely get back to the growth and to the margins. The question is, what will be the journey in this point of time. The more sema we will have, the more growth we'll have, the more BD we'll have, we can actually do it much, much faster. So we are maintaining our commitment for the margins, we are maintaining our commitment for growth. The question is what will be the scenarios between sema, abatacept and BD primarily. And of course, because on the levers that we can control better, we are very confident that this is the base and the cost. Operator: The next question is from the line of Saion Mukherjee from Nomura. Saion Mukherjee: My first question is on the U.S.-based business. There has been a lot of price erosion over the last 3, 4 years since you have launched REVLIMID how is the base today versus, let's say, before REVLIMID? Is it up, down? If you can give some color so that we get a sense where we should assume the number post-REVLIMID? Erez Israeli: Sure. So it went down. It went down primarily not so much on volume. There were some products, about I think 5 that faced competition and price erosion, and that's what took it down. It's not significantly down. Most of the decline that you see is Lena, Lenalidomide but if you want to compare, it is done. Saion Mukherjee: And do you see it sort of stabilizing now from the current level? Or do you think there is scope for further price erosion. And if you can just give some color on the pricing dynamics in the U.S. at this point? Anything has changed? Erez Israeli: No, no change. I think it's stabilized. And I believe that it stabilized also for a while. We saw the products here and there but yes, I don't foresee additional trends like that in the coming quarters. On the base products. The erosion that will be will be on some of the launch products, the products that we launched, those can still face erosion because not all of them, what we call exhausted their potential erosion but it's insignificant as we speak. Saion Mukherjee: Okay. My second question is on sema, this $12 million that you mentioned, you feel confident about selling. So if not in Canada, where will this volume be absorbed in your view, which market. Erez Israeli: Sure. So we are going to either directly or to partners going to obtain approval in the next, let's say, 12 to 15 months in 87 countries, most of them are very small. The notable countries besides Canada will be India, Brazil, Turkey. And then we have partners that are selling in several countries of Latin America. So I cannot highlight a particular market and also in Asia. We have also B2B partners that also preparing their own launches, and we have partners on both the API as well as [indiscernible]. So I believe that the main markets that I mentioned can take, let's say, the lion's share of this quantity. Depends, of course, on the success and how -- and the date that we will actually launch. And the rest will be taken by the B2B parties. Also, the markets that I mentioned are divided to 2 types of countries. The COPP countries and the non-COPP countries. So it will be a certain sequence in which it will come to play. So far, and the demands that we have, we have already just the orders that we are discussing and gives me confidence that if the approvals will come that we'll be able to sell that, yes. Saion Mukherjee: Erez, if I can just add, like this is for 2026. Now what about 2027, how does this 12 million move up in 2027 in your estimate? Erez Israeli: So it can move up even to -- for sure to 15, but it can move up even further than that. It depends on the evolution of the product. and the qualification of FTO-11, which will significantly ramp up the capacity will be towards the second half of 2027. I'm talking about calendar not FY. Operator: The next question is from the line of Madhav Marda from Fidelity International. Madhav Marda: I wanted to understand a bit on the -- I think we've delivered double-digit growth in the ex-U.S. markets. Are we confident of maintaining this trajectory over the next 1 or 2 years? That's my first question. Erez Israeli: Yes, very much. Madhav Marda: Okay. And could you highlight any key drivers? Like do we have like new launches lined up, what can help that steady growth? Because India especially 13% was quite a good number, so ahead of market. So just wanted to understand what could drive it. Erez Israeli: So each one of the markets, we have different drivers. So if you want, I can highlight the markets for you the main markets. In Europe, it's primarily a combination of the NRT business, the leverage of the U.S. portfolio in which the pipeline is coming up and the launch of biosimilar rituximab, denosumab and bevacizumab that we had in the U.K. In the case of India, it's obviously the -- it's primarily our inorganic move that we made on innovation and the acquisitions of brands that we did in addition to a normal growth that we had on the legacy pipeline. So I always mentioned that in India, our legacy pipeline will be like the market and what we are adding value is in the places in which we are bringing products better than the standard of care. This is the strategy and now that we are accumulating enough of those is starting to be shown. It took us, I say, I'm sure we all remember quite a few years to build that. In the emerging markets, it's primarily again leverage of the generic business, especially on injectable and oncology as well as biologics, all of our biologics is going to emerging markets. And in each one of them, we have SLA depends on the market, selective innovation that we also licensed as part of our deal with India. In the case of Russia, it's primarily our legacy brands as well as some licensing and acquisition that we made in Russia on both the OTC as well as the as the Rx. API is primarily the focus on peptides. And on both -- there is also a lot of demand for the peptides on the API side. I hope I covered the markets for you if I forgot something, please... Madhav Marda: Make sense, and my second question is just on abatacept, you said we can submit the BLA by end of calendar year '25. So the Phase III trial, I'm assuming is complete now, and we're expecting sort of an update on that in terms of whether that's completed successfully? Or how should we think about the progress on the trial itself. Erez Israeli: It should be completed very, very soon and so far so good. Madhav Marda: Okay. Okay. Understood. Got it. And if you file on time and so basically, the approval will be in line with the expiry in early calendar year '27. That's how we should think about it. Erez Israeli: That's the idea, yes. Operator: The next question is from the line of Dr. Kunal Dhamesha from Macquarie Capital. Kunal Dhamesha: Just the first one on abatacept. So basically, the first filing that we'll do would be for IB version, right? Erez Israeli: Correct. Kunal Dhamesha: And what kind of the further development, the subcutaneous version would require? Erez Israeli: Can you repeat, sorry? Kunal Dhamesha: For the subcutaneous version what further developments... Erez Israeli: There is another set of tests that allow us to submit the subcu, but it doesn't require additional study. Kunal Dhamesha: Okay. So no Phase III, but some form of characterization, et cetera. Erez Israeli: Correct. Kunal Dhamesha: And the first filing that we'll do by December 2025. Would that include Bachupally as a manufacturing source or the CMO as a manufacturing source? Erez Israeli: Bachupally will start. And the CMO will be a tech transfer from Bachupally. Kunal Dhamesha: Okay. So then it might -- so Bachupally would be still the keystone for us in a way. Erez Israeli: Yes. But in the United States, I absolutely building that we will be able to be, especially for the subcu, the CMO will be enabled as day 1 launch. The mitigation that we discussed before. Kunal Dhamesha: Sure. And the second one on semaglutide Canada. So basically, let's say, over the last -- since we talked in the earlier Q1 earnings call. Your expectation about the market formation has that changed now on the day of patent expiry? Or how should we think about it given that there are more filers whose filings have been accepted by the regulatory authority in Canada? Erez Israeli: No. So nothing changed, at least in my perspective, just to make sure that, that we are expecting in the market to be competitive. There will be multiple players. The question is just the day they will get approval. So it's all about that. That did not change. I believe that the market formation will be as expected. Will -- once there is an approval, there is an application for reimbursement. And according to the rules in Canada of the pricing, that's how the market will play. So nothing changed in the way I think the game will be played is now it's about obtaining approval and obtaining a good outcome from the litigation in India. Kunal Dhamesha: Sure. And lastly, on India for sema, when I look at -- we have basically conducted trial for Ozempic and Rybelsus. So does that enable us to launch the weight loss version, which is Wegovy generic as well? Erez Israeli: For Wegovy we'll have to have an application by itself. We'll have to... Kunal Dhamesha: It would be a separate application? Erez Israeli: It will be a separate. Operator: The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services. Tushar Manudhane: Sir, just on a steady, robust traction of biologics across European markets and Indian market, if you could just highlight how much has been the total biologic sales across different markets on an annualized basis to date. Erez Israeli: I'm sorry, It's something and your voices is too low. Just to make sure you asked how our sales evolve in India and Europe, that's what they asked, the question is. Tushar Manudhane: Biologic sales, cumulative biologic sales across different markets. Erez Israeli: The market or us, I'm sorry.[indiscernible] so we launched in Europe Hopefully, I'm answering it correctly. We launched in the Europe bevacizumab and recently rituximab in multiple countries, and we will increase the numbers of the countries as time goes by. And this is after we got the approval, the recent approval for rituximab for Europe. In India and emerging markets, we were always there. So it is going well. In the main program that we will launch in Europe will be denosumab and abatacept. This is the main pipeline. The same product, obviously, will be launched in India and emerging markets. But in India, we'll also have pembro as well as nivo. So that's right now the plans in those countries. Tushar Manudhane: And sir, with respect to rituximab, now that we are thinking of having a CMO, will that require let's say, at least the stability data from CMO side and hence maybe more time to sort of get through the regulatory process. Erez Israeli: The CMO that I mentioned is for abatacept, primarily for the subcu and it will require a tech transfer as well as stability. But we believe that we will be able to be ready for the big quantities, which will be in the beginning of calendar '28. So we should be good by then. Tushar Manudhane: Understood. And just lastly, on the PSAI segment, where there has been improvement in the gross margin quarter-over-quarter, while we are still lower than the historical gross margin but if you can just help understand in terms of the current gross margin and how to think about it over the next 1 to 2 years? Mannam Venkatanarasimham: So we expect, I think, going forward, PSA gross margin range of 20% to 25%. Tushar Manudhane: Compared to 15% currently, right? Mannam Venkatanarasimham: No, this quarter is at 18%. And because I think here, based on the product mix and then I think leverage of the all the overheads and everywhere. I think the range you can expect then going forward, 20%, 25% PSA gross margin. Tushar Manudhane: Got it. And you -- there was an earlier comment of peptide sales within PSA. So if you could quantify how much has that been? Erez Israeli: We build a capacity of up to 800 kg. Naturally, we are not even close right now to this level and right now, it's very small, but it will grow as it will come it. Operator: The next question is from the Kunal Randeria from Axis Capital. Kunal Randeria: So firstly, I would like to understand how your R&D will take shape given that you're developing a few biosimilars like pembrolizumab and daratumumab and of your R&D budget, how much you would be earmarking for biosimilars and Aurigene. So basically, your non-generic business. Erez Israeli: So just to clarify, daratumumab, we are now developing. It's a product that we license from Helios from a Chinese company. Denosumab was developed by Alvotech, and we have a partnership with them. And so in that respect, the main products that are done internally is still abatacept that we basically finished the clinic of it. As you can see, the R&D is about 7% right now of the sales and likely that it will stay in this range for now. Kunal Randeria: Sure, sure. And secondly, again on semaglutide. So do you foresee a situation where the market may not turn out to be as favorable as you think in Canada because besides the number of filers, which are increasing by the day, there are perhaps risks. Let's say, from a compounding pharmacy, which is intending to enter Canada and even the innovator has seen volume pressure in several markets. So there might be a situation where they are aggressive on pricing. So -- is there a risk of the market deterioration? Erez Israeli: First of all, I mentioned all along, I think that Canada market will be competitive with multiple players. So I also now in 33 years within pharmaceuticals, I learned not to forecast launch. I always mentioned that it can range from 0 to many, many millions of dollars. So -- but yes, the answer is I anticipate that Canada is going to be very, very competitive. I anticipate that Canada will be very, very competitive. As players will get an approval. Kunal Randeria: Right. And if I can, if you don't mind, ask is there -- I mean, any particular price erosion that we can see from the current levels, maybe 80%, 85% kind of price erosion that will eventually settle down to? Erez Israeli: I have no clue. I wish I do. Operator: [Operator Instructions] The next question is from the line of Vivek Agrawal from Citi. Vivek Agrawal: My question is related to NRT and branded markets like India, EM. So the growth was quite decent across the board and really a commendable job. So just want to understand how to look at the investment that you are making behind these markets? Or are these are sustainable investments or, let's say, it can be cut down in future? Erez Israeli: First of all, I don't think you see the investment in emerging markets. As we speak, we got the market in certain waves. And the markets that we did not get, we are still managed by Haleon, and we are paying them a fee for doing that for us. So naturally, as market is coming to us, the fee for Haleon is going. And therefore, it's -- the margins are going up because we don't need to pay them. And we are starting to invest in the market that we invest are the only markets that we've got the beginning, meaning U.K. and Scandinavia. So that's -- so we -- right now, my base is not yet -- it's absolutely not a steady state. We have 2 more waves to go and before we go. What I can tell that so far, it's exceeding our expectation both on the pace of growth as well as on the margin. In both cases, it's much better than what we presented internally when we approved the project. So it's a kind of a good start, I would call it. Vivek Agrawal: I understand, Erez. And just a related question here. It's on OpEx basically. So on absolute basis, how we should look at the OpEx in FY '27. So can it continue to increase, let's say, from '26 level, maybe relatively at a lower pace? Or is there any possibility of absolute decline in OpEx, let's say, in '27 compared to FY '26. Mannam Venkatanarasimham: So Vivek, if you look this quarter, we have at 30%. And then if you adjust the one-off, I think we are close to 29.1% at somewhere and then for any modeling, I think we'll be in the zone of like 28% to 30%. Operator: The next question is from the line of Dr. Harith Ahamed from Avendus Spark. Harith Mohammed: Just on rituximab again. So given this is the second successful PAI and CRL that we've had, are there any specific challenges related to the speciality? I'm asking also because this is a biologics facility and our track record, otherwise on compliance has been quite excellent in recent years. Erez Israeli: So there is nothing specific per se. We -- it's all obviously, as this is a sterile plant, we have -- we've got queries that are related to the nature of the site. We believe it's addressable. In a case that they will come with another set of questions. What we will do is that we will submit. We have an alternate line as a backup, which is FFF 2 that we feel that FFF 2 is a fill and finish or for those that are on the line. So we may need to move the product from 1 line to another in a case that it will not come well on the first one. So it's primarily related to the fact that the first line that we have FFF 1 is some of the design of it raised those queries and also last time we are addressing it. But if it will not work, we'll have to move to FFM 2. I'm not worried on the not getting approval. I'm certain that we get approval. Just to remind all of us, rituximab for us was deliberately chosen in order to start the regulatory process on time to make sure that by the time that abatacept will come, Bachupally will face those kind of stuff. And this is -- it's serving its purpose and hopefully, we can absorb it soon. Harith Mohammed: Okay. A quick one on tocilizumab biosimilar. It's been a while since we got an update on that one. Can you share the status of that program? Erez Israeli: We don't -- we are not planning to have it as a global product. We will have it only for India. Harith Mohammed: Yes. And then one quick follow-up on the previous question. The cost reductions that we have alluded to in the past, 500, 600 basis points of reductions. Are these reflecting to a small extent in the first half numbers? Or should we wait for the coming quarters for this to actually the numbers. Erez Israeli: Yes, I believe so. You can see that despite the fact that Lena is going down. We are maintaining our reasonable numbers. So it's absolutely a reflection of those mitigations. Of course, the full force of it will come as quarters will come. And we have also shared the numbers. So we believe that with SG&A of around 28% and R&D of around 7%. It comes to the famous 5% to 7% that we set, and there is even opportunity for more if we need to. So we maintain that we will -- we are very, very sensitive to the margins. And naturally, we're discussing it every time, and we will absolutely be really disciplined on those. Operator: [Operator Instructions] Next is Gautam from Leo Capital. Unknown Analyst: My question was on the GLP-1. Do you only plan to do fill and finish or do you also manufacture API drug substances. How much manufacturing capacity do you have? And which markets are we targeting for this? Erez Israeli: So we have CTO-6 making the API. I mentioned that the overall potential of all the investments that we put can reach even 800 Kg, but we are very, very far from this output at this stage. We've don't need also. Just that -- but we are preparing it not just for semaglutide, liraglutide, but also for 40-something peptides that we identified and we are going to develop either by ourself or with the partners in the next coming years. So right now, we will have sufficient capacity for the demand that we'll have for the liraglutide semaglutide in the submissions to the relevant authorities of all the peptides that will be of patents, including tirzepatide that will be obviously an R&D project, but it's very important to submit it in relevant markets. And we are also making the product, we are planning to make it in FTO-11 and also with the partners. In general, the approach will be that we will have for every important product in-house capabilities as well as partnership capabilities for all kinds of risk mitigations. Unknown Analyst: Okay. So can you just like expand on the fill and finish also what's the capacity we have and the status on that and the markets we are supplying for that? Erez Israeli: I think we discussed it. We have 12 million pens for the semaglutide with the partner. We can -- and we have 2 lines of cartridge that will be an FTO-11, they can reach even 50 million, but right now it's Theoretical. The cartridge lines are on the way and they will be assembled and will be ready, not for these 12 months, but after. Operator: The last question for today comes from Sumit Gupta from Centrum Capital. Suma, please go ahead. Sumit Gupta: Yes. So just one question on the Indian business. So sir, can you segregate the volume and price growth? Erez Israeli: The volume and the price. Mannam Venkatanarasimham: So Sumit, the price is like in the range of normal 5%, and then the balance growth is like mainly from the new products and volumes. Sumit Gupta: Okay. So going forward, like should we expect this to continue? Or can we expect any significant growth in volumes also? Erez Israeli: You should expect to continue, we will have new products volume, and the price will be in that range that MVN shared with you. Operator: We reached the end of the call. I now hand the call over to Richa for the closing comments. Richa Periwal: Thank you all for joining us today. We truly appreciate your continued interest in Dr. Reddy's Laboratories and the time you've taken to engage with our Q2 FY '26 results. If you have any further questions or need any additional information, please do not hesitate to contact the Investor Relations team. Have a great day. Stay safe and take care. Erez Israeli: Thank you.
Operator: Good day, and welcome our quarter 2 fiscal year 2026 [indiscernible] Limited. I'm Aishwarya Sitharam and I'm part of the Dr. Reddy's Investor Relations team. [Operator Instructions] I now hand over the conference to Richa Periwal. Richa Periwal: Thanks, Aishwarya. Good morning, good evening, and a warm welcome to all. We hope you had a joyful and safe Diwali celebrations with your loved ones. Thank you for joining us for Dr. Reddy's Laboratories Q2 FY '26 Earnings Conference Call. We truly value your time and participation. Joining us today are members of the leadership team. Mr. Erez Israeli, CEO; Mr. MVN, our CFO; and the Investor Relations team. Earlier today, we released our quarterly financial results. These are now available on your website for your reference. We will begin today's session with MVN providing an overview of our financial performance for the quarter. Following that, Erez will share his insights on key business highlights and our strategic outlook. We will then open the floor for questions. Before we proceed, please note that this call is the proprietary material of Dr. Reddy's Laboratories and may not be rebroadcasted or quoted in any media or public forum without prior written consent from the company. This session is being recorded, and both the audio and the transcript will be made available on our website shortly. All commentary and analysis during this call are based on our IFRS consolidated financial statements. Please note that certain non-GAAP financial measures may also be discussed. Reconciliations to the corresponding GAAP measures are included in our press release. Finally, a reminder that the safe harbor provisions outlined in today's press release apply to all forward-looking statements made during the call. With that, let me now hand it over to MVN to present the financial highlights for the quarter. Over to you, MVN. Mannam Venkatanarasimham: Thank you, Richa, and Aishwarya, good evening, and a warm welcome to all. Thank you for joining us on our Q2 FY '26 earnings call. I'm delighted to take you through our financial performance for the quarter. We delivered a steady performance in Q2, achieving near double-digit growth despite lower Lenalidomide renamed sales. The acquired consumer health care business supported the top line momentum. EBITDA margin stood at 26.7% for the quarter. All financial figures in this section are translated into U.S. dollars using a convenience translation rate of INR 88.78, the exchange rate prevailing as of September 30, 2025. Consolidated revenue for the quarter stood at INR 8,805 crores which is USD 992 million, a growth of 9.8% year-over-year and 3% on sequential basis. While U.S generics faced product specific price erosion and lower Lenalidomide sales, overall growth was supported by the integration of consumer health care business and double-digit growth delivery across other markets aided by favorable ForEx. Consolidated gross profit margin for the quarter was 54.7%, a decrease of 492 basis points year-over-year and 223 basis points sequentially. The decrease in margins during the quarter was due to lower Lenalidomide sales and product-specific price erosion in the U.S. generics. Onetime inventory provisions from the discontinuation of the certain pipeline products due to technical challenges in the lower operating leverage in PSAI business. Gross margin was 59.1% for global generics and 18% for PSAI. The SG&A spend for the quarter was INR 2,644 crores, which is USD 298 million, an increase of 15% on year-over-year and 3% on a sequential basis. The year-over-year increase was primarily driven by focused investments in the acquired NRT consumer healthcare business and in branded generics, which are key to driving sustainable growth. SG&A for the quarter includes a onetime provision of INR 70 crores for a VAT liability in one of our subsidiaries and charges related to a discontinued pipeline product. SG&A spend accounted for 30% of revenues during the quarter and was higher by 132 basis points year-over-year and similar levels on a sequential basis. Excluding the one-offs related to VAT provision, SG&A expense as a percentage of revenues was at 29.2% in Q2 FY '26. The R&D spend for the quarter was INR 620 crores, which is USD 70 million, a decline of 15% year-over-year. And broadly, flat sequentially. The decrease was due to reduced development spend on biosimilars during the quarter as major investments for abatacept have already been completed. We continue to make focused R&D investments in complex generics, APIs and biosimilar pipeline while pursuing strategic collaborations to bring innovative assets that support sustainable long-term growth. The R&D spend was 7% of revenues for the quarter, lower by 203 basis points year-over-year and 26 basis points on a sequential basis. Other operating income for the quarter was INR 267 crores, higher than INR 98 crores in the corresponding quarter last year. This was mainly on account of product-related IP settlement income in the United States and onetime reversal of INR 88 crores in liabilities related to discontinuation of the pipeline product. EBITDA for the quarter, inclusive of other income, stood at INR 2,351 crores which is USD 265 million, an increase of 3% on year-over-year and a sequential basis. The EBITDA margin stood at 26.7%, lowered by 174 basis points on year-over-year and flat sequentially. Adjusting for the onetime VAT provision mentioned earlier, the underlying EBITDA margin was at 27.5%. Impairment charge was INR 66 crores, including INR 54 crores for property, plant and equipment at our Middleburg facility following the discontinuation of the pipeline product, conjugated estrogen. The remaining charge pertains to product related to intangibles impacted by adverse market conditions. The net finance income for the quarter was lower at INR 77 crores as compared to INR 156 crores for the same quarter last year. The decline in net finance income reflects lower returns from financial investment following the deployment of cash reserves towards acquisition of consumer health care business and other intangible assets in line with our capital allocation strategy. As a result, profit before tax for the quarter stood at INR 1,835 crores, that is USD 207 million. PBT as a percentage revenues was at 20.8% on an adjusted basis, excluding the onetime VAT provision, the PBT margin was at 21.6%. The effective tax rate for the quarter was at 22.2% compared to 30% in the corresponding period last year. The ETR for Q2 FY '26 was lower primarily due to favorable jurisdictional mix for the quarter. The ETR in the corresponding period last year was higher due to reversal of previously recognized deferred tax assets related to land indexation following amendments introduced through the Finance Act 2024 to Income-Tax Act 1961. Profit after tax attributable to the equity holders of the parent for the quarter stood at INR 1,437 crores, which is USD 162 million, a growth of 14% on a year-over-year, flat on Q-o-Q basis. This is at 16.3% of revenues, Diluted EPS for the quarter is INR 17.25. Operating working capital as of 30th September 2025 was INR 13,331 crores, which is in USD 1.5 billion, an increase of INR 3 crores, which is like USD 0.4 million over 30th June 2025. CapEx cash outflow for the quarter stood at INR 511 crores, which is INR 58 million. Free cash flow generated during the quarter was INR 1,046 crores, which is USD 118 million. As of September 30, we have a net cash surplus of INR 2,751 crores which is like USD 310 million. Foreign currency cash flow hedges executed through derivative instruments during the period are as follows: USD 502 million hedged using combination of forward structured derivative contracts scheduled to mature through December 2026. These contracts are hedged at the rate of INR 86.9 per U.S. dollar, RUB 4.28 billion hedged at a fixed rate of 1.03 per Russian ruble with maturity falling within next 4 months. With this, I request Erez to take us through the... Erez Israeli: Thank you, MVN. Good day, everyone, and thank you for joining us today. We are pleased to report a consistent performance in Q2 FY '26, marked by a double-digit growth and steady profitability. This performance was driven by contributions across all key markets except for the U.S. generic business. During the quarter, we continued to make a meaningful progress across our strategic priorities namely growing the base, scaling our presence in consumer health care, innovative therapies and biosimilars. We advanced our key pipeline programs, including semaglutide and abatacept. In addition, we have been driving initiatives to enhance cost efficiencies across our operations while simultaneously pursuing business development activity to support sustainable growth in the coming quarters. Let me now walk you through some of the key highlights of the quarter. Revenue grew by 10% year-on-year driven by broad-based growth across businesses, benefiting from acquired consumer health care and supported by a favorable ForEx. Growth was partially offset by lower contribution from Lenalidomide and some price erosion in the U.S. in some select products. The EBITDA margin stood at 26.7%. The ROCE for the quarter was around 22%. The cash flow from operation was utilized to our plant expansions and acquisition of strategic brands and securing rights for distribution in defined markets. We closed the quarter with net cash surplus of $310 million reinforcing the strength of our balance sheet. We strengthened our innovation-led portfolio to strategic collaboration and launches. We entered the anti-vertigo segment with the acquisition of Stugeron and related brands across 18 markets in APAC and EMEA from Janssen Pharmaceutica. In India, we strengthened our gastrointestinal portfolio with the launch of 2 novel drugs Tegoprazan under the brand name of PCAB and Linaclotide under the brand name of Colozo. In partnership with Unitaid, Clinton Health Access Initiative & Wits RHI, we are working to make Lenacapavir, a long-acting HIV prevention tool accessible and affordable in low and middle-income countries. We continue to make progress on our key pipeline products. The subject expert committee, the SEC under Central Drug Standard Control Organization has recommended approval for semaglutide injection in India. We received a positive opinion from European Medicines Agency Committee for medicinal products for human use for denosumab biosimilar candidate. The U.S. FDA accepted our investigational new drug's IND application for COYA 302, a partner novel drug for the treatment patients with ALS. We also made a steady progress on integrating the acquired nicotine replacement therapy business. We have successfully integrated 2/3 of the business by value, including Canada, Australia and selected key Western European markets. The next phase will include Southern Europe, Israel and Taiwan. On the regulatory front, several inspections were completed across our global facilities. In September 2025, the U.S. FDA conducted a pre-approval inspection on our Bachupally biologics facility and issued a Form 483 with 5 observations. The agency recently issued a complete response letter in reference to the ongoing resolution of observation pertaining to the biologic license application, the BLA of our rituximab biosimilar candidate. We are actively working to address these observations. The U.S. FDA conclude a GMP inspection at our Mirfield API facility in the U.K., resulting in issuing a Form 483 containing 7 observations. Additionally, our API site CTO-5 in Miryalaguda, in Telangana as well as our Middleburgh facility in New York were classified as VAI following successful GMP inspection by the U.S. FDA. The GMP and pre-approval inspection PAI conducted by the U.S. FDA in July 2025, at our formulation manufacturing facility, FTO-11 has been formally closed. We have received the EIR establishment inspection report with the inspection outcome categorized as VAI. We continue to be recognized for our industry-leading performance in sustainability. We retained our MSCI ESG Rating for A for the second consecutive year. Our ESG Risk Rating from Morningstar Sustainalytics improved from 23.6% to 18.4%, representing a lower ESG risk profile. Our waste management practices were recognized with the Diamond Standard for achieving 99.9% of waste diversion from landfills. Further our formulation facilities at Srikakulam FTO-11 became India's first pharmaceutical facility to receive a Leadership in Energy and Environmental Design, Platinum Certification for existing buildings from U.S. Green Building Council. Let me take -- let me take you through the key business highlights for the quarter. Please note that all financial figures mentioned are reported in their respective local currencies. Our North American generic business generated revenues of $373 million for the quarter, a decline of 16% year-on-year and 7% sequentially. The performance was impacted by price erosion in selected key products, primarily Lenalidomide. During the quarter, we launched 7 new products and expect launch momentum to continue in the second half of the fiscal. Our European business reported revenue of $135 million for the quarter, growth of 150% on a year-to-year basis and 3% on quarter-on-quarter. The year-on-year performance was primarily driven by contribution from the acquired nicotine replacement therapy portfolio and new product launches, which offset the price erosion pressure -- the pricing pressure. Excluding the NRT, the growth was 6% year-on-year and quarter-on-quarter. During the quarter, we launched 8 new generic products across European markets, further strengthening our portfolio. Our emerging market business delivered revenue of INR 1,655 crores in Q2 reflecting a growth of 14% year-on-year and 18% sequentially. Growth was primarily driven by new product launches across markets and aided by favorable ForEx. During the quarter, we introduced 24 new products across multiple countries, reinforcing our commitment to expanding access and strengthening our market presence. Within this segment, our Russia business delivered a growth of 13% year-on-year and 18% sequentially in constant currency terms despite prevailing macroeconomic challenges. Our India business reported revenues of INR 1,578 crores in Q2, delivering a double-digit year-on-year growth of 13% and 7% increase sequentially. This performance was driven by contribution from new product launches, improved pricing and higher volumes. According to IQVIA, we have moved up one place to the 9th position in India pharmaceutical market for the month of September and continued to outpace market growth. With moving annual total MAT growth of 9.4% compared to IPM 7.8% growth. During the quarter, we launched 11 new brands in addition to the acquired Stugeron portfolio, further strengthening our domestic franchise. Our PSAI business reported revenue of $108 million in Q2 FY '26, registering growth of 8% year-over-year and 13% sequentially. During the quarter, we filed 37 Drug Master Files globally. We have further sharpened our R&D focus on programs that offer clear differentiation and strong commercial potential in alignment with our strategic priorities. We have rationalized few pipeline products that face extended regulatory uncertainty limited market opportunity or increasing competitive intensity. Our focus is anchored around company generic GLP-1 molecules and biosimilar. In addition, we are actively pursuing strategic collaboration and partnership to enhance our innovation ecosystem, accelerate development time lines and expand our capabilities in emerging therapeutic areas. During the quarter, we completed 43 global generic filings. For the quarters ahead, we are focused on robust execution to deliver on our strategic priority, meaning grow our base business, focus on our key pipeline assets like semaglutide and abatacept improving operational efficiency and productivity across the value chain. And we continue to actively explore partnership and value-accretive acquisitions that support our strategic vision and innovation momentum while enhancing our capabilities. These efforts are aimed to driving sustainable growth and delivering long-term value for our stakeholders. And with that, I will welcome your thoughts and questions as we move into the QA session. Operator: [Operator Instructions] The first question is from the line of Neha Manpuria from Bank of America. Neha Manpuria: My first question is on the U.S. business. While I know you talked about product specific erosion and REVLIMID quarter-on-quarter. One, should we expect any REVLIMID all in the third quarter? And second question on the U.S. business. You've seen a product discontinuation this year. Last year, we saw NuvaRing being discontinued. You continue to spend a fair bit on R&D. How should we think about the U.S. product pipeline? Because if I look at Reddy's approval history while we have got a fair bit of approvals, we haven't really got any meaningful large launch approval outside of REVLIMID and probably Vascepa was the last one that I can think about. So I just wanted your thoughts on how we should look at some of these more meaningful launches coming through now that conjugated estrogen has been discontinued. How do you think about the U.S. growth. Erez Israeli: So just, Neha, I think there was some thing with the voice. Just the beginning of your question, I got the rest of it. Since the beginning of the question, I could not hear it sorry about it. Neha Manpuria: Yes. No problem. I was asking that, is it fair to assume that there would be no REVLIMID limit in the third quarter? Or would we still see some bits of REVLIMID as a part of the settlement in the third quarter? Erez Israeli: So we should assume that we will have and -- but less than what was in this quarter. So -- and likely that it's either going to be the last quarter or maybe some tail that will go into Q4. But by and large, Q3 will still have REVLIMID in it. On the R&D question, first, I agree with you. We -- there were certain products that we tried for a while to get an approval. And as we did not get, we kind of pull the trigger on them. We kind of gave ourselves a certain time lines that if we don't we just move on. As we speak, the main products in the United States as related to R&D will be the biosimilars I think the main products in terms of significant growth in the United, which will be abatacept. On the small molecules, we do have meaningful products that are coming primarily peptides, long-acting peptides. Some of them we missed the first to file, but they are still meaningful. The overall pipeline is about 100 products as we speak, we will tick in the pipeline. And out of that about, I would say, around 20 that will be considered what we call the complex generics. But as we discussed many times in the past, it's hard to predict on this product. So your observation is correct. What we absolutely did is that we're relooking our portfolio, and we are focusing on products that we believe that we have a good chance to be first to market as time will come. Neha Manpuria: Understood, Erez. Erez, if I were to just extend this question then to, let's say, a sema filing or abatacept filing. What gives you confidence on getting approvals on those filings? Even in case of abatacept, now that Bachupally, we have got a CRL on rituximab. I'm just wondering if -- I know there's always risk to approval, but how should we think about management's confidence in getting approval for sema in Canada or next year as we think about the abatacept? Erez Israeli: So on abatacept, let's go with abatacept and I'll go to sema after. On abatacept, we are supposed to submit the BLA, and I'm very confident about it in the end of December of this year -- calendar year, end of end of December 2025, which is exactly the date that we aim to. Here, I have a high level of confidence. It's also important to us because it will open the door for us to launch also the subcu, which is the more important SKU at the beginning of 2028, subject to settlement, of course, of the IP. The confidence comes that we are not doing only with Bachupally, but we increased the chance because we will have also for the United States, CMO that will make it, the product. I'm less concerned about the European approval because Bachupally was already approved by European, but not yet by the U.S. FDA. And also, in the case of the U.S., we don't yet know what will happen with the tariff on biologics, while we feel now more comfortable giving all the press that likely there will be no tariff. We need to see when the guidelines will come. But as a balance sheet, we don't know, and we felt the need to have a backup also there. So we will -- if we will not be able to launch from Bachupally we'll be able to launch from the United States. And this will enable us also a potential challenge, if will happen on tariff. On the sema, we are expecting the feedback from Health Canada in the next few weeks. It can be any day, but it can be within the next few weeks. And we know if we get that efficiency or not. I'm certain that we will launch all the 12 million pens that I discussed with you last time, obviously, if it will not be in Canada, it will be in other places. So the launch is going to happen. The question, of course, if we get a CRL or we'll get something in Canada, obviously, the pricing may be different. But I'm confident that we will sell the product. The question is which market they would come. Can I guarantee that we'll not get the CRL, though I cannot, I wish. Operator: The next question is from the line of Damayanti Kerai from HSBC. Damayanti Kerai: My first question is again on semaglutide. So Erez, can you remind us the legal status, which was underway in India, litigation with Novo on semaglutide? Erez Israeli: Sure. We are challenging the patents in India. And it's in the -- currently in the high court in Delhi. All the hearings were done, and we are waiting for the decision of the judge. We don't know exactly when she will submit her decisions. And likely that we ever will not like the decision will appeal. So likely that it will continue after but at this stage, the hearing are done, and we are waiting for the outcome of the decision of the judge. Damayanti Kerai: Sure. And just to clarify, this outcome should not be impacting your plans in the ex-India market, right? The markets outside of India? Erez Israeli: Depends what will be the decision of the judge. What we are seeking, we believe that the patent is invalid. And in any case, as we speak today, by the decision that was done in May, we are -- we can produce an export, not to do it in India, but the court in the decision back in May on the -- allowed us to continue to make the product and to export it. In terms of -- in the current state, we can launch in India only at patent expiration, which is right now dated to March '26. Damayanti Kerai: Okay. That's clear. My second question is going back to abatacept. So just clarifying earlier discussions. So did you mention you have a CMO in place to manufacture that product in case Bachupally takes some time to get the clearance from the FDA? Or what is the arrangement? Like what kind of risk mitigation strategies are in place? Erez Israeli: Sure, correct. So we will have -- I did mention that we will have a CMO in the United States to produce abatacept, in addition to our capacity that is built in Bachupally, India and it's mitigating 3 risks. Damayanti Kerai: Hello. Erez Israeli: Can you hear me now? Damayanti Kerai: Yes, I can hear you now. Erez Israeli: So it's addressing 3 risks. One is in a case that it will be again, CRL or any regulatory challenges that we will be able to launch from already approved FDA sites in America. Second, if there will be any tariff or any other potential restriction or regulatory burden assets related to make or sell biosimilar in the United States. And number three, to increase capacity. It's allowing us more capacity in the case that we will get nice market share. So we're absolutely going with the CMO option in the United States. Damayanti Kerai: Okay. That's helpful. And my last question is for semaglutide, I understand you're working on your in-house fill and finish capacity. So can you share the update on that project? Erez Israeli: It's going on. It will not impact the launches in the next 12 months because by the time that we will have to submit and qualify it, it will be post approval in all the countries. So the -- working with the partner that we have today. This is the famous 12 million units that we discussed in the past. This is still relevant and maybe with some upside. But right now, I think we are about the same range. And this will happen with the current partners, but we will have two cartridge lines in FTO-11. And this will be significantly expanded capacity to many, many more millions. But let's see that we let's say, in that respect, it can go to even up to $50 million, but it's all theoretical at this stage. It will be relevant not for the next 12 months, but for the period after that. Operator: The next question is from the line of Dr. Bino Pathiparampil from Elara Capital. Bino Pathiparampil: First question on the India market, India business had a strong growth in the quarter. Is there anything in particular that helped you? And was there any impact related to the GST disruption in the quarter? Erez Israeli: Yes. So we manage well the GST. So the GST was not a significant obstacle for us. We manage that well. It's just execution of our strategy, the way we discussed it for many quarters. We identify the therapeutic areas that we want to focus on. And we made several inorganic moves to buy brands that allow us relevant access. So as well as licensing of innovative products. and just working well and it's likely to continue. We said all along that we believe that innovation will allow us to outpace the market, and we feel very, very comfortable now about that strategy. I think more and more people see that now. Bino Pathiparampil: Understood. You have recently done this acquisition of the Stugeron brand from Janssen. Can you give some idea about what sort of revenues does that business have in its acquired form. Erez Israeli: So it's 100 plus in terms of size, something like that. Bino Pathiparampil: $100 million? Erez Israeli: No, INR 100 Cr, this is in India. Richa Periwal: In Delhi, in India. Erez Israeli: Yes, India. Bino Pathiparampil: That is India. Richa Periwal: Bino, India and emerging markets put together. Bino Pathiparampil: Is INR 100 Cr. And for that, if I'm right, you paid USD 15 million. Erez Israeli: Correct. Bino Pathiparampil: Okay. Understood. And any benefit of that in the growth for the quarter is some 20 days of that part of India business? Mannam Venkatanarasimham: Not much. Erez Israeli: No, no, it was very... Mannam Venkatanarasimham: Insignificant. Erez Israeli: Yes. You can take it as no real impact. Bino Pathiparampil: Got it. And my last question on the margin outlook beyond REVLIMID. Of course, we keep asking this every quarter. But if you look at current quarter, even with Lenalidomide, if we remove the other income from the EBITDA margin, it is below 23% and with Lenalidomide further coming down in the next quarters, it may fall even further. So do you still fully stick that for full year FY '27, you will get back to 25% EBITDA margin? Erez Israeli: I'm not sure how did you get to the 23%. I'm aware of 26.7%. But nevermind. Yes, absolutely. Lenalidomide is with higher margin, everybody knows that. And naturally, it's impacting and anticipating that we are discussing for 4 years. We knew exactly when Lena is going to go. And it's happening exactly as we discussed. We are addressing it with a lever that I mentioned, growing the base, contain the cost of BD and focus on these key products. I absolutely believe and I'm maintaining it that in the next 2 years we will absolutely get back to the growth and to the margins. The question is, what will be the journey in this point of time. The more sema we will have, the more growth we'll have, the more BD we'll have, we can actually do it much, much faster. So we are maintaining our commitment for the margins, we are maintaining our commitment for growth. The question is what will be the scenarios between sema, abatacept and BD primarily. And of course, because on the levers that we can control better, we are very confident that this is the base and the cost. Operator: The next question is from the line of Saion Mukherjee from Nomura. Saion Mukherjee: My first question is on the U.S.-based business. There has been a lot of price erosion over the last 3, 4 years since you have launched REVLIMID how is the base today versus, let's say, before REVLIMID? Is it up, down? If you can give some color so that we get a sense where we should assume the number post-REVLIMID? Erez Israeli: Sure. So it went down. It went down primarily not so much on volume. There were some products, about I think 5 that faced competition and price erosion, and that's what took it down. It's not significantly down. Most of the decline that you see is Lena, Lenalidomide but if you want to compare, it is done. Saion Mukherjee: And do you see it sort of stabilizing now from the current level? Or do you think there is scope for further price erosion. And if you can just give some color on the pricing dynamics in the U.S. at this point? Anything has changed? Erez Israeli: No, no change. I think it's stabilized. And I believe that it stabilized also for a while. We saw the products here and there but yes, I don't foresee additional trends like that in the coming quarters. On the base products. The erosion that will be will be on some of the launch products, the products that we launched, those can still face erosion because not all of them, what we call exhausted their potential erosion but it's insignificant as we speak. Saion Mukherjee: Okay. My second question is on sema, this $12 million that you mentioned, you feel confident about selling. So if not in Canada, where will this volume be absorbed in your view, which market. Erez Israeli: Sure. So we are going to either directly or to partners going to obtain approval in the next, let's say, 12 to 15 months in 87 countries, most of them are very small. The notable countries besides Canada will be India, Brazil, Turkey. And then we have partners that are selling in several countries of Latin America. So I cannot highlight a particular market and also in Asia. We have also B2B partners that also preparing their own launches, and we have partners on both the API as well as [indiscernible]. So I believe that the main markets that I mentioned can take, let's say, the lion's share of this quantity. Depends, of course, on the success and how -- and the date that we will actually launch. And the rest will be taken by the B2B parties. Also, the markets that I mentioned are divided to 2 types of countries. The COPP countries and the non-COPP countries. So it will be a certain sequence in which it will come to play. So far, and the demands that we have, we have already just the orders that we are discussing and gives me confidence that if the approvals will come that we'll be able to sell that, yes. Saion Mukherjee: Erez, if I can just add, like this is for 2026. Now what about 2027, how does this 12 million move up in 2027 in your estimate? Erez Israeli: So it can move up even to -- for sure to 15, but it can move up even further than that. It depends on the evolution of the product. and the qualification of FTO-11, which will significantly ramp up the capacity will be towards the second half of 2027. I'm talking about calendar not FY. Operator: The next question is from the line of Madhav Marda from Fidelity International. Madhav Marda: I wanted to understand a bit on the -- I think we've delivered double-digit growth in the ex-U.S. markets. Are we confident of maintaining this trajectory over the next 1 or 2 years? That's my first question. Erez Israeli: Yes, very much. Madhav Marda: Okay. And could you highlight any key drivers? Like do we have like new launches lined up, what can help that steady growth? Because India especially 13% was quite a good number, so ahead of market. So just wanted to understand what could drive it. Erez Israeli: So each one of the markets, we have different drivers. So if you want, I can highlight the markets for you the main markets. In Europe, it's primarily a combination of the NRT business, the leverage of the U.S. portfolio in which the pipeline is coming up and the launch of biosimilar rituximab, denosumab and bevacizumab that we had in the U.K. In the case of India, it's obviously the -- it's primarily our inorganic move that we made on innovation and the acquisitions of brands that we did in addition to a normal growth that we had on the legacy pipeline. So I always mentioned that in India, our legacy pipeline will be like the market and what we are adding value is in the places in which we are bringing products better than the standard of care. This is the strategy and now that we are accumulating enough of those is starting to be shown. It took us, I say, I'm sure we all remember quite a few years to build that. In the emerging markets, it's primarily again leverage of the generic business, especially on injectable and oncology as well as biologics, all of our biologics is going to emerging markets. And in each one of them, we have SLA depends on the market, selective innovation that we also licensed as part of our deal with India. In the case of Russia, it's primarily our legacy brands as well as some licensing and acquisition that we made in Russia on both the OTC as well as the as the Rx. API is primarily the focus on peptides. And on both -- there is also a lot of demand for the peptides on the API side. I hope I covered the markets for you if I forgot something, please... Madhav Marda: Make sense, and my second question is just on abatacept, you said we can submit the BLA by end of calendar year '25. So the Phase III trial, I'm assuming is complete now, and we're expecting sort of an update on that in terms of whether that's completed successfully? Or how should we think about the progress on the trial itself. Erez Israeli: It should be completed very, very soon and so far so good. Madhav Marda: Okay. Okay. Understood. Got it. And if you file on time and so basically, the approval will be in line with the expiry in early calendar year '27. That's how we should think about it. Erez Israeli: That's the idea, yes. Operator: The next question is from the line of Dr. Kunal Dhamesha from Macquarie Capital. Kunal Dhamesha: Just the first one on abatacept. So basically, the first filing that we'll do would be for IB version, right? Erez Israeli: Correct. Kunal Dhamesha: And what kind of the further development, the subcutaneous version would require? Erez Israeli: Can you repeat, sorry? Kunal Dhamesha: For the subcutaneous version what further developments... Erez Israeli: There is another set of tests that allow us to submit the subcu, but it doesn't require additional study. Kunal Dhamesha: Okay. So no Phase III, but some form of characterization, et cetera. Erez Israeli: Correct. Kunal Dhamesha: And the first filing that we'll do by December 2025. Would that include Bachupally as a manufacturing source or the CMO as a manufacturing source? Erez Israeli: Bachupally will start. And the CMO will be a tech transfer from Bachupally. Kunal Dhamesha: Okay. So then it might -- so Bachupally would be still the keystone for us in a way. Erez Israeli: Yes. But in the United States, I absolutely building that we will be able to be, especially for the subcu, the CMO will be enabled as day 1 launch. The mitigation that we discussed before. Kunal Dhamesha: Sure. And the second one on semaglutide Canada. So basically, let's say, over the last -- since we talked in the earlier Q1 earnings call. Your expectation about the market formation has that changed now on the day of patent expiry? Or how should we think about it given that there are more filers whose filings have been accepted by the regulatory authority in Canada? Erez Israeli: No. So nothing changed, at least in my perspective, just to make sure that, that we are expecting in the market to be competitive. There will be multiple players. The question is just the day they will get approval. So it's all about that. That did not change. I believe that the market formation will be as expected. Will -- once there is an approval, there is an application for reimbursement. And according to the rules in Canada of the pricing, that's how the market will play. So nothing changed in the way I think the game will be played is now it's about obtaining approval and obtaining a good outcome from the litigation in India. Kunal Dhamesha: Sure. And lastly, on India for sema, when I look at -- we have basically conducted trial for Ozempic and Rybelsus. So does that enable us to launch the weight loss version, which is Wegovy generic as well? Erez Israeli: For Wegovy we'll have to have an application by itself. We'll have to... Kunal Dhamesha: It would be a separate application? Erez Israeli: It will be a separate. Operator: The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services. Tushar Manudhane: Sir, just on a steady, robust traction of biologics across European markets and Indian market, if you could just highlight how much has been the total biologic sales across different markets on an annualized basis to date. Erez Israeli: I'm sorry, It's something and your voices is too low. Just to make sure you asked how our sales evolve in India and Europe, that's what they asked, the question is. Tushar Manudhane: Biologic sales, cumulative biologic sales across different markets. Erez Israeli: The market or us, I'm sorry.[indiscernible] so we launched in Europe Hopefully, I'm answering it correctly. We launched in the Europe bevacizumab and recently rituximab in multiple countries, and we will increase the numbers of the countries as time goes by. And this is after we got the approval, the recent approval for rituximab for Europe. In India and emerging markets, we were always there. So it is going well. In the main program that we will launch in Europe will be denosumab and abatacept. This is the main pipeline. The same product, obviously, will be launched in India and emerging markets. But in India, we'll also have pembro as well as nivo. So that's right now the plans in those countries. Tushar Manudhane: And sir, with respect to rituximab, now that we are thinking of having a CMO, will that require let's say, at least the stability data from CMO side and hence maybe more time to sort of get through the regulatory process. Erez Israeli: The CMO that I mentioned is for abatacept, primarily for the subcu and it will require a tech transfer as well as stability. But we believe that we will be able to be ready for the big quantities, which will be in the beginning of calendar '28. So we should be good by then. Tushar Manudhane: Understood. And just lastly, on the PSAI segment, where there has been improvement in the gross margin quarter-over-quarter, while we are still lower than the historical gross margin but if you can just help understand in terms of the current gross margin and how to think about it over the next 1 to 2 years? Mannam Venkatanarasimham: So we expect, I think, going forward, PSA gross margin range of 20% to 25%. Tushar Manudhane: Compared to 15% currently, right? Mannam Venkatanarasimham: No, this quarter is at 18%. And because I think here, based on the product mix and then I think leverage of the all the overheads and everywhere. I think the range you can expect then going forward, 20%, 25% PSA gross margin. Tushar Manudhane: Got it. And you -- there was an earlier comment of peptide sales within PSA. So if you could quantify how much has that been? Erez Israeli: We build a capacity of up to 800 kg. Naturally, we are not even close right now to this level and right now, it's very small, but it will grow as it will come it. Operator: The next question is from the Kunal Randeria from Axis Capital. Kunal Randeria: So firstly, I would like to understand how your R&D will take shape given that you're developing a few biosimilars like pembrolizumab and daratumumab and of your R&D budget, how much you would be earmarking for biosimilars and Aurigene. So basically, your non-generic business. Erez Israeli: So just to clarify, daratumumab, we are now developing. It's a product that we license from Helios from a Chinese company. Denosumab was developed by Alvotech, and we have a partnership with them. And so in that respect, the main products that are done internally is still abatacept that we basically finished the clinic of it. As you can see, the R&D is about 7% right now of the sales and likely that it will stay in this range for now. Kunal Randeria: Sure, sure. And secondly, again on semaglutide. So do you foresee a situation where the market may not turn out to be as favorable as you think in Canada because besides the number of filers, which are increasing by the day, there are perhaps risks. Let's say, from a compounding pharmacy, which is intending to enter Canada and even the innovator has seen volume pressure in several markets. So there might be a situation where they are aggressive on pricing. So -- is there a risk of the market deterioration? Erez Israeli: First of all, I mentioned all along, I think that Canada market will be competitive with multiple players. So I also now in 33 years within pharmaceuticals, I learned not to forecast launch. I always mentioned that it can range from 0 to many, many millions of dollars. So -- but yes, the answer is I anticipate that Canada is going to be very, very competitive. I anticipate that Canada will be very, very competitive. As players will get an approval. Kunal Randeria: Right. And if I can, if you don't mind, ask is there -- I mean, any particular price erosion that we can see from the current levels, maybe 80%, 85% kind of price erosion that will eventually settle down to? Erez Israeli: I have no clue. I wish I do. Operator: [Operator Instructions] The next question is from the line of Vivek Agrawal from Citi. Vivek Agrawal: My question is related to NRT and branded markets like India, EM. So the growth was quite decent across the board and really a commendable job. So just want to understand how to look at the investment that you are making behind these markets? Or are these are sustainable investments or, let's say, it can be cut down in future? Erez Israeli: First of all, I don't think you see the investment in emerging markets. As we speak, we got the market in certain waves. And the markets that we did not get, we are still managed by Haleon, and we are paying them a fee for doing that for us. So naturally, as market is coming to us, the fee for Haleon is going. And therefore, it's -- the margins are going up because we don't need to pay them. And we are starting to invest in the market that we invest are the only markets that we've got the beginning, meaning U.K. and Scandinavia. So that's -- so we -- right now, my base is not yet -- it's absolutely not a steady state. We have 2 more waves to go and before we go. What I can tell that so far, it's exceeding our expectation both on the pace of growth as well as on the margin. In both cases, it's much better than what we presented internally when we approved the project. So it's a kind of a good start, I would call it. Vivek Agrawal: I understand, Erez. And just a related question here. It's on OpEx basically. So on absolute basis, how we should look at the OpEx in FY '27. So can it continue to increase, let's say, from '26 level, maybe relatively at a lower pace? Or is there any possibility of absolute decline in OpEx, let's say, in '27 compared to FY '26. Mannam Venkatanarasimham: So Vivek, if you look this quarter, we have at 30%. And then if you adjust the one-off, I think we are close to 29.1% at somewhere and then for any modeling, I think we'll be in the zone of like 28% to 30%. Operator: The next question is from the line of Dr. Harith Ahamed from Avendus Spark. Harith Mohammed: Just on rituximab again. So given this is the second successful PAI and CRL that we've had, are there any specific challenges related to the speciality? I'm asking also because this is a biologics facility and our track record, otherwise on compliance has been quite excellent in recent years. Erez Israeli: So there is nothing specific per se. We -- it's all obviously, as this is a sterile plant, we have -- we've got queries that are related to the nature of the site. We believe it's addressable. In a case that they will come with another set of questions. What we will do is that we will submit. We have an alternate line as a backup, which is FFF 2 that we feel that FFF 2 is a fill and finish or for those that are on the line. So we may need to move the product from 1 line to another in a case that it will not come well on the first one. So it's primarily related to the fact that the first line that we have FFF 1 is some of the design of it raised those queries and also last time we are addressing it. But if it will not work, we'll have to move to FFM 2. I'm not worried on the not getting approval. I'm certain that we get approval. Just to remind all of us, rituximab for us was deliberately chosen in order to start the regulatory process on time to make sure that by the time that abatacept will come, Bachupally will face those kind of stuff. And this is -- it's serving its purpose and hopefully, we can absorb it soon. Harith Mohammed: Okay. A quick one on tocilizumab biosimilar. It's been a while since we got an update on that one. Can you share the status of that program? Erez Israeli: We don't -- we are not planning to have it as a global product. We will have it only for India. Harith Mohammed: Yes. And then one quick follow-up on the previous question. The cost reductions that we have alluded to in the past, 500, 600 basis points of reductions. Are these reflecting to a small extent in the first half numbers? Or should we wait for the coming quarters for this to actually the numbers. Erez Israeli: Yes, I believe so. You can see that despite the fact that Lena is going down. We are maintaining our reasonable numbers. So it's absolutely a reflection of those mitigations. Of course, the full force of it will come as quarters will come. And we have also shared the numbers. So we believe that with SG&A of around 28% and R&D of around 7%. It comes to the famous 5% to 7% that we set, and there is even opportunity for more if we need to. So we maintain that we will -- we are very, very sensitive to the margins. And naturally, we're discussing it every time, and we will absolutely be really disciplined on those. Operator: [Operator Instructions] Next is Gautam from Leo Capital. Unknown Analyst: My question was on the GLP-1. Do you only plan to do fill and finish or do you also manufacture API drug substances. How much manufacturing capacity do you have? And which markets are we targeting for this? Erez Israeli: So we have CTO-6 making the API. I mentioned that the overall potential of all the investments that we put can reach even 800 Kg, but we are very, very far from this output at this stage. We've don't need also. Just that -- but we are preparing it not just for semaglutide, liraglutide, but also for 40-something peptides that we identified and we are going to develop either by ourself or with the partners in the next coming years. So right now, we will have sufficient capacity for the demand that we'll have for the liraglutide semaglutide in the submissions to the relevant authorities of all the peptides that will be of patents, including tirzepatide that will be obviously an R&D project, but it's very important to submit it in relevant markets. And we are also making the product, we are planning to make it in FTO-11 and also with the partners. In general, the approach will be that we will have for every important product in-house capabilities as well as partnership capabilities for all kinds of risk mitigations. Unknown Analyst: Okay. So can you just like expand on the fill and finish also what's the capacity we have and the status on that and the markets we are supplying for that? Erez Israeli: I think we discussed it. We have 12 million pens for the semaglutide with the partner. We can -- and we have 2 lines of cartridge that will be an FTO-11, they can reach even 50 million, but right now it's Theoretical. The cartridge lines are on the way and they will be assembled and will be ready, not for these 12 months, but after. Operator: The last question for today comes from Sumit Gupta from Centrum Capital. Suma, please go ahead. Sumit Gupta: Yes. So just one question on the Indian business. So sir, can you segregate the volume and price growth? Erez Israeli: The volume and the price. Mannam Venkatanarasimham: So Sumit, the price is like in the range of normal 5%, and then the balance growth is like mainly from the new products and volumes. Sumit Gupta: Okay. So going forward, like should we expect this to continue? Or can we expect any significant growth in volumes also? Erez Israeli: You should expect to continue, we will have new products volume, and the price will be in that range that MVN shared with you. Operator: We reached the end of the call. I now hand the call over to Richa for the closing comments. Richa Periwal: Thank you all for joining us today. We truly appreciate your continued interest in Dr. Reddy's Laboratories and the time you've taken to engage with our Q2 FY '26 results. If you have any further questions or need any additional information, please do not hesitate to contact the Investor Relations team. Have a great day. Stay safe and take care. Erez Israeli: Thank you.
Judy Tan: Good morning, everyone. My name is Judy, the Head of Investor Relations for Frasers Centrepoint Trust. Welcome to FCT's Second Half and Full Year Financial Results for the Financial Year 2025. With me today, we have got our senior management team, Mr. Richard Ng, our CEO; Ms. Annie Khung, our CFO; and Ms. Pauline Lim, the Managing Director for Investment and Asset Management. Without further ado, I'll pass it on to Richard to kick off today's briefing. Richard Ng: Thanks, Judy, and a very good morning to all of you. Thanks for joining us in this call. Okay. Just to start off with, maybe we can give all of you a quick recap of what happened for the full year financial FY '25. Of course, one of the key aspects is the acquisition of Northpoint City South Wing, which we announced in March of this year. And coupled with the divestment of Y10, that kind of helped us again to proactively reconstitute our portfolio. As we have shared before, the idea is for us to grow, but at the same time, to continue to strengthen the portfolio that we have, and we have done exactly that, right? As part of that acquisition, we also did EFR fundraising. We raised about over $420 million. It was a very successful EFR. And at the same time, we raised another $200 million via the perpetual securities. Financial position, very healthy at 39.6%, and cost of debt has come down on a quarter-on-quarter basis. For this quarter, it's at 3.5%. And later on, we'll talk a little bit more about cost of fund and also our refinancing plan. The operating performance continued to be very strong as demonstrated in the positive rental reversion, shopper traffic and also tenant sales. Hougang Mall AEI Is ongoing, and it's actually on track in terms of timing, in terms of cost. And happy to say that over 80% of the entire AEI spaces has already been pre-committed. Next slide, please. Okay. So again, very high-level numbers. DPU came in at $0.12113. That is 0.6% higher compared to full year FY '24 at $0.12042. Our aggregate leverage is below 40% at 39.6%. Cost of debt overall for the full year is at 3.8%. And if you compare that to FY '24 of 4.1%, so you have seen a downward trajectory for overall cost of debt. Net asset value came in at $2.23 compared to $2.29, a slight drop from FY '24. Okay. Operating highlights. Just wanted to stress a little bit in terms of the committed occupancy. Overall, the asset is again performing very well in terms of occupancy, but you could see on the slide there or the chart there shows a 1.8% gap, and that is partly contributed by the 2 -- or it's contributed by the 2 spaces that we have taken back from Cathay. That accounts to the 1.8% that you are seeing there. Otherwise, occupancy rate would have been at 99.9% again. Shopper traffic and tenant sales, you can see the next chart. Shopper traffic has gone up for the full year, year-on-year at 1.6%. And tenant sales, we grew by 3.7%. Again, quite a strong sales that is -- strong performance from our retailers as well. Rental reversion came in pretty strong at 7.8% versus 7.7% that you saw in FY '24. And as I mentioned just now, Hougang AEI is very much on track to complete by September 2026. Targeting an ROI of 7% based on $51 million CapEx, we are still again on track to achieve that. More than 80% of the spaces has already been pre-committed, as I indicated upfront just now. A little bit on the big picture, general macroeconomics. The advance estimates for Singapore economy came in at 2.9%. Of course, if you compare to the 4.5% in previous quarter, you could see a drop in that. But actually, the numbers came in higher than the market estimates. So actually, it's a positive note. What is also interesting is the inflation continuing to ease, down to 0.5% year-on-year in August. Again, this is helpful for us because easing of inflation is also helpful in terms of the cost perspective for our operation as well as also for our retailers. Overall market for retail sales seems to have kind of rebounded even from the overall RSI perspective. So for August, it's a 4.6% growth year-on-year, pretty strong. And if we take the RSI year-to-date from January to August, because they always release the numbers 1 month later. So we only have up to August. So we can only measure January to August. For RSI, the overall number came in at about 1.2% growth year-on-year. And if we were to take the same period for FCT's portfolio from January to August, our growth is actually at 4%. So we are ahead of the general market performance. Rental (sic) [ retail ] rents continue to track positively. Suburban prime rents grew by 0.5% quarter-on-quarter and 1.7% year-on-year. So this actually kind of bring us to the next slide also looking at the supply side of things. So overall, again, very limited stock that's coming on stream. From now to 2028, we are looking at about 1.2 million square feet of total spaces that's coming up. But if you just focus strictly on suburban, we are looking at about slightly over 340,000 square feet of space. And even for that matter, it's not looking at any significant mall. For example, you have Lentor Modern Mall coming up next year, 90,000 square feet; another one, Parc Point Neighbourhood Centre in Tengah, it's about 75,000 square feet. So there are pockets of neighborhood malls coming up. So nothing significant on this list at this point in time. Next slide, please. So this is the overall picture. Very limited supply, strong occupancy, and that's the reason why for CBRE in their forecast of rental trajectory is still on an upward trend or whether it be suburban or Orchard Road and of course, on an island-wide perspective. The next segment is going to -- we are going to go into the financial highlights. I'll hand over to Annie. Annie, please. Shyang Lee Khung: Thank you, Richard. Good morning, everyone. Let me take you through the financial highlights. Gross revenue for the second half is 14.3% as compared to corresponding period last year. This is mainly because of the Northpoint City South Wing acquisition, completion of the AEI at Tampines 1, partially offset by the Hougang AEI, which commenced in April 2025. If you exclude the effect of these 3 malls, gross revenue is about 2.1% higher, mainly due to the higher occupancy and a higher rent across all malls -- most malls. Property expenses for the second half is about 20.1% higher compared to same period last year. Excluding the 3 malls, property expenses is about 5.1% higher due to the higher property tax. The second half, the NPI is about 12% higher compared to last -- same period last year. If you exclude the effect of the 3 malls, it is about 1% higher, okay? Distribution from investment is 3.5% higher mainly because of the better performance from Waterway Point and NEX. DPU for the second half is 0.6% at $0.06059. Next slide, please. On a full year basis, the gross revenue is also higher mainly because of the same reason as previous slides. If you exclude the effect of the 3 malls, gross revenue is about 2.4% higher, mainly because of the higher pricing rent across most malls. Property expenses is about 13.5% higher compared to last year. If you exclude the effect of the 3 malls, it is about 4.7% due to the higher property tax, marketing as well as the higher net allowance of doubtful debt. NPI is about 9.7% higher than last year, and it's about 1.6% higher if you exclude the effect of the 3 malls. We recorded a higher distribution from investment by 37.1%, mainly due to the full year contribution from NEX, which was completed in March 2024 as well as some inclusion of the one-off distribution from JV during the year. With the 2 half DPU of $0.06059, it brings us a total of $0.12113, which is 0.6% higher than last year. Next slide, please. The higher balance in the total assets and liabilities as at 30th September 2025 is mainly because of the inclusion of the Northpoint City South Wing. Net asset value is lower at $0.0223, mainly because of the enlarged unit base following the equity fundraising during the year as well as the effects of the mark-to-market recognizing the derivative financial instruments. Next slide, please. Okay. As briefly mentioned by Richard, as at 30th September 2025, aggregate leverage is 39.6%, which is 3.2 percentage points lower than last quarter. This is mainly due to the repayment of loans from the proceeds from the issuance of the [ perps ] as well as the divestment proceeds from the Yishun 10 in the last quarter. The interest coverage ratio is healthy at 3.46x. And average cost of debt for full year is at 3.8%, but on a quarter basis, it has dropped to 3.5%. Average debt maturity stood at about 3.16 years. And the hedge ratio for the -- as at year-end is higher compared to last quarter at 83.4% due to the repayment of variable borrowings during the quarter. Credit rating remained unchanged at Baa2 stable from Moody's. Next slide, please. Okay. For the capital management front, we have diversified sources of funding where we issued a 7-year $80 million bond as well as the $200 million perpetual securities during the year. For the debt that is maturing in FY 2026, borrowings is in Q2 2026, and we are in the advanced stage of refinancing of these loans. Next slide, please. Aggregate appraised value for the total portfolio, including the 50% of NEX and Waterway Point increased by 16.8% as driven by the acquisition of Northpoint City South Wing as well as stronger performance. The cap rates adopted by the valuers remain unchanged as compared to last financial year, which is in the range of 3.75% to 4.75%. Next slide, please. DPU of $0.05963 will be paid on the 28th November 2025, and this is for the distribution period from 4th April to 30th September 2025. Yes. I will now hand over to Pauline for portfolio highlights. Thank you. Pauline Lim: Thank you, Annie. Good morning, everyone. I will just do a deep dive into the various performance metrics that Richard touched on earlier. So in terms of committed occupancy, the portfolio stands at 98.1%. It would have been 99.9%, if not for the re-entry of the 2 cinemas at Century Square and Causeway Point, right? And if we actually take into consideration the cinema space, the 2 assets, Causeway Point and Century Square, would actually be reporting at 100% occupancy as well. And we are in advanced negotiations and planning for the repurposing of this space, right, okay? And I think one of the observations is for the cinema space, because of the lower-than-average rent, it does give us certain opportunities to reposition the mall better. Next slide, please. All right. In terms of NPI, I think one of the key observations is that the NPI actually generally increased or improved on a year-on-year basis for all the assets. And that's with the exception of Century Square and Causeway Point, which maintained largely neutral compared to last year. And that's notwithstanding the fact that we had that vacancy as well as the arrears from the cinema space in these 2 properties. So very strong top line growth across the portfolio. And this is reflective of the strong operating performance in terms of footfall, in terms of sales, which allows us to achieve very good healthy reversion. Okay. Next slide, please. Okay. So now we cover reversions at 7.8%, which is a good reversion for the entire FY '25. I think one of the observations is that this reversion has actually maintained at the strong level over the 2 consecutive years. We do see reversions coming in at this level for FY '24 as well. The other observation is that we have achieved positive rental reversion across all our malls within the portfolio. Next slide, please. Okay. This slide shows the trending of the portfolio occupancy. I think a couple of observations. You will note that the occupancy cost of our portfolio at 16.1% for FY '25 is below the pre-COVID levels. And this is reflective of the fact that sales growth for our portfolio has been strong. And that enables us to maintain the healthy EOC and trading performance of our retailers, notwithstanding the good rental reversion that we have negotiated from our leases. And in a way, this is reflective of the success of our focus on driving footfall as well as sales conversion. Next slide, please. I think Richard touched on this earlier. So on a quarter-on-quarter basis as well as year-on-year basis, we do see the strong growth in the traffic, the footfall coming to our malls as well as the conversion into healthy tenant sales growth as well. Next slide, please. All right. Observations from this slide, we do not see any tall towers going forward over the next 3 years. So as you are aware, our average lease tenor is 3 years. So for the next 3 years, no concentration in terms of lease expiries. So this bodes well in terms of the cash flow from our portfolio. Next slide, please. Yes. Again, coming back to the resilience of our income and valuation. By AUM across the assets within the portfolio, we do not see any significant concentration risk, right? And also at the mall level in terms of the trade mix, there is no concentration or rather that we do see a higher proportion of essential services at 54% GRI. And I think over the course of the past few years, we've seen the resilience from the suburban retail sector, and that is largely due to the fact that it has a large component of essential services, which caters to the daily needs as well as the necessities of the population that we serve. So we see a resilience at both the balance sheet as well as the P&L level. Next slide, please. Okay. In addition to achieving good rents for our portfolio, we are also very cognizant of the sustainability of our retail offering. So there is a focus on refreshing our trade mix to delight and also to keep up with the latest retail trends. On average, we are looking at about 20% refresh rate for leases that comes up. And over the course of FY '25, we have brought 76 new-to-portfolio tenancies. The other observations are that this refresh is actually across all our malls, and it's a variety of trade. So no concentration -- no particular concentration in one particular sector, right? So it's, of course, F&B and the various retail offering. Next slide, please. Okay. For this slide, we wanted to showcase some of the promotions, events and placemaking activities that we had undertaken over the course of this year and in particular, the last quarter. So on the left-hand side, you see some of the promotions as well as the activities during -- for SG60 during the National Day celebration. And a large part of our focus is to actually work hand-in-hand with our retailers to magnify the outreach to our shoppers, right? And we are positioning our malls given its strategic location within the heart of the heartlands as the social hub within that particular catchment. And this is to build that loyalty and sense of place with our shoppers. Next slide, please. Okay. Update on Hougang Mall AEI. I'm very pleased to update that the progress of the AEI has been good in terms of timing, in terms of meeting the financial underwriting. So like what Richard mentioned earlier, 80% of the overall AEI spaces have been pre-committed to date. And if we look at Phase 1, which has just TOP and spaces are being handled over to the new tenants, we've achieved a pre-commitment level of close to 100%. So in terms of downtime, that has been mitigated. And also the focus on refresh is seen in the new-to-Hougang concepts that we have actually brought into. So out of the pre-commitment, we have brought in about -- this 40% represents about 30 new-to-Hougang concepts that we are bringing to HM post AEI, okay? And the other focus for the AEI would be refreshing some of the amenities. The mall is new. So part of updating the retail experience will also be refreshing some of the key touch points like the lobbies as well as the restroom. Okay. Next slide, please. So with this, I will hand over to Judy to take us through the ESG. Judy Tan: Yes. Thanks, Pauline. On the ESG front, we are pleased to share that in recognition of FCT's progress towards sustainability, we have been recognized as the Regional Sector Leader (Listed) in the Asia, Retail category in the 2025 GRESB Assessment, right? And this is also the fifth year in which we have attained a 5-star rating, and we have also increased our score from 91 to 93, okay. This slide showcases 2 of the initiatives that we have implemented actually in FY '24, both first of its kind, including the Singapore's largest single solarization for retail malls. And right now, we have got this program implemented across 8 malls, producing over 1,400 megawatt per hour of renewable energy, translating to, of course, savings as well as carbon emission reductions for us. And of course, on the Singapore's first-of-its-kind food valorization program as well, we have actually reduced about over 258,000 kg of food waste reduced. So all initiatives that contributes towards carbon emissions reduction. On the community engagement front, of course, Frasers Property is all about inspiring experiences and creating places for good. And this slide basically just shows my read of all the different activities, placemaking initiatives that we had during the year to engage and reach and excite our shoppers as well as the communities. And in particular, for the SG60 community campaign, we actually donated a total of $200,000, working hand-in-hand with our shoppers as well as tenants. We also wanted to highlight this initiative that we had where we actually ran a dive into sustainability campaign in our malls to actually encourage shoppers to come forth, donate their bottles, their used bottles. And we actually rewarded shoppers $2 FRx gift vouchers for every 5 bottles recycled. And during this period, not only did we do good, we also saw an increased traffic to our malls by over 20%, right? So for this initiative, that actually got the Frasers Property Singapore to be recognized as a Runner-Up by the Singapore Retailers Association Retail Awards under the Green Initiative Award of the Year. Next up, I will hand it over to Richard to give his concluding remarks, looking forward. Richard Ng: All right. Thanks, Judy. Next slide. Yes. Okay. So again, we have shared with you the set of results and how do we get there? Of course, from the perspective of our portfolio itself, both organically, AEI and also in terms of acquisition, we have done a lot of good work this year, and that, by itself, actually helps in giving us a boost in terms of our overall performance and also the DPU. The market has continued to be very strong, very resilient because of tight supply and at the same time, strong demand. And this is something that we continue to see, and we believe that the positive trajectory will carry us through to the FY '26 as well. We spent a lot of time sharing about placemaking, ESG and so on. And this is fundamental for us because our malls are located in strong catchment area with a very strong community feel, right? So we want to make sure that this is a place where we can continue to drive traffic, bring in more people, more shoppers into our malls. And ultimately, this will then help to result in a better sales performance for retailers and by itself will then give us a better performance for our overall portfolio, right? With that, I'll end my presentation and happy to take questions from you guys. Thanks. Back to you, Judy. Judy Tan: Thanks, Richard. Okay. Right now, we'll go on to question and answers. And then, of course, we've got a couple of analysts already raising up their hands. First up, can I invite Yew Kiang from CLSA to unmute himself and post his questions, please? Yew Kiang Wong: Can you hear me? Judy Tan: Yes. Yew Kiang Wong: Richard, can you share the tenant sales for this FY and this quarter for Causeway Point and Northpoint? Richard Ng: For Causeway Point and Northpoint specifically, okay, I will not be able to give you specific, but what I can share with you is perhaps I'm not sure, but maybe you're alluding to the impact and so on of people going to JV. But what we have seen is over the last -- from 2019 to now, both malls have actually -- in terms of sales has delivered more than double digit, right? For Causeway Point, I'm looking at slightly over the middle double digit, more than 10%. For Northpoint City, it's more than 20% from 2019 to this period. And if you look at the annual growth rate, it's about 3% to 4%. Yew Kiang Wong: Okay. So the double digit is over that since COVID, is it from 2019? Richard Ng: Yes, from 2019 to now, right? Yes, so despite -- there's a lot of talks about people -- more people shopping in JV, et cetera, but what we have observed at our most modern malls, they -- the sales continue to improve, right, between 3% to 4% annually. Yew Kiang Wong: Okay. Okay. And then any plans on Central Plaza? Richard Ng: Okay. Central Plaza is something that we have been talking about for a very long time. A couple of reasons, right? One reason is, firstly, it's an integrated development part of Tiong Bahru, right? It actually fits into Tiong Bahru very nicely, providing access for the people in the office to support the retail. And we get to control the type of tenants that comes into the office as well. That's one key aspect of having it as an integrated development. Secondly, we also recognize that there are still some potential for us to look at decanting some space, better utilization of space, right? So there's still some GFA that we probably could harness as part of an integrated development. Once you sell it off, you will lose some of this. Thirdly is, again, the management of the entire asset is important for us. If you do look at selling out Central Plaza, you lose control of the carpark because that is actually, again, a MCST -- it becomes an MCST asset, right? So certain component, we feel it's important for us to put it together as an asset -- an ongoing asset performance. On the other hand, we also recognize that Central Plaza is an office building, not really our core asset. But if you look at the asset itself, it's performing well, but we still feel that there's opportunity for us to continue to push the performance a little bit better, right? So we look -- we will always be looking at the possibilities of what do we do with the asset. But as of now, I would say that there's still room for us to further improve the performance, both in terms of occupancy and in terms of the rent. Yew Kiang Wong: Can you sell this to the sponsor and then technically, it's still under the family. So MCST issues and all, so we're more stricter then. Richard Ng: I can't speak for the sponsor whether this is an asset that they will consider. But we are always open. We are always exploring possibilities, alternatives, use and so on. But as of this time, we don't see this as something that is right on top of our agenda. Yew Kiang Wong: Okay. Last question. FY '26, what's your focus going to be? Richard Ng: Focus, of course, we acquired South Wing, right? We also mentioned there are certain things we want to do at South Wing. We want to improve the performance organically while we continue to look out for some AEI opportunities. So that's one, right, because we acquired this asset this year, we want to make sure that it delivers what we have set out to do. Secondly, there's actually a lot of opportunities in terms of AEI. One is the big one is NEX that's coming up. We have obtained the written permission. So we are still targeting our June, July commencement of AEI. That's a big one, right? It's talking about massive 50,000 type of square NLA square footage. That will take us for 2 years. The other one is, of course, focusing on repurposing or backfilling the cinema space as soon as we can, if possible. If not, then we look at the best alternative use for that space, and there could be some level of AEI required in order for us to repurpose the space. Yew Kiang Wong: So fair to say for FY '26, you are focusing on organic improvement operational rather than M&A? Richard Ng: Acquisition M&A is always opportunistic, right? It's something that we can't control what comes out to the market, what's available in the market. And even if whatever that's available in the market, whether it fits our portfolio structure, the type of assets that we want, whether the pricing is something that we can afford, right? But what we can always focus is something controllable, and those are the controllable aspects. Pauline Lim: Richard, can I supplement your response to Yew Kiang's first question in terms of sales growth. So Yew Kiang, if I may refer you to the circular or the presentation that was done for the acquisition of South Wing. So we did have a slide that actually shows the growth in the retail sales, the retail sales index of South Wing versus some of our dominant malls, which includes Waterway Point as well as Causeway Point. From there, you see that the growth trajectory, right, since 2019 to 2024 has been very strong, right? And 2024 can be taken as a reference point, right? I think Malaysia -- Singaporeans have been going through across the border all this time, right, and when the exchange rate was very favorable and so forth. So that's one point. I'll be happy to send you that slide for your reference, right? Yew Kiang Wong: Okay. I'll look for it. If I can't find, get Judy. Pauline Lim: Sure, sure. I think the other point is also if you look at the performance metrics, right, of Causeway Point and Northpoint City in terms of occupancy and all that, that has been -- that's at 100%, right? So in a way, it ties back to the sales performance. I think retailers would not be renewing or so keen to take up space if they are not trading at a healthy level. So I'll leave these thoughts with you. Judy Tan: Next up, we've got Geraldine from DBS. Geraldine Wong: Maybe just following on to Yew Kiang's question, strategy for 2026 is organic. But if the right asset comes along in the market that you like and thinking about how your share price has done really well to trade 10% above book, would you then want to be a bit more aggressive in taking on an acquisition at this point in time or still too early? Richard Ng: Okay. Geraldine, I think, again, going back to acquisition, there are many components to consider when we look at a specific acquisition. Of course, firstly, it's opportunistic, right, if there's opportunity available in the market. And then we have to evaluate the asset, whether we think that the asset is something that can improve the portfolio further. We look at the bottom line, whether there's opportunity to further improve the performance of the asset or if the asset has really been significantly optimized. And definitely, in terms of the pricing, I mean, we do note that there are instances where a seller bids very aggressively, right? I mean if you look back, for example, at Seletar Mall, nobody really knew what's the final price because it's not publicly available. Of course, you hear in the market and so on. But if those numbers were true, it was very, very aggressive, something that I think would be very difficult for ourselves to be part of it because we believe if we buy something, I mean, there must be value. It may not be immediate, but at least, over time, the performance of the mall must be commensurate with the pricing that we go into. So those are all the considerations. So there isn't a short answer to it and say, yes, we will do it or no, we wouldn't do it. But if all those factors, having taken into consideration, are favorable to what we have today and something that we believe is going to be positive for our shareholders, of course, we will be interested to look at it. Geraldine Wong: Okay. Everyone is taking a look at the current mall. Maybe a second question, if I may. The AEI opportunities at Northpoint as well as NEX, the increased NLA, so if you are thinking about ROI margins, are they going to be much meatier than the 7% that you have at Hougang Mall? Richard Ng: I think typically, we try to at least target that range, 7% to 8%. When it's meatier, it also comes with a meatier cost as well, right? So it's a balance about both. And when we upgrade the malls, we take the opportunity to also improve a certain component of the mall as well, right? So for NEX, it's a very big AEI. Not only we see it as an opportunity for us to improve the performance on a near term, but whatever that we are doing, we believe is going to be good for us on a longer term as well, improving circulation, making space available -- bigger space available for us to do other activities in the mall, et cetera. So by and large, we will still look around the between 7% to 8% kind of return. Geraldine Wong: Okay. Maybe just squeezing in a very quick last one. In terms of occupancy cost for Causeway Point, Northpoint City, our portfolio average is at 16%. But for these 2 malls, are we above at or lower than the portfolio average? Richard Ng: Okay. If I can remember, Causeway Point is below. I think Northpoint City is also below, if I remember correctly, but definitely not higher than what we have on the average. Geraldine Wong: Okay. So a very good place to do business. I hope the market dynamics will run its course. Judy Tan: Next up, we've got Terence from JPMorgan. M. Khi: Richard, congrats on the good set of numbers. I just wanted to ask on Cathay. I understand that on a year-on-year basis, actually, the NPI has been quite flattish for the 2 malls impacted by Cathay, Causeway Point and Century Square. But on sort of looking at the second half, we saw maybe like a 2% drop versus second half last year. So can I just get understanding that Cathay was not contributing to NPI in second half? Or was it only -- or was it for the full FY '25? Richard Ng: Okay. Cathay's contribution, I would say, kind of pretty much reduced significantly as we progressed through the year, right? When the first round when we came out with the -- serving the notice, et cetera, right, this is -- that's when they really stopped paying the base rent, but they were still paying some contribution. But that kind of slowed down and trickled down significantly. So by and large, I would say the contribution, it's very minimal, if any, towards the second half. And you're right, the drop that you saw is mainly contributed by Cathay. M. Khi: Okay. That's actually very -- that's a very good number to start with for second half NPI. I think it's not a very significant drop. I think it's -- most of the other malls will be able to carry it. Also asking about Cathay, I wanted to understand what are you looking at? Are you trying to bring in another cinema tenant? Or are you trying to repurpose for other users? Could you give us a sense? Richard Ng: Okay. I would say that we are currently exploring various options. If there are operators today that are prepared to consider the space and they can come in and operate very fast, that's one alternative that we could consider. But at the same time, that if we feel that certain -- okay, there are 2 spaces we are looking at, right? If the spaces presents a very strong opportunity for us to kind of repurpose the space and then can bring in a strong tenant, a strong anchor tenant to kind of anchor that space and that gives us a longer runway in terms of sustainability of the traffic, the mall and so on, then that's another consideration. So I would say, at this point in time, we are actually very excited with a few options that we have on hand. Some of them, because of the repurposing requirement, will take a bit longer because you need to engage authorities, et cetera, and so on. And we should be able to come back and give some sensing definitely by the first quarter in terms of the direction we are heading. And if, let's say, there's any opportunity to probably replace with an existing tenant on a one-on-one basis or that somebody can kick in faster, that will be even better for 1 or 2 of the space. M. Khi: Okay. That's great. Also, I noticed or I understand that there was a one-off distribution from JV this year, FY. Could you share on the amount of the one-off? Richard Ng: JV, I would hand over to Annie to give a little bit more color on that. Shyang Lee Khung: Yes. Terence, yes, the one-off distribution is from NEX is due to the excess cash at the entity level, which we assess that is no longer required and it is distributed as a dividend. M. Khi: And can you share the value? How much? And this came into DPU, right? Shyang Lee Khung: Yes, it's about $9 million, the one-off distribution. M. Khi: $9 million. And was that in second half or in first half? Shyang Lee Khung: Yes. I think most of it is in the first half. Some came in the second half. M. Khi: Okay. That's great. And maybe a final question for me, 3.5% fourth quarter funding costs, what's the expectation for next year, FY '26? Shyang Lee Khung: Yes. At the current rate level, we are looking at about 3.3%, 3.4% for the next year. Judy Tan: Next up, we've got Rachel from Macquarie. Lih Rui Tan: Can you all hear me? Richard Ng: Yes, Rachel. Lih Rui Tan: Congrats on this good set of results. Maybe just firstly, in terms of reversions, I saw that actually second half probably moderated a little bit. So if you could guide us what you're looking at on reversions for next year? Richard Ng: Okay. We did share that this number, again, is a very strong number that you could see. And first half was stronger compared to second half, partly due to the constituent of the leases up for renewal, right? Sometimes when you have more specialty, for example, that leases comes up in the quarter itself, probably the reversion could be a little bit more aggressive because smaller spaces and so on. So it's a combination of the profile of the expiry that we have between first half and second half. So going forward, and this is something that we shared before, we believe that going forward, on a more sustainable basis, we are probably looking at about mid-single-digit positive rental reversion. Lih Rui Tan: Okay. And can I just ask on -- in terms of the tenant sales, I think it's been very strong in the fourth quarter. But is there any impact from the Tampines Mall being included? If we were to still exclude Tampines, what kind of tenant sales will we be looking at? And what's your opinion? I know this year, we have a lot of government vouchers, but if government vouchers was to taper off, what's your view on tenant sales moving forward? Richard Ng: Okay. I -- first and foremost, I think definitely, Tampines 1 has also helped to contribute towards the strong sales that you saw. But even if we strip out Tampines 1, the sales were still positive for the rest of the portfolio. You're right, to some extent, this year, we had a lot of goodies, a lot of handouts, SG60, CDCs and so on. And we believe that even come, I believe, end of the year or January, there's another tranche right, CDC voucher that's not been distributed. And probably some of these so-called handouts or incentive goodies may last a little bit longer because I don't think it's easy for them to just wean off or cut off immediately. They probably have to wean off over time. But fundamentally, I think what's important, Rachel, is also looking at the big picture, right? So those one-offs and others, yes, you get it, it's fine. It's a bonus. But what's more important is the underlying macro perspective. What we are seeing is, firstly, it's increased population base, right? So -- and that actually is a fundamental, right? You have bigger numbers and also the income level of our people are growing, right? And this is largely supported by, again, your -- what do you call that, Judy, the progressive wage model. Judy Tan: Progressive wage model, yes. Richard Ng: Progressive wage model. So that, to me, is actually more significant and more sustainable, right? Because if you look at how the progressive wage model works is, there is a kind of minimum starting point and there is a fixed growth for the different sector of worker, right, that you see, whether it be cleaning, security, retail worker, F&B operators, landscaping, M&E engineers for the lift and escalators. So -- but if you just take an example, right, you just take an example of a general cleaner, from 2023 to 2029, the same person will likely almost double the salary, right, for this period itself. So to us, this is actually a very important aspect that is going to kind of underpin the growth that we expect from our suburban malls because, by and large, most of this progressive wage are targeted at the mass market, and that's the market that we are serving. So while we get the one-off, the goodies, that's good. It's helpful. But I believe the growth in population and also the growth in this ability to spend, that will again be the one that underpins the performance of our malls. Lih Rui Tan: Okay. And my next question really is on Isetan. I think we saw that they are exiting Tampines Mall. Could you give us -- remind us again when is the Isetan lease expiring in NEX? And has negotiations been going on? Are they talking about exiting or downsizing? Richard Ng: Yes. So for this, maybe I would ask Pauline to share some color. Pauline Lim: Rachel, I think because of some privy details, I cannot say much, right? But what I can say is we do have plans for this space, and it's positive plans. And you are aware that we are doing the AEI, right, for NEX as well. Lih Rui Tan: Even the lease, when they are expiring, like 1 year or 2 years? Pauline Lim: The lease will be coming up next year, next calendar year, yes. Judy Tan: Next up, we've got Terence from UBS. Terence Lee: Terence from UBS. Just using the closure of Gong Cha as an example, and I'm going to presume for FCT that any bad debt exposure is probably quite low. But more broadly, my question is, have we hit the point of saturation for certain trade categories, be it bubble tea, the coffees or even potentially even some of the Chinese restaurant chains? Richard Ng: Okay. Yes. Okay. The first part of the question, Terence, our actually arrears is very minimal, except -- the exception is cafe for a different reason and perspective. But by and large, we follow pretty strict guideline and processes, whereby if the tenants do not pay up within a certain period, we will actually engage them, send them certain notice and we will repossess the unit within a certain period of time. So that's how we managed to keep our arrears actually on a very thin level. If you look at Gong Cha or many other news that you have seen in the market of closure, people exiting and so on, I think this is part and parcel of F&BC, right? You do get certain products, certain brands that have been here for a while. And Gong Cha, in particular, I -- what I read was more because the brand itself -- I mean, the owner of the brand itself wanted to exit and then potentially come back again at some point in time, but that's news. But in terms of F&B operator, I think you see there are certain brands, certain products, they are probably very trendy at certain point in time, and that set can run out -- run its cost, and then they are no longer here. But then you see another new concept will pop up. And that's the beauty of F&B, right? Something that it's changing because the tastes change, the preference change, and competition is also there, right? So the stronger one, the better ones come in, and then you see those who are not able to keep up or their products are deemed less exciting or maybe in terms of taste and so on is not as good, they will then be the ones that has to review their product or they may exit the market. But then the new ones will come. So be it bubble tea is not new, we used to have -- back then, I used to say that Waterway Point has the most bubble tea operator. We have about 6 operators. But now you reduce to about maybe 3. That's one example. Coffee chains, similarly, you have different types of coffee, different operator, different type of taste that appeals to different shopper, right, a different customer. Again, is it too many? The market will dictate whether there is too many or they still see opportunity to grow new offerings. And that is no different, right? So the long and short of this is that what we see is a lot of movement, a lot of churn, but the demand for F&B space continue to be very strong. And that is from our own perspective as an operator, we see that is, again, a sector that has continued to develop, continued to evolve, but we see very strong demand. Terence Lee: Got it. And just circling back to the question on acquisitions. I mean now that Northpoint City is, I guess, underway, is it then reasonable to expect that FCT will have to start looking overseas to acquire? Richard Ng: Not really. We still have joint ventures partners in 2 assets, right, Waterway Point and NEX. So we'll continue to cultivate the relationship with our partners. And hopefully, at some point in time, they may look at redeploying their capital. They may look at exiting the malls at some point in time. And if you add those 2 together, it's close to $2 billion. So significant size opportunity that's still available for us in mid- to longer term. But what we are focusing a lot is just now they're talking about what do we focus on '26, FY '26, what's the main focus and concentration. There's a lot of areas that we think we can still harness a lot of value we can still create based on our existing portfolio. So there's actually a lot of work for the team on the ground. AEI, it's one big area that we are focusing on. And AEI is one that we believe will continue to, again, give us value. Tampines 1 has been proven to be very successful. Again, for Hougang Mall, Pauline has shared the performance in terms of the leasing commitment, very strong, which we will see contribution once it's fully completed. NEX is going to be the next one to go. And we are now looking at also plans for the other malls in the portfolio. So we are continuing to work on it. So we are actually kept very busy while at the same time, looking out, if there's any opportunity that comes to the market, we'll evaluate it and see if it makes sense. So the long and short of it is, we will stay pretty focused on what we have today. Terence Lee: Got it. And earlier, there was the guidance on where funding costs would trend towards, 3.3% to 3.4%. I just want to understand the thinking behind the fixed hedge profile. Is it a plan to keep it at a relatively high level such that the flow-through is rather, I guess, muted? Why is it this thinking? Richard Ng: Okay. Maybe I'll just give you a color, then Annie can chip in as well. I mean you are seeing a little bit of elevation in terms of hedge portion now at this point in time because when we bought over South Wing -- Northpoint City South Wing, we took over the debt for the asset, right? But we do have a refi coming out in January, February for the FY '26. Once that is done, we will probably review the hedging again and it is likely to come down from this level. Judy Tan: Next up, we've got Derek from DBS. Derek, would you like to unmute yourself. We can't hear you for now. Geraldine Wong: Judy, I think there's a problem with Derek's mic. So maybe I can ask his questions on behalf. So I think first is on tenant sales. If you can give us some color what is lagging? Richard Ng: You mean what trade is lagging, is it? Geraldine Wong: Yes, yes, the trades that are lagging. Richard Ng: Okay. Pretty much most of the sectors are actually performing positively with a few exceptions. Maybe to just give a little bit of color. Department store, I think it's a little bit of a drag. Books and gifts, it's a bit of a drag. Infocom, a little bit. Fashion accessories, it's seasonal. So by and large, I think these are the few sectors that we saw a little bit of a drag. But the rest seems to be pretty positive. Geraldine Wong: Okay. I understand. Yes. Maybe, Richard, the second part, maybe some idea on Metro, what to expect and when is the expiry? Richard Ng: Okay. Metro, again, it's a case of we are evaluating the options. We are working with the tenants to see what are some of the ideas, concepts that they could be able to introduce. I think there's a lot of news articles on the collaboration with Shinsegae and others, retailers in Korea. So we would like to find out what is it that they are able to bring to the market. And specifically, if we continue to work with them, what can they bring to Causeway Point. So it's an ongoing conversation. But at the same time, we also recognize that they take up a significant space. So it's a question it's about having Metro, not having Metro; having Metro, but maybe rightsizing Metro. So those are the possibilities that we are exploring. That's not a finality at this point in time. Geraldine Wong: Okay. Just one quick last one. For your leases expiring in 2026, where will it be and which malls? Richard Ng: It's pretty much cutting across all malls because our leases are on 3 years basis, right? So just now when we shared the lease expiry profile, it's quite evenly spread. So we do have expiry across the whole portfolio. Judy Tan: Next up, can I invite Brandon to unmute himself to ask the questions, please? Brandon Lee: Richard, I just want to ask you on the tenant sales growth, right, if you were to exclude the T1 and all the cinema, everything, what's the net growth for FY '25? Richard Ng: Okay. It's slightly below 2%. Brandon Lee: Slightly below 2%? Richard Ng: Yes. Pauline Lim: So that includes the drag from the cinema because we haven't taken out that. Richard Ng: Yes, yes, yes. When taken out the cinema. Pauline Lim: So probably about 2-ish. Richard Ng: Yes. Okay. Yes. Brandon Lee: So it's 2-ish percent? Richard Ng: Yes. Brandon Lee: Because if you are looking at your forecast on this reversion going to next year, right, and looking at your occupancy cost relatively flat, right, so basically, your outlook on tenant sales growth is quite muted. Is it -- can I sort of get a forecast on that, implied? Richard Ng: No, not really. I think we still continue to expect positive sales coming in from our retailers. But it's a case of, again, depending on the composition of your type of leases that's coming up for expiry. And of course, I would also like to say we typically will build in a little bit of conservatism when we look at the expiry or the reversion for next year, right? So which is why we say it's about mid-single. We have been doing 7.7%, 7.8% for the last 2 years, right? Pauline Lim: So Richard, maybe I'll supplement that point, right? So Brandon, I think we are not relying solely on organic growth, per se, right? There's a lot of proactive tenancy management, if I may say, right? Proactive tenancy management in terms of working with the tenants, existing tenants to drive their sales, right? I spoke about the refresh rate, which means that we are constantly looking at weeding out or changing out some of these weaker performances and bring in the more trendy and more sought-after brands, right? So that is also part of the active management as well. It's not so much just relying on the organic growth of our existing pool of tenants, right? And with the AEI, it gives us that opportunity to actually do more of that refresh, right? So I think we should take all of this into consideration. Brandon Lee: Okay. And just on the revaluation, I realize this second half, we didn't provide the cap rate. So what's the trajectory from FY '24? And also what's the revaluation loss of the $11.1 million due to? Richard Ng: Okay. You're talking about trajectory from FY '24 in terms of the cap rate or... Brandon Lee: Yes. Richard Ng: The cap rate stayed constant. Brandon Lee: Okay. So -- and I think all the malls saw partial [ wither out ], but then you still recognized a loss, right? So what's driving that? Richard Ng: Yes. Okay. Maybe Annie could give a bit of color on that. Shyang Lee Khung: Yes. Okay. Brandon, you can see that there's $11 million loss, but actually included in this $11 million loss is an accounting fair value loss of about $41 million, which arose from the acquisition of Northpoint City South Wing because of the accounting treatment of it treated as acquisition. So if you exclude that accounting item, there's actually a fair value gain from the investment property of $30.7 million. Maybe I should also add to say that the fair value loss accounting includes the transaction cost that was also capitalized. Yes. So you should strip out the accounting loss and look at the true fair value gain of the investment property, which is about $30.7 million. Brandon Lee: Okay. Okay. So basically transaction costs of Northpoint. Okay. And just last one, right, which I think if you look at your portfolio today, right, just looking at it from a divestment and acquisition standpoint, right, would you be open to still owning or acquiring more or divesting malls where the size is like below sort of a 200,000 square feet kind of range? Richard Ng: Okay. By and large, our preference is definitely moving towards stronger, bigger, more dominant mall as what we have been doing for the last couple of years. So today, we have 4 of the top 10 largest mall in Singapore. But those opportunities comes far and few in between, right? Then the next level we look at is probably the likes of our 200 over 1,000 square feet malls. And then the last category will be the 100 over 1,000 square feet malls. So again, if we have an opportunity to reconstitute, to replace something stronger, of course, that is something that we would seriously look at as part of the overall reconstitution and strengthening of our portfolio. Judy Tan: We've got Jonathan from UOB Kay Hian, who has got a question. Jonathan Koh: Congrats on the good results. Could you touch on AEI for Northpoint City? In the past, you've talked about a holistic AEI. Could you touch on some of the key enhancement that you are planning? Next, right next to it, Yishun 10, would that be redeveloped into residential? And how does that impact your AEI and give us some sense of timing? Richard Ng: Okay. So maybe we can look at the 2 questions there. The first one is probably easier to explain that Yishun 10. Yishun 10, we have divested to Frasers FPL. So they did have some announcement in terms of their plans on that. You can look that up. We are not sure exactly what will be undertaken. What we know is that in the past, we have kind of engaged the authorities before. It's not going to be another mall that's coming out. So it's not going to be a fully new mall that's going to be developed. So that's one thing we know. But beyond that, we do not really know what ultimately will come out there, right? So that's for Y10. And it will not affect any of our decision as to what are we going to do with South Wing. So for South Wing, when we did the acquisition, we spoke about a couple of pockets of opportunities that we saw and something that we're going to take -- undertake over a period of time. So one of them, which is organic, something that we feel that we could improve in terms of the performance at the mall level, whether it be OpEx or revenue. So this is something that is work in progress. We also identified some opportunities for maybe re-leasing about 5,000 square feet of NLA. That is work in progress because in order to do that, we need to go through several rounds of approvals and getting agreement and consensus from the various authorities. So that's work in progress. So that will take a little bit longer, but the work in progress now really is to tighten up any bulk purchase arrangement and getting the best outcome in terms of the mall performance at this point in time. Jonathan Koh: I presume timing-wise, more likely FY '27? Richard Ng: For the AEI itself, the 5,000 square feet we talk about? Yes, slightly. I don't think we will get everything through in FY '26. Jonathan Koh: Okay. And just... Richard Ng: It will commence probably in FY '27. Jonathan Koh: And just a brief follow-up. Isetan, what is the square footage that they occupy at Tampines 1? Richard Ng: Isetan is not in Tampines 1. Isetan is in Tampines Mall, which we don't own. Jonathan Koh: Okay then. So I thought -- it was mentioned, I thought maybe related. Okay. No worries. Thank you. Judy Tan: We've got from Rayson from HSBC, who's got questions. Rayson Khoo: Just a few questions. Firstly, just looking at the Hougang Mall AEI, more than 80% committed. I think it probably moved about like 6% or so versus the last quarter. And then if I recall correctly, for Tampines 1's AEI, you were actually more than 90% committed before the works commencement. Just comparing this to pre-commitment rates, is sentiment getting a little bit weaker for the Hougang space? Are you reserving some of the space tactically for like certain trades? And then just on top of this, if you can just share how your tenant curation strategy takes into consideration the upcoming mall beside it? Richard Ng: Okay. So maybe I'll share my perspective and then Pauline can also jump in. So if you look at the overall pre-commitment, I think it's very strong because we kind of have different phases, right? So the first phase that's going to be opening at the end of this year is actually almost 100% short of one small lease that's currently under negotiation, which I think probably negotiation is really done, probably documentation. So the first phase is fully committed. The second phase is going to go on until towards the later part of FY '26. We still have a bit of time. So the question is sometimes you want to make sure that you also get in the type of trade that you want, and that negotiation can take a little bit longer than usual. But getting over 80% pre-commitment, I think it is still a very healthy, strong kind of indication in terms of demand for the mall, right? The second question you have is in terms of what is going to come up. We don't really know what the final form product that's going to come out in the new GLS. But what we can do is look at ourselves and how we can, in a way, strengthen Hougang Mall. And that's part of the reason why we are doing this AEI. We have expanded one of our key anchor that's a library. We brought them up to the highest floor. We gave them more space because for library to stay, it's an important component because library, despite whatever people talk about reading and so on, they actually bring in a lot of traffic. They also help us in terms of placemaking activities and so on. So it's a very ideal case for us to strengthen our positioning by also locking in some of our anchor tenants. We are also working with another anchor, our supermarket operator to see how we can improve the supermarket itself. So those are various components that we look at positioning ourselves with to complement whatever that's going to come out in the future on the GLS side. Rayson Khoo: Okay. And right. Just another question on the management fees in units because I think it's about 50% for this FY. And then if we're just looking at FY '26, which is going to be very AEI focused, should we expect the management fees in units to exceed 70%, which was when T1 was undergoing the AEI? Or would you like prefer to just phase out the AEI instead? Richard Ng: Okay. I don't think it will reach that level. Probably it will be higher. We could expect it to be higher than this year, but maybe not that level. But then again, it depends on, again, at which point in time we're going to commence our next AEI, right? Say, for example, at NEX, that will bring into play again in terms of our requirement to use some of our AM fee in unit. Where we can, we, of course, try to spread it out, but sometimes because of timing, because we believe that we want to capitalize on the opportunity faster as well. So there could be an overlap, right? Because the faster you complete, the faster you can also generate the income, right? And especially when there are strong demand of retailers wanting to come to a mall like NEX, we want to get it done. We want to start fast because we see a lot of opportunities coming up there. So -- but by and large, I think it's likely to be slightly higher than what it is for FY '25, but may not reach the level -- may not reach that level that you mentioned. Judy Tan: Okay. Next up, we have Vijay from RHB. Vijay, if you like the ask the questions? Vijay Natarajan: A couple of quick questions from me. Can I know what is the outstanding rental arrears from Cathay at this point of time? And should we have to assume that this won't be recovered? Also, earlier, you mentioned in the plans of repurposing the space, if somebody can take it up as it is, then it would be a faster way to recover the space. So are you looking at a cinema operator to replace the Cathay? Richard Ng: Okay. Maybe I will tend to answer the first part first. I think it's something that it's out in the market that we actually sent in an SD probably about 2 months ago. Pauline, was it 2 months ago? Pauline Lim: About July. Richard Ng: Yes. Okay. Yes. So about maybe slightly over 2 months ago. And the SD amount amounted to $3.3 million, if I get the number correctly. Pauline Lim: $3.3 million. Richard Ng: That is official. So we are going through a legal process, a legal proceeding to recover that amount. We have to let the process run its course before we could comment as to if we could recover the amount? Or if we could recover, how much of the amount? Is it partial? Fully? Or what's the amount, right? So we don't have that response for you today. But definitely, we are going through the legal process to recover as much as we could, right? Pauline Lim: Richard, if I may add on to that, right? So the quantum $3.3 million also includes a portion that relates to the outstanding security deposit from this tenant. So what is really owing is actually lower than that $3.3 million that's out there in the market, right? So that's one point. I think the other thing is we are also -- we have other various -- or we have other legal recourse, right? So to answer your question, Vijay, are we writing off this amount? At this point in time, no, we are still pursuing the various legal recourse that we have. Vijay Natarajan: Okay. Okay. I mean repositioning the space, are you looking at a cinema operator? Or if not, what other types of segments you are looking at, at this point of time? Richard Ng: We are looking at various options on the table right now. We have cinemas, we have non-cinema operators. So there are a few options that's available to us to consider. Vijay Natarajan: Okay. But what would be a preference at this point of time? Richard Ng: It depends on what is the offer and also what is likely contribution that the tenants can bring, right, whether it be -- we think that a certain trade may be able to bring in more or drive stronger shopper traffic as opposed to the other. So those are considerations, and of course, the economics as well. Vijay Natarajan: Got it. Second question is, what is the proportion of variable rent as a percentage of total rents in your portfolio at this point of time? And is there a change in terms of variable rent mix, especially for sectors like F&B, which are facing a bit more challenges at this point of time? Richard Ng: Not really. GTO is about 5% of our total revenue. So it's still a very small proportion of our overall rental structure. I have not seen really a significant change in terms of the overall GTO proportion, whether it be F&B or the other trades. Judy Tan: We'll just accept one last one from Derek from Morgan Stanley. Derek, can you unmute yourself? Richard Ng: Hey, Derek, hi. Judy Tan: Hi, Derek? Otherwise, we'll take one question from the chat as well. There's a question coming from one of them. It appears cost pressures have built in 2025, while other SG REITs saw utility cost decline. Why is there this difference? Richard Ng: Okay. Again, it depends on the base, right? So some of the other operators, they actually had a higher cost base before that, but we have been quite active in hedging our utilities over time, right? So if you look at -- we have managed to bring it down in the previous year. So that movement may not be as significant because for the last 12 months, 15 months, it has been quite steady. The rates has been quite steady. So when we hedged it, we hedged forward, right? So we capitalize on that as well to make sure that we are not exposed to any significant risk because you don't know there's a lot of dynamics that's going around, whether Middle East, Russia, Ukraine and so on, right? So there's a lot of uncertainty. So we took that position. But you have to look at the starting point, right? Did they come off from a higher base or they were already lower than us and they got lower. So that's the question. Judy Tan: Thanks, Richard. Derek, are you able to ask your question? Okay. Maybe some issues with his sound system. But anyways, I think we are out of time. So thank you so much, everyone, again for joining us in FCT's results briefing. If there are any further questions to follow up, please feel free to reach out to me. And thank you so much again for joining us today. I'll end the call right now. Thank you. Richard Ng: Thank you. Judy Tan: Thanks, Richard and team as well. Shyang Lee Khung: Thank you.
Wu Yu: [Audio Gap] we continue to stabilize the business. You can say that now, besides the price, we can also see that value has already become a key focus of majority of the consumers, whereas you can see that we also continue to see the emerging of the new consumption scenario, which is accelerating the evolution of the consumption structure to some extent. We believe that good products need compelling stories to support them. We also need effective presentation method and the life cycle management to truly convene the value of the brands and products. Currently, industry opportunities still exist, but seizing those opportunities has become more challenging than before. Against this backdrop, Topsports has remained committed in advancing our core strategy and actively adapting to changes in market conditions and consumer demands. Externally speaking, we continue to expand our brand partnership ecosystem and evolve our capacity metrics. Internally, we persistently refine our omnichannel retail agility as well as operational efficiency. Despite the challenging external environment, we'll still be able to achieve our planned performance in H1 of this year. Look ahead, of the second year, we will remain a product business approach while keeping a resolutely optimistic attitude. We will gain market insights from core diverse perspectives, respond to external challenges with great agility and continued to enrich Topsports role and value within the industrial ecosystem. Next, I will hand over the floor to Rebecca, please. Rebecca Zhang: Thank you. Please allow me to update you on the financial performance for H1 of this year. Overall speaking, we achieved our planned performance as expected, which has been mentioned by Mr. Yu, which also exceeds the market expectations we observed from the capital market. Well, from the revenue perspective, affected by the weak consumer demand and offline traffic fluctuations, overall revenue declined 5.8% to RMB 12.3 billion. By category, retail business declined by 3% Y-o-Y in H1 of this year. Wholesale business declined by 20.3%. By brand, core brand sales revenue decreased by 4.8%, reaching RMB 10.8 billion, where other brand sales revenue declined by 12.2%, reaching RMB 1.4 billion. The performance of other brands was primarily affected by lifestyle sports brands. Though overall performance of the specialized vertical brands remain the best, comprehensive sports and live sports category. At the GP margin level, specific affecting factors including, one negative factors and two positive factors. Regarding the negative factors, we have a deeper discount rate Y-o-Y, which have a negative impact on the GP margin, which is also indeed the same as what we mentioned to you. There are a few factors leading to the interaction. As you can see, that still, we have an ever-increasing number of the business. And especially in China, the online sales discount is more than what we have for the offline channel. So that's the reason the online channel sales continue to go up, which will indeed have a negative impact over the GP margin as a whole. Well, at the same time, as we have already mentioned, the deeper discount is being further ramped up, but still compared with the second half of fiscal year 2025, there's a narrow down. Meanwhile, we can see the revenue from the retail business contribution started to go up, whereas you can also see that the brand partner support that can also be supportive to our GP margin with the 2 positive factors to some extent, is diluted the negative factors burden. So in other words, resulting in the overall GP margin declined only by 0.1 percentage, reaching 41%. At a percentage ratio perspective, during the period, revenue declined by 5.8%. Total expenses decreased by 5.5%, with expense ratio only increasing slightly by 0.1%, reaching 33.2%. In the challenging environment, we hope to alleviate offline operating expenses pressure through the omnichannel deployment and the refined cost efficiency management. Overall estimated rental expenses from the value perspective, is being decreased by 12.1% on a Y-o-Y basis. Rental expense ratio declined by 0.8 percentage points, which was the biggest contributor to the overall expense ratio control. First of all, for the offline channel, we continue the structured optimization in offline channels to reduce losses and improve efficiency, where with operating as well as openings and renovation efficiency improved on a Y-o-Y basis. The second point is channel mix changes. The online and offline channel indeed performed different for GP margin and cost. Online channel has a lower expense ratio, where we have more revenue from the online channel. It also helped to further lower the overall expense ratio. Well, regarding the employment, we maintained a staffing line with omnichannel deployment needs, building an agile and efficient Thailand supply to consolidate our cost efficiency advantage. Overall, employee head count decreased by 16% Y-o-Y. Total employee cost decreased by 5.2%. The expense ratio has been quite stable, only increasing 0.1 percentage reaching 10.5%. They are mainly due to 2 reasons. First of all, we aim to provide long-term development support to quality talents where average productivity improved during this period, while at the same time, we also made organizational efficiency optimization work in H1 of this year, which will be demonstrated in cost efficiency going forward. Other expenses increased by 1.6% on a Y-o-Y basis, mainly including property, plant equipment depreciation, platform service fees, logistic service fees, where you can see that with rapid online business sales growth during the fiscal year, the corresponding platform operating expenses also increased. From an overall business progress perspective, negative factors mainly include operating negative leverage impact from the offline traffic situation, where this impact was partially offset by continued optimization of the offline network and increased proportion of the online rental business. Let's also take a look at the net profit changes. The trajectory from the net profit trend chart on the left, you can see the main factor affecting the net profit are decline in GP margin and impact of other income. Well, the remaining items, including total expenses, the net financing cost and the tax expenses provided a positive contribution. Well, you can also see on the right side of this slide, the GP margin deduction along with the decline in GP margin, a slight increase in the expenses ratio and the decline in other incomes were negative factors, where net financing costs and tax expenses provided positive contributions. Excluding the impact of other income, net profit declined by 6% over Y-o-Y basis. Consistent with 5.8% Y-o-Y basis, while our net GP -- our net profit rate was only being reduced by 0.3%, reaching 6.4%. And continue to further improve the negative leverage that may impact our overall business operation. Coming next, let me just discuss our working capital efficiency. During the fiscal year, inventory management has been our key focus. We adhere to the principle of maximizing merchandise efficiency, conducting omnichannel inventory circulation management. Inventory amount decreased by 4.7% with increased turnover days increased slightly from 1.7 days to 100 -- reaching 150 days. Trade receivable reduced by 1.5%. Turnover days declined by 3.5 days, reaching 12.6 days. Trade payable decreased by 64%. Turnover days declined 6.5 days, reaching 8.2 days. Payable related to the merchandise procurement reduced, which will also lead to the inventory reduction at the end of August. Regarding the working capital efficiency, the revenue decline continued to be seen, but average working capital as a percentage to revenue remained flat. We continue to maintain essential efficient working capital management. Let's now move to the cash generation capacities. Net operating cash flow was RMB 1.35 billion, down by 48.2% due to a few factors. So let me just share with you those factors. There are 2 reasons. The change was mainly due to the different -- the Chinese New Year timing between the 2 years, which actually have RMB 1 billion of the receivables and tradeables. And first of all, let me see, regarding the receivables. In H1 of this year, we need to calculate the Y-o-Y difference from February to August of this year regarding the operational capital. So it's actually a 6 months comparison. So performance in February has been essential, but at the same time, for February, the performance will be impacted by the Chinese Spring Festival. In 2024, the Spring Festival was in February. So the peak sales reason, the cash collection happened in March of 2024, but actually in 2025, the Spring Festival was in January. So the peak cash collection happens in February of 2025. So that's the reason the month-on-month perspective, you can see that receivables by the end of 2025 February is lower than what we have for the same period of 2024. So indeed, for receivables, different Chinese New Year timing between the 2 years, affecting the Y-o-Y comparison of the sequential changes in receivables, while at the same time, we also see impact from different procurement cadence on payable changes. Payable changes has everything to do with products we procured, we have reduced inventories, so as the payables. The second point is regarding the brand support and collaboration. It's more like a synergy between brands and us, including the rebates and also payment period and product refund. As we can see for the past few years, all those factors are not going to perform the same on a yearly basis, where we always continue to maintain good communication with the brand company to have collaborations to make strategies according to the landscape we have by them. So I was talking about the 2 factors impacting our operation cash flow. Free cash flow was RMB 1.22 billion. During the period, dividend payments were RMB 868 million, representing 34% of the beginning cash. Period end cash was RMB 2.538 billion, down by 1.9%, essentially flat. Net cash was RMB 1.27 billion. During the period, we maintained robust cash generation capacity. Last but not least, I'd like to talk about our dividend payout ratio. Based upon our cash generation capacity, there are 3 ways for capital allocation. First of all, supporting organic business growth; second, investing in scale expansion opportunity; third, excellent shareholder cash returns. We have constantly maintained this approach based upon the actual cash position of the fiscal year after funding requirement for the first 2 items, we still remain substantial cash reserve to support future business growth. During the period, our free cash flow was RMB 1.22 billion, representing 1.5x of the net profit for the same period, which provide a solid foundation of our dividend payment. Therefore, the Board has resolved to decline the interim dividend of RMB flat or consistent, maintain the same with last year. We hope we can leverage our high-efficiency operations and continue to provide a positive cash return through our efficient operation, creating sustainable shareholder return value. Coming next, let me just welcome Rebecca Zhang to -- Mr. Zhang to walk you through the business review section. Qiang Zhang: Thank you very much. Review H1 of this year. Micro retail market demand fluctuate. Social retail data show that textile and power industry grew by 2.5%, slightly faster than last year, but recovery pace was lower than the growth rate of the total social consumer goods retail sales. Industrial growth is no longer universal. It extend from the specific scenario and the demographic. In omnichannel retail, we now have instant retail, the broader and deeper channel deployments. The experience economy has risen with consumer purchasing not only product, but also service, content and emotional connections. Technology innovation also play a crucial enabling role in both back-end operation and front-end interactions. Where for sports industry, consumer segmentation has been more subdivided and be more diverse, shifting from general sports population to specialized vertical interest communities. Professional functionality has become the key direction for product upgrades with consumer pursuing high performance and scientific support. Meanwhile, while domains have been deeply integrated, sports has been connected to lifestyle, social interactions and the technologies. Facing such environment, industrial leading company generally focus on core strategies, invest in product R&D to build technology barriers, capture segmented demand through brand and category metrics expansion, advanced operational lean management, improving resources conversion efficiency. We are facing the external challenges. Topsports adapts to trends, refine internal capacity and enhancing our corporate resilience through forward-looking strategy positioning and agile execution. Against the backdrop of coexisting opportunities and challenges, we have made 2 reinforcement, reinforcing expansion into emerging scenarios and high potential area. Our brand metrics covers the comprehensive sports, lifestyle sports, professional sports and IP culture, and we continue to expand the brand deployment in running and outdoor. Committed to become an omnichannel one-stop operational partners for more partners in China's market on the diversified sports landscape. We also have 3 major iterations. In omnichannel retail, we comprehensively focus on continuous lean improvement of the offline and online efficiency. In talent strategy, we have released Topsports talent philosophy of ambitious, self-driven, disruptive, self-reflective, responsible and mutually achieving, focusing on building a growth-oriented team with both innovation and practical capacity. In technology upgrades, we continue to advance our digital intelligence strategy, optimize and expanding application of diversified tools, improving multichannel digital operational efficiency. During the period, facing continued evolving consumer habits and scenario demands, we expanded and optimized our omnichannel retail capacities based upon the offline and online synergy plus differentiated channel operations. We proactively drove traditional stores to breakthrough single growth to comprehensively deploy one plus and diversified operating models. While physical store as a core, extending to online consumption scenarios through the middle school expansion, embracing new platforms and method of connecting with consumers. By period end, our offline store has extended to online operational touch points covering multichannels, including constant e-commerce, private domain operations, local lifestyle and instant retail, leveraging the multipoint deployment and merchandise advantage. With coordinated support from merchandise management, user service and digital intelligence, we will be able to capture differentiated demand across various consumption contacts, building a flexible and efficient online operational system to support the high-quality growth of the online business. Where in terms of the store layout, facing the market environment with fluctuating offline traffic, we use operational efficiency as our core anchor, prudently advancing optimization of underperforming stores, adapting to the demand changes through flexible layout adjustment. We adhere to the optimize plus principle, optimizing and deploying one brand, one strategy retail store structural adjustment strategy based upon brand partners differentiated characteristics, target consumer profile and product attributes. More importantly, by building an integrated omnichannel retail network, Topsports has provided consumers with seamless connected full scenario service experience. At the end of August 2025, we operated 4,688 directly operated stores with store count down by 19.4%, sales area down by 14.1%. Compared with February 28 of 2025, store count down by 6.6%, total sale area down by 4.6%. Average sales are per store increased by 6.5%, consistent with 4.8% trend from the same period last year. Due to our more focused resources allocation, capital expenditure decreased by 36%, selling and distribution expenses ratio decreased by 0.2 percentage. Frankly speaking, we recognize the essential role a physical store play in sports industry. We upgrade the store with potential value. We're also actively expanding offline store online capacity, seeking ideal alignment between experimental value presentation and the store performance. Against the backdrop of complex and the variable retail markets and consumer behavior, Topsports remain strategic foresight, continue to work with our upstream and downstream partners to explore diversified offline value, providing Chinese consumers with rich experience and good product recommendation across all scenarios. This year, we jointly let and implemented NBA Star China tour activity with major brand partners covering the key CBD in Shenzhen, Chengdu and other cities. Fan enthusiasm was high at the event value, further highlighting our value as an active co-contributor of the diverse culture. Meanwhile, we launched new concept stores with multiple brand partners. Serving as exclusive collaborator and leading facilitator, we're working with brands on localization strategy creating fresher and more cutting-edge product and the store experience for young consumer groups. We also deeply practice sustainability concept, partnering with emerging pet brand [indiscernible] to launch the used closing recycling charity initiatives in stores, advocating circular economy principle and engaging more than 10,000 consumers. Regarding the online business, we advanced refined channel operation, optimizing overall metric strategy based upon the scenario characteristics. During the period, retail online business sales, including both public and private domain achieved a double-digit growth Y-o-Y. Let's take a look at operational factors for each channel. For e-commerce platform, we focus on store cluster metrics, omnichannel expansion, leveraging multi-brand advantage to enhance efficiencies through merchandise support. In content e-commerce, we use account metrics and building product synergy, and to build a heat product to penetrate into target demographics through interest-based approach. Private domain operation deepen user connections through precise and customized community service. The newly added instant retail during the period leverage our store network to provide instant need, instant purchase and instant fulfillment consumer experience. By period end, we have 800 Douyin and WeChat video accounts, more than 2,300 Xiaohongshu accounts with more than 3,600 mini program stores and 3,700 stores participating in instant retail. During the period, we continue to maintain first place on Douyin Sports and outdoor ranking. Our private domain mini program also maintained first place on Tencent official WeChat popular mini program sports and outdoor category rankings. Through the above deployment, Topsports online business can now comprehensively cover consumer 4 major purchase scenario as brand interest-based, recommendation based and instant need purchase achieving effective extension and the systematic organization of the online business. That concludes my sharing. Let me just pass on the floor to Ms. Zhang Huijing to review our initiatives and achievements in user operation and digitalization. Huijing Zhang: As many of you can already see, Topsports is committed to building a diversified user value system. We're deeply mining user potential value to form a virtuous circle development ecosystem to continue to deepen the user relationship. Where in user acquisition, we have a very targeted focus. We focus on omnichannel expansion, combining the omnichannel scenario-based interactions, engaging marketing and cross-industry collaboration to engage new users. While at the same time, we also drive multi-platform user information integration and consolidation, improving omnichannel user profile to ensure users enjoying consistent benefits across all scenarios. In existing user operations, we upgraded and refreshed the naming and benefits of Topsports membership tier system, deepening emotional connections with users. Meanwhile, we also built an omnichannel integrated operational closed loop using product, content and coupons as entry points to continuously enrich and cultivate user value. Whether users are in-store or after visit, we maintain omnichannel operation thinking, closely following characteristics of each stage in user life circle, achieve success reach and efficient conversion, further enhancing user belongings and brand affinity. Well, till now Topsports user base has steadily grown to 89 million. We focus on refined deployment managing and continue to give my user value. We deeply integrated our original membership IP, TOP Run Free into city scenarios like travel shopping and Q&A. During the May Day holiday, online active activities awakened more than 1 million private domain users, contribute more than RMB 100 million in sales beyond regular membership activities. We launched money-saving season cards for high-frequency members addressing their high-frequency consumption effectiveness pain points. Results show that card purchase a significant repurchase rate than regular users. Those above initiatives can allow the user to maintain consistent high stickiness and loyalty across all scenarios. Total member accounts reaching 92.9% of the sales in offline store and WeChat mini programs with repeated purchase member contributing to 60%. We also achieved positive result in high-value member operation, though they only represent a mid- and single-digit percentage of the total consuming member, but their value contribution is approaching 35%. High-value member average order value constantly and significantly exceeds the membership average, reaching 6x of the average member order value, demonstrating strong consumption potential and user stickiness. While at the same time, we also build a digital platform as our key strategy. In H1 of this year, our digital platform evolved towards a more intelligent strategy. We constantly guided by precision plus efficient inking combined with business strategy to focus on scale expansion and cost reduction and efficiency improvement across omnichannel dimensions. We refine and strengthen efforts across 3 themes, including omnichannel integration intelligence and panoramic view, building Topsports smart retail ecosystem. To be specific, omni-channel integration comprehensively connects business processes across 5 dimensions, including product members, marketing, service and data. In product dimension, we focus on building a system that can maximize inventory sharing, ensuring omni-merchandise visibility, stability and fulfillment capacity. In members, we drive universality and value maximization of the traffic acquisition and operation, enabling members to achieve consistent and quality service across different touch points. In marketing, we actually provide strong momentum into business development through diversified coupon and combination, supporting user value mining and sales conversion. In service, we achieved the consistent efficiency in consumer service tickets, significantly improved the user service response speed and quality. We achieved our mid-wall upgrades and migration, improving system utilization and operating speed while delivering efficiency optimization. While at the same time, we are also improving our sales efficiency. As you can see, in omnichannel intelligence, we continue to further improve the on-shelf efficiency, while at the same time, we will be able to continue to improve the inventory listing and utilizing of efficiency through end-to-end supply chain timeless control. Intelligent marketing and sales, we drive dynamic upgrades in product delisting while forming automatic process communications with AIGC content creation and copy AI-assisted product selection recommendation. At the intelligent operation and the decision-making, we complete the leap from the passive analysis to proactive intelligence, advancing store operations towards automation and precision. In omnichannel ergonomic views, we rely on digital intelligence capacity to achieve deep constructions of the user ecosystem and value enhancement on the AI-powered ecosystem. By building user operational model support that match user value growth curve, we support the development of the user ecosystem across all time period scenario and life cycles. Meanwhile, accelerated AI technology penetration also bring new momentum to -- the Chinese consumer cautious where consumption motivation shifted from a purely practical to pursuing emotional value and on the multidimensional aspects -- combined with the rising running enthusiasm, consumer demand for sports equipment has been upgraded to dual requirements of professional and quality, value in both segmented scenario enhancement experience and resonate with brand value, making the vertical segmented sports brands more favored. Based upon this, we can seize market opportunities by further expanding our freight cycle with a focus on deepening deployment in running and outdoor. We have successfully launched a partnership with running brands, including Norda, Soar, Ciele and outdoor brand Norrøna, to meet differentiated vertical demands. Additionally, we expand our own capacity circle as exclusive operational partners of those brands in Chinese market. Topsports is responsible for end-to-end operations, including brand strategy, content, communication, omnichannel operation and community cultivation, working with brand partners to tap the market potential, achieve effective connections with the target user and sustainable healthy brand environment. Currently, those brands are proceeding with orderly expansion based upon their distinctive features through a differentiated approach and plans. They attract new users through the major events and circle activities building social media metrics with leading style products to achieve cross-scenario brand mature cultivation and process demographic service. In channel, they adopt a multichannel development strategy, successfully opening the offshore online flagship stores. We're also flexibly utilizing the offline pop-up stores and buy stores to meet the Chinese consumers. In deploying those brands, we continue to explore to bring consumer with more diverse and distinctive experiential value across all domains. During the period, the Norda brand operated by Topsports debuted at the 2025 Yunqiu Mountain Trial race, creating a scenario-based independent retail space, emphasizing on try-on experience featuring with minimalist artistic and a strong design, attracting numerous runners for the on-site inductions. Sequentially, Norda successfully held the first brand event in China at Aranya, Jinshanling, the Mountain Breeze as Escort, Wild Trails into Zen, connecting with domestic running communities to accelerate their presence in China market. As an innovative attempt to invest in more heavily in running shoes and retail formats. We help to connect the runner brands and cultures through running lifestyle brands. Recently, we actually have our running concept store, Ektos in Shanghai, reconnecting the traditional offline retail language with runner needs as a core, emphasizing our integration into community and runner lives to increase user stickiness. The store social infrastructure provides runner with one-stop services. In product selection, we emphasize on professional logic using professionalism to resolve consumer pain points. We're introducing the unique product to maintain user freshness, where we focus on the community operations and content co-creation, transforming the store positioning from a single run equipment sales venue to become Ektos, a platform or spreading running culture and promote exchange and growth among the running enthusiasts. We hope to achieve good products and service through Ektos building reputation and influence in domestic and international running industry, making Ektos an independent operational platform for understanding Chinese running culture, therefore, engaging more brands to open their new stores in China. Going forward, we are optimistic about the running subdivision, and we'll have more deployments in this regard. Currently, the sports consumption industry are facing the opportunities and the challenges amid the intensified competition. Facing such situation, we will actively adapt to the trends and confront market challenges. We refine our competitiveness in sports retail industries through forward-looking strategy as well as ensure execution. Looking to the second half of the fiscal year, we're going to focus on the 4 parts. Focus on omnichannel scenarios, user innovative formats and service positioning for long-term growth. Continued focus on consolidating efficiency, forging fundamental resilience of the retail platform, optimize precise plus efficient digital intelligence empowerment support, practice ESG principle, building sustainable pathways for ecological co-construction and value co-winning. So that's all for the presentation. We're now happy to start the Q&A session. We welcome the online investors to ask questions. Thank you. Operator: [Operator Instructions] Coming next, let's welcome Wei Xiaopo from Citi. Xiaopo Wei: Can all of you hear me? Unknown Executive: Yes, please. Xiaopo Wei: I have 2 questions. My first question is regarding your key partners. A few weeks ago, your U.S. partner, Nike, has make some very interesting comments of the China market in their quarterly report. They specifically emphasized they're going to have a major investment in China market. Mr. Zhang, in your presentation, you already mentioned, Topsports continue to actually refine our omnichannel operation and also to help to tap into the online value of the offline stores. Just as was being mentioned by Nike, for Nike global directed e-commerce, the Chinese partner dilemma facing the offline operation dilemma. So Nike's online retail business is not 100% aligned with the China market needs. So in other words, as far as I believe that Nike is going to invest more for the offline channel, is it possible for the Topsports management team to comment on what would be the future of the Nike in China? Or what about the partnership strategies? What about the order and the product you see from Nike? But at the same time, my second question, in your interim report, your GP margin residence is much better than what we expected. You have already mentioned, part of the reason is because of the brand support, but how sustainable the brand support would be? This is my first question. Unknown Executive: Thank you, Mr. Wei. I clearly noticed for Nike Global, it has already disclosed its comment for Chinese market. It was measuring its business structure product in China. Its business recovery in China is much slower than its business development in other countries. In Nike's statement, it was mentioning the online platform and online business in China has been quite chaotic. People are all competing over the price. So that's the reason that Nike started to roll out its management and plan for online channel, and they are going to further reduce discounted product for e-commerce sales, which has been mentioned by Nike, where we are being supportive to Nike's initiative. We are helping them. We are, at the same time -- and it also mentioned it's going to invest for the offline channel, because sometimes if you operate a single brand store, the churn would be pretty long, including store selections, GFA decisions, the shelving, listings and product presentations, all the offline store operations be further challenges with more adjustments being needed. We are in the process with Nike for negotiation. Some has already generated a good further results or some are still in negotiation. Let me just give an example based upon the existing sales and the market landscape. Topsports already narrowed down the GFA for many of our own stores because you can clearly see the offline traffic has been changing. So that's the reason we are actually narrowed the GFA for many of our stores, which would also be aligned for the future new openings and renovations we have for our stores. While at the same time, we also continue to further reduce the accretion cost. Let me just give you an example. For Category 1 Jordan store, for a single store, the traditional -- the decoration criteria cost being reduced by 45%, where for STORE 750, actually, the decoration cost being further reduced by 42%, which can also help to further reduce offline store operation expenses, which can further improve the operation of the physical stores, where there's another improvement on the product or merchandise by embracing the sports brands, we already see 2 significant improvement on 2 categories. The first 1 is a running category. And you can see that our product continue to perform above industry average. Starting from Q3, we invested in [indiscernible] and its single month sellout is close to 50% to 60%. In other words, it has already been taken as the best-selling products, which actually further improved the selling rate of the new product. In winter, we actually have the [indiscernible] with just 3 months after the product debut, the authorization is already more than 40% or the sell rate is already more than 40%. We do see for the running shoes, some of the new products and functional products are actually having very good sales performance. For the basketball category, copy product sales rate was also outstanding. So you can see for the functional product sellers, no matter for running or for basketball, the key flagship sales all see very nice selling performance of the new product and highlight of the new product, while at the same time for Topsports in order to make sure we can respond to consumer needs in a more efficient way. As we are working with Nike for their next highlight of flagship product and that is outdoor ACG product. For outdoor ACG product, its independent brand. For Topsports, we are also an important partner of the independent outdoor brand, ACG for Nike. Till now, we have already nailed down the first 5 stores. The first 1 is the Beijing Sanlitun store. It's being operated by Nike, but the top 2 to top 5 stores were all being operated by Topsports. Stores being located in Nanjing, Chengdu, Guangzhou and Changchun. The location has already been selected. And the commence time has already been confirmed. We are actually working with the brand to further explore their offline potentials. Xiaopo Wei: I have the second question regarding your brand metrics. Especially for the past 1 year, we say your brand metrics being further expanded with accelerated pace. For example, the management mentioned you are engaging more brands for partnership and the cooperation was being more innovative, for example, Norda. So I really would like to know with those new models, for the emerging brands besides Nike and Adidas, for example, like Norda, Soar, Ciele and Norrøna, what would be your future target? Do you have any qualitative or quantitative target that can share with us? Unknown Executive: Thank you, Mr. Wei. This is also a very good question. Let me just respond to your question from different perspectives. If you have any ongoing questions, please send me more message. First of all, for the past 1 year, as many of the friends already see, we are accelerating our pace for brand metrics expansion. You see it from the results we shared with you, but actually, it's not a short-term action. It's been a long-term commitment. Many of the brands, especially the emerging brands, we have already engaged with them for 2.5 or even 3 years. It happened just been released within the past 12 months. We have already have a long engagement and commitment or negotiation with those brands many years ago. For my second point, let me just share with you how I comment on the brand metrics and the brand family. If -- you are the one follow our company for many years. You probably still remember when we go for IPO roadshows, we tell people we are more like a combination fund or just like the portfolio that you may have. For many of the ETF shows, we're going to talk about tracking error. Tracking error can actually reflect whether you can effectively tell the market changes. We are also bringing the tracking error thinking to see whether our brand metrics would be able to tell the brand, the future development, market dynamics or showcasing the segment with new potentials. By having such a thinking in our mind, we continue to think about and review what are those brands we can work sustainably to bring them into our brand metrics. So generally, for our brand deployment, to a great extent, it also shows the changes we have to the market dynamics, our focus on segmented areas with new highlights. If we believe there's any segment with good short-term, long-term development value, we'll continue to add into this segment to make a continued investment to showcase our confidence. To be more specific, for example, in the secondary market, you may actually have the circulations, no matter for consumables or industrial products or technologies. We hope that in the areas, we're supposed to have our presence, we then would like to have more leadership in that segment. Especially for Topsports, we are a platform having the omnichannel presence. We need to continue to leverage our advantage. We indeed have the platform and scale up capacities to work with different brands for partnership. So that's the reason from this perspective, it can also help you to truly understand why we continue to expand our brand metrics. Mr. Wei, I remember, you also have the second part of your question regarding our vision and our targets. Well, for vision, you probably have been already inspired by what I mentioned, how you understand our brand metrics and the market development. What we do now is to leveraging our partnership with brands to continue to support them. Besides retail operations, we also provide brand management support and initiatives to the brand. I hope that the capital market could be more patient because at a new stage, we'd like to take baby steps to make every step counted to consolidate our business. For any new business transformation, we also keep an eye on the new model besides transitional retail operations, truly hope to have a more refined product or business model. A new business model provides more promising opportunities to us and to brands to tap into more market potentials. So 3 points from a response. You can understand our brand combination and the product portfolio, which showcase the market dynamics, our confidence and our investment of the market. Secondly, we hope that by having the ownership and leadership in our key areas, the brand we're working with is also emphasizing our business shift from traditional retail operations to brand management. But still, we are focused on the product, making the business model right to lay a solid foundation for our future sustainable growth. Hope I helped to answer your questions. Wu Yu: Thank you. Thanks, Mr. Wei. I find out, there are 2 questions you may need some answer from me. So let me just share with you how sustainable the brand support is going to be, and then what about the order. Let me see for support sustainability. The market is not performing well. We get more support from the brand partners. We're looking into the future. I truly believe as the largest and the best partners with the brands, we're surely going to have more support more than others get. Regarding the product order for the past 2 quarters, you can see that the order has been decreased on a Y-o-Y basis. Majority of our brands are adapting the flexible supply chain. In flexible supply chain, there are opportunities for us to have more order placement. You can see in the actual seasonal sales, our actual sales or product arrival is actually higher than the order were placed. So that is my answer to your question. Operator: Coming next, let's welcome Ding Shijie from Guosen Securities. Shijie Ding: Thanks for giving me the chance to raise a question. I'd like to ask the company, what would be the outlook you have for H2 of this fiscal year or even next fiscal year? And we also noticed the wholesale revenue for Nike in China market was declining for the past few quarters, but the decline has been further narrowed down. So as someone ordered from Nike, will Topsports share with us what would be the breakdown of the new product or the old product you ordered from Nate? Whether any updates you may have on the discount or product sales from Nike? My third question was supplementary Ektos project. We see that we have more consumers who's been deeply engaged in running. But still, there are some pain points for shopping, for example, the brand preference and know-how of the salesperson, we are very interested in Ektos. Is it possible for you to share more the product Ektos, how is future developments being planned? Unknown Executive: Let me just respond to your question regarding H2 of this fiscal year. Well, as you can see from our presentation, communication or what you can see from the industry. You noticed, the industry still faced challenges even in recent weeks. In such a challenging macro environment, in this fiscal year, what we are committed to is to fulfill our full year guidelines that we provided in May of this year. In other words, in fiscal year 2026, we hope the net profit could be flat. Net profit rate could be improved on a Y-o-Y basis. This is also the commitment, we still outlook now. Well, regarding fiscal year 2027, as many of you know, we only give the outlook when we hold the annual release. So it's too early to provide the fiscal year 2027 outlook. Let me just ask Mr. Zhang to respond to the inventory metrics to you. Qiang Zhang: Thank you for Nike products, around 70% to 80% of the products on the new product, which is healthy and which is also the level we are keeping now. We're going to keep it in the near future. Where for the key brands, what the key brand is doing now is that they are actually leveraging 3 strategies. For example, we control the volumes to maintain the discount rate. So actually, the discount rate has been quite stabilized. Where you can also see that the sales of the running-related products will continue to go up, which is indeed supporting the new product sales, which can also benefit our GP margin to some extent. This is what we are having now. Wu Yu: Thank you. Thanks for the questions. All the questions are quite professional and well targeted. That really makes me truly inspired. Those questions are quite good. So please allow me to share with you some of my ideas by responding to the questions. Let me just try to give a few comments on the questions I heard before. For Ektos. Ektos indeed is a business or a more accurate manifestations we have for our commitment into this business. So Topsports' investment or commitment in running has been further manifested by Ektos. For Ektos stores, what is happening for the project and to our stores? What are those content business going to be presented by Ektos? Well, from the physical format, Ektos is more like a multi-brand retail space in the physical channel. But when we started the trial operation from the 1st of October to now, it's around more than 20 days. So besides selling the exclusive product ready to be seen by the market, Ektos has already become and evolved into a hub that can connecting the people who are in love of running. For example, we have KOLs who come to the store for visit. We have the runners who come to the store to talk to us. In our Ektos, we call ourselves as a social infrastructure. It's a social infrastructure concept. What do we mean by saying social infrastructure? For example, there's 1 corner in the Ektos store, they are going to open to our membership. In Zhongshan parks in Changning district, we do have a coastal running pathway. Our store can provide the storage locker and the 24/7 vesting service to our runner, hoping that we'll be able to have direct reach to the runners for more communication and interactions. But at the same time, for Ektos, we also have some top runner from Shanghai. They are not coming to Ektos for store visit or shopping. They just take Ektos as a place for their appointment or engagement, just like the social space, we have in Europe, just what Starbucks presented to the community, is actually a connection hub of the community. I think for Ektos not only bring more product sales, engaging more brands. For the past 2 to 3 weeks, there are more sports brands connecting us, hoping that we can have some co-branded events or running their brand communities in Ektos. We're helping them to show more content. So actually, Ektos is a diversified harbor rather than being limited on the physical space. It's already go beyond its physical format. Then how Ektos is going to develop in the near future? I think it was not contradictory with what we have already mentioned. When Mr. Wei was reading the question, I have already shared with you, we're not only going to limit ourselves for the retail operation or omnichannel deployment. We are now shifting into brand management, too. So all those initiatives when we combine together, we are, in other words, continue to embracing brand management with a physical platform and ready-to-go strategies. So in other words, Ektos is indeed our store, a physical store or manifestation of our commitment for the branding sector, where it's going to be parallel to our single brand business and more emerging business or more connection service would be available at Ektos. In other words, let me just use 1 sentence to summarize my comments. Ektos is not only a new store of shopping the new brands or new products. If you have any further questions, I welcome you to raise the questions now or after the meeting. Thank you. Operator: Coming next, let's welcome Dustin Wei from Morgan Stanley, please. Dustin Wei: Recently, trend update would be my first question. Double 11 has already been started, and I know you have many good online sales. Do you have any trend to update us? My second question is a long-term question. For retail market in China, offline and online has been changing all the time. Right after COVID-19 in 2023, offline traffic has been recovered. But in 2014, 2025, offline traffic has been kept at a very low level. I know you closed some underperforming stores, but still the offline traffic continue to go down. I see it's actually structural changes of the consumer behavior. I'm not sure whether I'm making the right statement. Now your online sales is already 40% to 45% in 3 to 5 years, it's going to be 70% of your overall sales. From our membership data, can you indeed see that majority of the young consumers on the age of 30 still purchase online rather than go for offline store. If such thing happen in the next 3 to 5 years, then for Topsports, where we already taking the right strategy to improve our digital capacity, whether this is going to generate some good opportunities or setbacks to our GP margin or business model? My third question is regarding your new business models. For example, you have exclusive partnership from a few nice emerging brands. Let me just ask you, for example, like Norda, Norrøna, are you contracting those brands for exclusive partnerships or may within that agreement term, you help them to take care of all the commercials in China, for example, distributions self-directed stores. Does exclusive partnership look like this? I know that the company has a very strong cash flow capacity. If you really would like to engage those brands in long run, did you consider JV or equity investment as a way of being part of the emerging brand operation? Wu Yu: Thank you, Dustin. Let me respond to your questions. The first question is regarding the market landscape now, where you can see the market data or market sentiment. I think you can already observe that as a consumer or even you talk to other peer company, you probably already feel what the market may look like. I see there are more challenges are in the market, where from Topsports, especially from our fiscal year Q3 to mid of October. In other words, from the beginning of September to the mid of October, in just 6 weeks, the sales is very much in line with the Q2 performance of the previous fiscal year. I mean, from June to August. Online offline performance are also quite consistent with before. I was talking about the sales. Well, regarding the discount and inventories. Let me see that for inventories. Topsports still maintained a very stringent control over inventory. The inventory level is pretty healthy and controllable, which has already been mentioned by Mr. Zhang in his presentation. Regarding the discount rate, for the past 6 weeks in Q3, discount rate has still been deepened. The attitude of the deepening has been narrowed down compared with what we saw in Q2. So these are the latest observation updates. Well, regarding the overall market, still we see the challenges. But for Topsports, we always maintain our own cadence in H2 of fiscal year, we're going to be more priority-oriented, right after moving into H2 of the fiscal year. Our business or the actions we take are still going to be in line with our overall road map and the expectation. Let me just ask Mr. Zhang to respond to your question regarding the evolving landscape of online and offline business. Qiang Zhang: Thank you, Dustin. I noticed the observation you mentioned in your question. We see the challenge for the offline channel is truly huge. This is how we comment on the online opportunity. First of all, the traditional channel expansion used to only focus on the store number, but now we focus on the omnichannel operation. For example, one physical store going to have a 10 online stores. So for one store, it has 1 physical store and 10 online stores. That is to make sure the offline store can develop their online capacity, especially when we have the traffic drainage for the offline channel, we have to find a self-rescue strategies. First of all, we need to build our private domain. By having a private domain to engage the traffic, we will be able to find a way for the offsetting the traffic drainage in the offline channel, retain the consumer, continue to enrich touch points and conversion. Besides the private domain, we also have the content e-commerce. That is basically restored with Douyin and Little Red Book. And we are also going to have the key stores and the flagship stores on the social platform, engaging more public traffic to this opportunity for sales. And the third part is Dianping.com or TikTok localized, and then they can actually direct the traffic to the stores. We also have our store presence, sales coupon, interaction with consumers, supporting them to come to our physical store for consumption. The fourth part, or should I say the most emerging and also 1 of the most important part, that is the instant retail. Instant retail can actually leverage the offline discount, providing more convenience to the online consumers. It's just like the food takeaway service of delivering Topsports product to consumer hands, which can have a fast fulfillment by providing the localized solution. Those are all indeed the strategies we have in order to support our offline stores to divide their online store capacity to offset the traffic drainage in the physical channel. Those are indeed the initiatives we are adopting now. Wu Yu: Okay. Dustin, let me just respond to your final question. I think you have already made a very few important points. Same as you mentioned, for the contracting relationship within certain geographic regions, for some brands are partnering with us in Greater China or even in Chinese Mainland area that is exclusive partnership we reached with the brands. But just 1 more comment I'd like to make on that. We never excluded the possibility of having some equity cooperations with those brands. But let me just point it out, being an equity investor is just a tour rather than the final objective. What we are going to do is to share the interest with the brand to have a deep collaboration. We hope that when we were working with different brands, each brand has a very different background, the history, development milestones. If equity investment would be a way to deepen such a partnership, if other parties stay open for negotiation, then for sure, we are happy to have the negotiation. But if the timing is not right, we are still quite patient and be fully committed of supporting the brands to prove to each other, we are the right partners for long and sustainable growth. Operator: Ladies and gentlemen, due to time constraints, let's welcome the final question. Let's welcome Samuel Wang from UBS to raise the final question, please. Samuel Wang: I'm Samuel Wang from UBS. I have a question for the management team. The sales revenue decline is kind of significant in H1 of this year. Would you mind to elaborate on the reason? My second question, you now have 89 million users. You must have generated some good insights from the user. Did you see any new trends? For example, outdoor and running categories still registered fast growth, where for other categories, whether basketball has been pressured or is it being remitted or for other sports, for example, like tennis, like badminton or like golf, do you have any trends or dynamics updates with us? My final question is regarding the new brands. What about their sales contribution to your overall sales? And what about their profit or even the net profit contribution to our overall business? Wu Yu: Thank you, Samuel. Let me just try to answer your question. I mean the first 2 questions. I will then ask my colleague to respond to a final question regarding new brands. My first response to your first question, wholesale revenue decline in H1 of this year. First of all, has been planned for the full year. This is also within our expectations. You know that for wholesale users, they are in the top-tier cities or Tier 1 cities. From the management perspective, I mean, if we consider efficiency, if the efficiency is not in the right timing, we may have some wholesale users or consumers. You know that for wholesale, the offline are the key for wholesale. Majority of our wholesale consumers, they have many offline stores. The offline traffic has been heavily impacted for this year. So our wholesale partner, I think their revenue is being heavily impacted. When we are dealing or handling with the wholesale customers, we would like to focus on the sustainable and healthy development. This is the strategy we have with our wholesale partners. Let me just complement on that because the overall micro environment is not looking right. Wholesale consumer confidence being impacted, order continue to go down, where there's another reason we have to notice, the market is facing various competition. The online product price and the sport product price has been quite chaotic. I mean the pricing system. For some of the wholesalers, they actually order less from the wholesale channel. They believe they will be able to get a better discount by having temporary small batch orders. So that's the reason the wholesale business was going down. Samuel, I didn't get your question very clear. You were asking about the insights from the membership to new brands. Are you asking me to comment on the new brands? Or are you asking me to talk about new brands deployment and the strategy? Would you mind to repeat the question again? Samuel Wang: No problem. My question is that you have 89 million users. You might have some user insights data. Did you see that the category difference, for example, running outdoors, the growth rate was looking pretty right. Basketball used to be pressured, whether the pressure is being elevated or for some of the niche sports like badminton, like tennis, like gold, do you see there's any brand who have a promising future with nice growth or any category who may have similar performance as outdoor in the near future? My second question -- third question regarding new brands. What about the new brand sales contribution and profit contribution or the net profit rate? Wu Yu: Thank you. Actually, first of all, sales contribution from new brands or niche brand, you see Topsports is a large company. So here now, the niche brands contributed less to the profit. You can almost neglect that. But running those niche brands or emerging brands is our strategy or our business pilots for future growth opportunities. Well, regarding profitability, you can see all the brands we are working with are having exclusive partnership with us. For those niche brands, we hope we can help them to have a good and high quality debut in China, consolidate their future growth opportunities in China. So profit and the discount control over those emerging brands being -- will by done by Topsports. So those are the 2 response I have regarding your new brands question. Well, let me just be brave in showcasing the promising verticals or the categories. I will ask my colleagues to give you more comments. First of all, as we can see, sports industry is being highly integrated, no matter from sports or from brands. While with these preconditions for the past 1 decade, you can see that we have domestic and international brands continue to show up. But to some extent, it was showcasing differentiation, people's interest and the preference being further sparked. This is actually 1 thing for your reference. Well, based upon that, you ask me what are the categories, what are those niche sports can grow? First of all, some of the so-called non-niche segment may not be niche in the near future. It may engage in more consumers in the near future. Well, based upon that, you see what would be the category that may likely to become the outdoor category. Just like the secondary market, you need to have the alpha and beta. Alpha shows the sports developments. And beta actually means the market dynamics that may lead to the brand growth in short run. You have to consider both factors together. Well, regarding the alpha, there are some niche market or sports, who have a very strong momentum for future growth. We have already made the corresponding resources allocation. Where for data, it's more like marketing campaigns, you just follow that, keep it on eye and be a part of that. That's my response. Let me welcome Mr. Zhang to say a few words. Qiang Zhang: Thank you. Responding to your question on category. In the category we are operating now, we see demographics and the consumption data is truly aligned. The largest category is still running. Running is still the best and still growing segment we see. It's also a category that all brands in competing with. For running shoes now, I mean for the light-weighted running shoes, people just want to make it less than 200 grams. Adidas made a running shoes weighted less than 200 grams. It's going to be a onetime marathon running shoes. Performance being extreme. The surface is quite breathable and thin and making sure it have very good elasticity. So in other words, all brands have been competing over technology innovation and material progress. So all brands have been working for running market. It's still the largest application with every growing market momentum. It's still a place with a new product on a daily basis. All brands are actually taking running as a focus area of development. Well, let's talk about outdoor segment. Outdoor category is more like a high rising -- and even if it was rising fast, but still this market is still a vertical market with focused demographics. No matter like North Face or other brands, they actually made a substantial growth in the outdoor categories, which is truly well demonstrated with very nice growth. There are other segments, including basketball. Basketball is more like the inventory market. For basketball, we actually focus on the junior high school and the senior high school or even sometimes primary school students. Many of those target users are the on-campus students. The brand allocation in the basketball won't change that much. Nike probably be the trial taker where other brands are taking the corresponding shares. So it's actually a relatively fixed market with nice inventories led by Nike. Mainly the basketball market is being led by Nike and other brands just take of the rest part of the market shares. For the niche market, tennis registered very nice growth, especially Nike tennis series, where Nike sponsored Jannik Sinner, were in the tennis global competition, we have many new rising stars from China, which actually be a great momentum among the public. We see such growth momentum from Tennis, but the contribution and volume is quite limited. I see the growth momentum from tennis is looking good. Well, for football. Football don't have too much promising potential for the professional product lines. For viewers of the football or the people who play football, in other words, we have more people watch football games rather than play football. But the football lifestyle products do register nice growth for the past 2 years. That would be the category dynamics, I'm happy to share with you. Operator: Okay. Due to the time constraint, ladies and gentlemen, here comes to the end of our presentation. Our management and IR team will continue to engage our friends from the capital market. Thanks for your time, and thanks for supporting Topsports.
Operator: Greetings, ladies and gentlemen. Welcome to the Vesta Third Quarter 2025 Earnings Conference Call. [Operator Instructions] And as a reminder, this call is being recorded. It is now my pleasure to introduce your host, Fernanda Bettinger, Vesta's Investor Relations Officer. Please go ahead. Fernanda Bettinger: Good morning, everyone, and welcome to our review of third quarter 2025 earnings results. Presenting today with me is Lorenzo Dominique Berho, Chief Executive Officer; and Juan Sottil, our Chief Financial Officer. The earnings release detailing our third quarter 2025 results was released yesterday after market closed and is available on Vesta's IR website, along with our supplemental package. It's important to note that on today's call, management remarks and answers to your questions may contain forward-looking statements. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ. For more information on these risk factors, please review our public filings. Vesta assumes no obligation to update any forward-looking statements in the future. Additionally, note that all figures were prepared in accordance with IFRS, which differs in certain significant respects from U.S. GAAP. All information should be read in conjunction with and is qualified in its entirety by reference to our financial statements. Including the notes thereto and are stated in U.S. dollars unless otherwise noted. I'll now turn the call over to Lorenzo Berho. Lorenzo Dominique Berho Carranza: Good morning, everyone, and thank you for joining us today. While we entered the year facing macro uncertainty and slower market activity, I'm pleased to note we're now seeing encouraging signs of improvement as clients start to make decisions. Leasing momentum is returning. Tenant demand is intensifying and the fundamentals behind Mexico's industrial real estate market remain intact. We are particularly encouraged by the uptick we're seeing in leasing absorption, a signal that companies are regaining confidence and moving forward with their long-term commitments. Third quarter was a solid quarter for Vesta. We delivered strong operational execution in a market which has begun to normalize from earlier year softness, as I have described. Vesta's rental revenues increased, supported in part by the rent-generating buildings we delivered last quarter and will continue to drive revenue growth through the end of the year. Our retention rate remains high and rents on rollovers continue to trend upward, demonstrating both the quality of our assets and the strength of our tenant relationships. Meanwhile, our stabilized portfolio continues to perform well. Total income for the third quarter reached $72.4 million, which is a 13.7% year-over-year increase. And total income, excluding energy, reached $69.9 million, a 14.5% increase. We delivered an adjusted NOI margin and adjusted EBITDA margin of 94.4% and 85.3%, respectively, for the third quarter 2025. Let me now walk you through leasing activity and market conditions across our core regions. Total leasing activity for third quarter 2025 reached 1.7 million square feet, 597,000 square feet in new leases with new and existing tenants and 1.1 million square feet represented renewals with an average age of 6 years and a trailing last 12 months weighted average spread of 12.4%. Vesta's third quarter 2025 total portfolio occupancy, therefore, reached 89.7%, while stabilized and same-store occupancy reached 94.3% and 94.8%, respectively. As expected, our overall portfolio occupancy dipped slightly during the third quarter, primarily due to the delivery of new buildings currently in the lease-up phase as a result of the robust development pipeline we executed throughout the year. We're confident that absorption will follow, and this positions us exceptionally well to capture the demand we anticipate later this year and into 2026, given improving demand indicators, which I'll touch upon today. Let me share some color on what we're seeing across our markets. In Monterrey, we completed construction of our Apodaca park with 3 new state-of-the-art facilities now in the marketing phase. We're seeing strong interest, particularly from advanced manufacturing and logistics companies. We will be highly selective in determining our future tenants given the quality of our parks and Monterrey's role as a key near-shoring destination. Apodaca stands out as Monterrey's most strategic submarket, offering direct access to major industrial corridors and proximity to the Monterrey International Airport. And after the quarter closed on October 2025, we announced that we have acquired 330 acres of land in Monterrey in the high-demand Monterrey-Apodaca Airport Highway corridor. The site benefits from strategic location next to the Monterrey International Airport and Nuevo León’s Research and Technology Innovation Park, offering exceptional connectivity and direct access to a highly skilled labor pool. The deal included attractive 24-month seller financing, providing flexible capital deployment. And importantly, with this acquisition, Vesta's land bank is nearly complete to deliver on the Vesta Route 2030. In Ciudad Juarez, we saw early signs of a market turnaround in the third quarter. According to CBRE, overall vacancy contracted by 130 basis points and Class A vacancy retreated by 190 basis points for this market. This was underpinned by 1.3 million square feet of net absorption during the quarter. Vesta secured a lease with a global electronics company of 500,000 square feet during the quarter, a transaction which boosted third quarter absorption and reinforced the vacancy decline in this market. Juarez continues to draw international manufacturers, especially in electronics and high-precision goods. We believe the third quarter marks an inflection point in Juarez's industrial recovery and Vesta is well positioned to capture the next cycle of demand. In Tijuana, we're seeing slower recovery with market dynamics still adjusting to a recent influx of supply in this market. High vacancy is a result of a wave of spec deliveries that enter the Tijuana market. That said, there are early signs of reactivation. CBRE highlights that 67% of leasing demand continues to come from manufacturing users, which reinforces Tijuana's ongoing strategic relevance in the broader nearshoring landscape. Vesta has been actively engaging with a strong pipeline of tenants in the region, which give us confidence that dynamics are improving. Tijuana is a constrained market with limited land availability and physical barriers that make long-term overbuilding less likely. These fundamentals, combined with recovering demand should gradually support rebalancing as the year progresses. And while Tijuana's pace of recovery is lower than in markets like Juarez or Monterrey, Vesta's competitive position remains strong. Our portfolio benefits from institutional grade quality, reliable infrastructure and access to key logistic corridors. As always, we will approach this market with discipline and a long-term view grounded in data and in a deep local understanding of our markets. We have seen sustained strength in Guadalajara and Mexico City. Both markets stand out not only for their debt in scale, but for the diverse tenant basis and consistently high retention, which is underpinning our overall portfolio. CBRE reports that the Guadalajara industrial market maintained a healthy 2.8% vacancy rate in the third quarter. Despite new deliveries, importantly, Guadalajara, is a key recipient of foreign direct investment, particularly in advanced manufacturing sectors like electronics, automotive and aerospace. In Mexico City, industrial fundamentals have remained remarkably strong as can be expected. CBRE reports record absorption year-to-date at the highest absorption in the last 5 years, driven by pre-leasing and long-term renewals. Vacancy remains low at just 2%, supported by steady demand from logistics and e-commerce tenants. More broadly, we're seeing that activity has stabilized in the automotive sector, and our tenants in the sector have continued to renew leases and deepen their long-term commitments. Mexico is deeply integrated into the supply chain that supports the North American automotive industry. We believe it's virtually impossible to decouple. In fact, we're seeing continued and growing integration across the region as manufacturers double down on resilient near proximity production strategies. At the same time, we're seeing a shift in momentum toward other high-value manufacturing segments with strength in electronics, scientific equipment and industrial machinery. Mexico has now overtaken China as the largest exporter of electrical and electronic equipment to the United States. Companies are investing ahead of current demand, which reinforces the importance of being ready when they're ready through land acquisitions, as I have described, but also energy supply. The Mexican Association of Industrial Parks recently announced that the federal government is advancing targeted initiatives to support industrial parks, particularly to meet the growing energy needs of new facilities and industries. We're confident in our ongoing collaboration with both federal authorities and energy regulators. As new energy legislation takes shape, we believe industrial parks, in particular, will stand to benefit. The proposed framework includes provisions for energy generation through public-private collaboration, which we see as a positive step toward enhancing reliability and long-term capacity for industrial users. This enables us to serve even energy-constrained regions without compromising on service or delivery. Juan will discuss our financial strategy and related capital deployment, but let me make just a few related comments. During the third quarter, we successfully completed a senior unsecured notes offering that enhances our liquidity position, extends our maturity profile and gives us the financial flexibility to fund future growth under attractive conditions. This also enables us to refinance upcoming maturities without disruption, supporting both stability and expansion. Vesta's capital allocation has remained conservative and focused. We currently have only one project under construction, a direct result of our cautious approach at the start of the year in response to low absorption. That discipline is now enabling us to move with confidence as we prepare for new development starts for the end of 2025 and beginning of 2026. We are prioritizing markets where tenant demand is most visible, and we'll continue to direct capital toward land and infrastructure readiness, ensuring our growth is tied to quality, timing and market visibility. Asset recycling is a key part of our capital allocation strategy, enabling us to monetize stabilized assets and reinvest in higher growth opportunities. During the third quarter, Vesta sold an 80,604 square feet building in Ciudad Juarez for $5.5 million, an approximately 10% premium to appraised value aligned with Vesta's strategy to opportunistically recycle assets. Considering our progress this quarter, we revised Vesta's full year 2025 guidance. Juan will discuss in more detail. In closing, our third quarter results underscore a clear and consistent message for Vesta. Resilience and solid fundamentals ensure Vesta is well positioned for what's ahead. This quarter also reaffirms our ability to execute on Route 2030, our long-term vision to build a scaled, diversified industrial platform serving the most important corridors in Mexico. With that, let me turn our conversation over to Juan to review Vesta's financial results in more detail. Juan? Juan Felipe Sottil Achuttegui: Thank you, Lorenzo. Good day, everyone. Let me begin by highlighting our strong financial results for the third quarter. As a result, Vesta has revised our full 2025 guidance. We now expect our EBITDA margin to reach 84.5% by year's end, up from our prior guidance of 83.5%, underscoring our continuous focus on expense control and on delivering strong results. We expect to solidly achieve revenue growth between 10% and 11% for our full year with an adjusted NOI margin of around 94.5%. Now let me walk you through our third quarter results. Starting with our top line, total revenues were up 13.7% year-over-year, reaching $72.4 million, primarily driven by rental income from new leases and inflationary adjustments across our rented portfolio. As per our current mix, 89.4% of third quarter rental revenues were denominated in U.S. dollars, slightly up from 89.2% in the third quarter of 2024. On the profitability front, adjusted net operating income increased 14.7% to $66.1 million. Our adjusted NOI margin remains strong at 94.4%, up 16 basis points from the prior year, reflecting higher operating leverage as revenue growth outpaced costs. Adjusted EBITDA totaled $59.7 million, a 15% increase year-over-year with a margin expansion of 34 basis points to 85.3%, driven by a lower proportion of administrative expenses in relation to revenue during the third quarter 2025. Vesta's FFO, excluding current tax, increased 16.5% year-over-year to $47.4 million compared to $40.7 million in the third quarter 2024, while FFO increased 20.1% to $0.055. We closed the quarter with pretax income of $52.4 million compared to $62.7 million in 2024. The decrease was primarily due to lower gains on revaluation of investment properties as well as lower interest income, reflecting a reduced cash position during the period. Turning to our capital structure. On September 30, 2025, we successfully completed a $500 million senior unsecured notes at a 5.5% interest rate due in 2033, further strengthening our balance sheet, enhancing financial flexibility and advancing our goal for a fully unsecured capital structure. The notes received a BBB-/Positive rating from both Standard & Poor's Global Ratings and Fitch Ratings. The proceeds were used to prepay the existing debt and shortly after quarter's end, on October 9, we repaid in full our Metlife II credit facility and related incremental facility for $150 million and $26.6 million, respectively. As a result, we ended the quarter with $587 million in cash and cash equivalents and a total debt of $1.45 billion as of September 30, 2025. Our net debt-to-EBITDA ratio increased to 4x, and our loan-to-value ratio was 31%, which temporarily reflects the outstanding balance of the facilities that were repaid shortly after quarter's end. On capital allocation, Loren has noted that we sold an 80,000 square foot building at a 10% premium to appraisal value in Ciudad Juarez during the quarter, consistent with our strategy of opportunistically recycling of assets. At the same time, we continue to strengthen our land results, as Loren mentioned before, with the acquisition of 330 acres of land in Monterrey. Moreover, reflecting our balanced approach to capital allocation, on October 15, 2025, we paid a cash dividend for the third quarter of $0.38 per ordinary shares. This concludes our third quarter 2025 review. Operator, could you please open the floor for questions. Operator: [Operator Instructions] Our first question comes from the line of Juan Ponce with Bradesco BBI. Juan Ponce: It seems clear that demand signals are going in the right direction. When do you think -- when you think about your long-term development pipeline, are you comfortable accelerating Route 2030 projects in the first half of 2026? Or do you think it is prudent to move slower ahead of the USMCA review in June? I ask because although vacancies have declined a bit in some of the northern markets, Tijuana still remains elevated. So I just want to get your thoughts on how you're thinking about this growth. Lorenzo Dominique Berho Carranza: Thank you, Juan, very much for your question. Definitely, we have seen positive demand signals pretty much across most of the markets. I would probably like to highlight that Mexico City and Guadalajara have remained very solid throughout the whole year with vacancy rates at record low levels and still strong demand, mainly coming from sectors such as logistics, e-commerce and electronics, but also other markets have also shown some positive signals. Now how does that translate into our long-term plan? Well, as you know, we analyze carefully market-by-market, and that's when we analyze internally at the investment committee, where do we want to resume and start new operations and new development. As you could see this quarter, even that we have had a slower year on construction starts, we were able to start -- we did resume in Guadalajara with one building. And over the rest of the year, 2025, we will continue to start in other markets where we have recently acquired land and when we think there's already strong demand so that we can continue developing. I wouldn't think -- I think that we should still focus on the mid- to long-term plan for the 2030 Route. And we will be analyzing carefully the progress on demand from next year. We will analyze carefully the trends on different sectors. We definitely think that in relative terms, Mexico is still very well positioned for many global companies. But as you stated, we'll have the USMCA review next year where other countries are getting tariffs. So we will analyze carefully. And with that, I think that we will resume whenever needed. Juan Ponce: And just as a follow-up, these positive demand signals, are they coming from existing tenants or companies that already have operations in Mexico? Or are you seeing this already from new tenants? Lorenzo Dominique Berho Carranza: That's a good question. I think it's both. I think it's existing tenants, but also new tenants. And we've seen more visits from companies from all over, from North America, from Asia, from Europe. And actually -- and interestingly, it's coming from -- also from different industries, not only the traditional industries such as auto industry, but also -- which is strong and integrating supply chains, but also coming particularly from industries like electronic sector, which is growing rapidly. It's also coming in the aerospace sector, for example, and of course, logistics, which continues to be quite strong. Operator: Your next question comes from the line of Pablo Ricalde with Itaú Pablo Ricalde Martinez: Congrats on the results. I have 2 questions, maybe one for [indiscernible] the first one is on the leasing activity that have been seen in October. I don't know if you can provide an update if you have leased some of the industrial parks that were vacant in September. That's my first question. And the other one is coming on the balance sheet. I don't know if you can provide what are you thinking in terms of net debt to EBITDA by year-end given all the lands which you are acquiring. Lorenzo Dominique Berho Carranza: Pablo, thank you. Juan, why don't you -- okay, let me elaborate on the first question and then you give more detail on the net debt to EBITDA for the year-end. I didn't understand quite the question from -- we're getting a little bit of back noise, Pablo, but I think it was related to leasing. We were able to lease up a few buildings, one of them for our logistics operation for the electronic sector in Ciudad Juarez. Also, we were able to lease up in the Bajio region as well as Tijuana in food and beverage, logistics and auto industry. We think that this is -- we think that eventually, over the next quarters, we will continue to see this particular industry striving, and we're getting more absorption for -- in different -- actually in different regions. Again, we see the pipeline picking up pretty much across the board. And I think that Vesta has good quality buildings in the right locations, brand-new buildings. And I think that's key when it comes to clients looking for space. Remember that many of our buildings already have energy, which is another key advantage. And for that reason, even that there might be also some competition, we think that Vesta is very well positioned in the right locations, brand-new buildings and the right utilities and infrastructure required to establish operations in light manufacturing and logistics. So we are very positive on the next quarter, end of the year, and we hope to see a good recovery for 2026, too. Juan Felipe Sottil Achuttegui: Okay. As for the balance sheet, let me say that what you see in our leverage today is just a result of the issuance of the bond and the interim period between the issuance and the payment of the liabilities. So leverage will come down as we pay down the -- as the Metlife liabilities are reflected on our balance sheet. And then net debt to EBITDA as well as leverage will come down to what our good objectives, not that the ratios that we show right now are particularly worrisome. I mean we are exactly where we need to be. We have a strong balance sheet, and we can continue to -- I mean, we have ample borrowing capacity. So... Lorenzo Dominique Berho Carranza: For end of the year, Juan, are -- is it -- are we going to be a net debt to EBITDA close to, what, 25% loan-to-value and net debt to EBITDA below 4.6 maybe? Juan Felipe Sottil Achuttegui: 4% -- around 4x. Operator: Your next question comes from the line of Francisco Chávez with BBVA. Francisco Chávez Martínez: Question is regarding the improvement in guidance for EBITDA margin. How sustainable is this new margin? And what can we expect once you resume the start-up of new projects? Juan Felipe Sottil Achuttegui: Well, look, we have been -- this year -- as we have pointed out beforehand, this year have -- we have focused a lot in maintaining a low-cost base and of course, the growth in our revenues have helped us a lot maintaining quite an attractive EBITDA margin. As we continue to grow the company, EBITDA will continue to be strong. And I think that EBITDA will continue to be in the 83%, 85% level as we continue to grow. Lorenzo Dominique Berho Carranza: And maybe related to the development question, I think that we have the appropriate -- remember that we are a vertically integrated company with -- where we have -- management is internalized. So we have the right headcount to run the operations for the existing portfolio as well as the development part of the portfolio. So since we are in -- developing in the same markets where we already have presence, we do not foresee any major increases in costs. Actually, the opposite. I think that going forward, we will become even more efficient and benefit from being an internally managed company and vertically integrated. And for that reason, we even think that operational margins will continue to be playing in our favor. Operator: Your next question comes from the line of Adrian Huerta with JPMorgan. Adrian Huerta: Congrats on the results and also on the land acquisitions. Just going back to the first question on demand. What else can you share with us in terms of how quick the recovery could come, meaning tenants looking and willing to sign contracts. Is there a backlog or is there a backlog of companies that you've been talking to that they basically have said that once there's more clarity on the USMCA, they will be coming. Anything else that you can share with us on that to give us an understanding of how quick these companies could start signing new contracts? Lorenzo Dominique Berho Carranza: Thank you for your question. And I think that -- I mean this has been a very -- this has been a transition year. And as you remember, early in the year, we see a major slowdown in terms of new absorption and many of the companies were pencils down, not only in Mexico, but also in the U.S., for example. There was a lot of uncertainty. And for that reason, we understand that companies were just not making any decisions. However, the year has evolved differently, and we are definitely seeing a major backlog on companies that want to establish operations in the North American region. And for that reason, we're in constant communication with potential clients. We're actually making -- we're traveling to other regions of the world. We've had people currently in the U.S., in Canada, in Europe, even in Asia, in China and in Taiwan, been participating in conferences and trying to understand what -- how companies are analyzing their manufacturing global footprint. However, all of the companies make decisions based on different drivers. Some of them are making them based on the technology -- the new technology revolution based on AI, and that's why we've seen electronic sector jumping so rapidly, even despite of uncertainty on tariffs. But there might be others, for example, auto industry that are just waiting to see what the final end game might be. However, I think, that companies want to be still in the most dynamic economic region in the world, and Mexico is playing a very important role in North America. We just -- we're seeing every quarter and every year just new numbers regarding exports to the U.S., our trade balances with the U.S., particularly some countries diminishing their positioning and trade participation with the U.S. So for that reason, we are confident that -- we think that we will continue to thrive as a main partner to the U.S. And for that reason, many of the industries that we already have had since NAFTA will continue to be well positioned. Adrian Huerta: Understood, Loren. And if I may add just another quick question. So we should expect some new construction to start over the next 2 quarters. And regarding the land acquisitions, we shouldn't expect much to happen in the next 2 to 4 quarters? Lorenzo Dominique Berho Carranza: Sure. Well, we are -- as we have stated before, when we need to accelerate the development, we do, but when we need to slow down, we also do. So right now, I think that we're just being very cautious on where we start. We will continue to monitor demand in each of the markets. So yes, we'll have some starts for the end of the year. And next year, we'll analyze carefully. And the good thing is that we currently have been able to acquire land throughout the year that will position us very well for the mid- to long term. We were able to buy land throughout this year in the strategic markets, and I will repeat the land that we have recently acquired, which was in Guadalajara where we started the building next to our site. We bought a second site in Guadalajara, which will be helpful for the Route 2030 strategy. We also bought land in Ciudad Juarez, in Mexico City, in Monterrey, in San Nicolás which is -- has more attributes for last mile and e-commerce. And recently, the one in Apodaca, which is going to position us with probably the best piece of land in Monterrey. And I think that's going to be incredibly helpful for the Route 2030 strategy, and that will continue positioning Vesta as a leader developer in the market of Monterrey. So with the land that we have already acquired that we will start doing improve -- and also in Tijuana, sorry for that. We're doing the improvements. We're doing the earthworks, putting the utilities, energy and everything so that eventually we can resume and develop whenever we see demand getting stronger. So we already have, as of today, let's say, approximately 90% of the land required to fulfill the 2030 strategy. Operator: Your next question comes from the line of Alejandra Obregon with Morgan Stanley. Alejandra Obregon: Congratulations on the numbers. My question is on the energy front. You have now the land and you were talking about the utilities. I was just wondering if you can talk about how the electricity part is playing out. The new government announced 5 packages for industrial real estate, utilities, plants. So I was wondering if you think that will help your plans going forward? And then also your investment in associates line appears to be gaining traction. So just wondering if you can talk about this energy investment and how should we be thinking of it forward -- going forward? Lorenzo Dominique Berho Carranza: Alejandra, thank you very much for your question. Definitely, being able to anticipate to the energy requirements for our clients has been key. And that's why we have followed very carefully the different alternatives that we can provide for our clients in the different regions. We think that the government is in the right track -- on the right track to keep on supporting investment or foreign investment in manufacturing, and they are -- and we have been working close by with them so that together with the association of industrial parks, so that industrial parks can have the right packages, the right incentives and the right amount of energy so that we can continue attracting investments. So we're very positive on the work that the government has done with providing these packages and the support. And I think Vesta is a key example on how things can be established in order for companies to -- in order to anticipate we start the feasibilities and the processes to engage on energy when -- as soon as we start to buy the land. So when we develop the parks and the buildings, at the same time, we are investing in the energy infrastructure so that when companies do the ramp-up of operations, there's already some energy in place. We know it takes time, but I think that we have had great results by getting some energy, and that's why our parks have already the energy, and we are very -- we're confident that, that's going to be a huge benefit now that demand will continue to pick up. Regarding -- and regarding your question on associates and energy, that's basically some renewable energy investments that we have recently done. We just closed one in Monterrey, and I think that's going to be also key to continue focusing on solar panels, renewable energies in all of the buildings that we have had in line with our 2030 Route to comply with a certain amount of renewable energies in our portfolio. Operator: Your next question comes from the line of Jorel Guilloty with Goldman Sachs. Wilfredo Jorel Guilloty: I have 2 quick ones. So I don't want to belabor the point on development, but just I wanted to get a sense of what are the more quantitative indicators that you look at when you make a decision to launch a development. So I mean is it the occupancy trends you see in your own portfolio? Is it the occupancy or net absorption trends you see in the market? Is it an increase in leads that you might get from external brokers or your own internal commercial team? So I just wanted to get a sense just like put numbers to this, like what exactly do you look at when you make a decision of going forward with a new project like what you announced with Guadalajara? And then the other question is around leasing spreads. So looking at the LTM leasing spreads, we saw that there was a slight decline. So it was 13.7% in 2Q '25. It was 12.4% in 3Q '25. So I just want to get a sense of what drove this? What -- is it lower rents in a certain market in order to drive occupancy. So I just wanted to get a sense of where these lower leasing spreads or leasing spread trends are coming from. Lorenzo Dominique Berho Carranza: Thank you, Jorel, and thank you very much for being on the call. I think that Vesta has a very unique investment approach. First of all, we already have more than 43 million square feet of industrial buildings that we have developed in the last 25 years. And that, together with outstanding clients where, as mentioned before, we have -- we do not rely on external brokers for our property management, we do it internally. So we have firsthand information from our clients. We have firsthand information from the sector. And remember that also as part of our strategy to have a local leadership and regional marketing officers in each of the markets where we operate. So that's why we have, again, firsthand information of what's going on, what are the main drivers of demand. And that's why we rely on our own data and analysis when it comes to making a decision on how to invest and when to invest. Of course, sometimes we listen to third parties, but I think that it's more -- the secret sauce is pretty much inside of the Vesta offices as to when to start and where to start, and it has been quite successful. Guadalajara -- the example in Guadalajara, well, this is the third expansion we do to the Guadalajara Vesta Park. As a reminder, we have as clients, Amazon, we have Mercado Libre, we have O'Reilly, we have DSV Logistics, and we have Foxconn as our main clients inside of that park. So we have a close connection with them. And by being close to them, we understand where the trends are heading. And that's why we believe that starting new buildings when you're close to great companies that tend to grow, we think that it's -- that's kind of the bread and butter of Vesta, and I think we're going to be very successful, and we will continue to follow that trend in other projects in other regions where we have recently acquired land. And regarding your leasing spread question on the last 12 months, it's -- I think that it's not a material drop. I think that eventually going forward, it's more maybe on the -- they should be hovering. I think that the trend is actually upwards if you look at the last 4 quarters. And I think that as long as we continue to see the spreads being on an upward trend in the low teens, high double digit or double-digit numbers, I think that, that's going to be quite attractive and appealing. The important thing is to have this as a sustainable number going forward, which is exactly we think. Vesta's current portfolio is -- has a good opportunity to catch up in terms of leasing spreads, and that's what we can see even with a 12% spread on the trailing 12 months, which is way higher than inflation. And remember that most of our leases are -- is above inflation and most -- and all of our leases are linked to inflation, which adjust annually. And in many cases, we're able to catch up. That's why if you look at today's CPI numbers close to 3%, considering a 12.4%, that's material. Wilfredo Jorel Guilloty: A quick follow-up, if I may. So just based on the development pipeline and how you get to the decision to launch, you mentioned conversations with existing tenants. Does that imply that future launches could be for these existing tenants for them to expand? Or is it more that you get color on the demand from them and that gives you the confidence to go forward with a new development? Lorenzo Dominique Berho Carranza: Well, I can only tell you that more than 60% of our growth comes from existing tenants. So we like to grow with existing tenants, particularly because they are outstanding companies. So that's why we continue to develop close to them. And if there's an opportunity to grow with them, it's fine. But if we continue to find other great companies that need to open up operations in Mexico, we will continue to do so. And I think that for that reason, we focus a lot in trying to be close with good companies and keep and support their growth and become the real estate partner in Mexico. And I think that has played out well in the past, and we think that, that will continue playing out well in the future. Operator: Your next question comes from the line of André Mazini with Citi. And since we have no response from Mr. Mazini, we are moving on to the next question from Francisco Suarez with Scotiabank. No response again, moving on to the next question. Next question is from Anton Mortenkotter with GBM. Ernst Mortenkotter: Congrats on the results. We've been hearing that some private developers under pressure to deploy committed capital are starting to buy stabilized assets rather than take on new spec projects given the softer demand backdrop. Are you seeing that trend as well? And would you think that this environment actually plays to your advantage, I mean, being able to preserve liquidity and deploy when demand dynamics are more favorable? Lorenzo Dominique Berho Carranza: Anton, thank you very much for your questions. Well, I think that one of the greatest benefits of this industry is that there's still plenty of liquidity in the market. And that plays very well to our favor, and we are seeing players in the private markets that are willing to take acquisitions of stabilized assets. We recently made an asset sale, for example. It's not very large, but I think it signals that there's appetite also for owners to get buildings and also from -- on the institutional front. However, I think that our focus will continue to be on the development front, particularly because at the cost that we are buying land, we are investing in infrastructure, and we invest on brand new buildings. We think that development yields that continue to be in the 10% ranges vis-a-vis building cap rates or acquisition cap rates in the 6% to 7%, there are still huge spread investment opportunities, and that's why we will continue to focus on -- in terms of capital allocation to the highest returns, the ones that create the most value. And I think liquidity, it generates value for all of us. We have seen that not only coming from private markets. We recently saw a transaction being an IPO of FIBRA in the industrial sector being launched at -- also at compelling cap rates. And we think that, that sets the -- it sets valuation standards, and it sets a tone into what we might be expecting going forward in terms of valuation, Vesta -- so -- for Vesta, that's why we think that there has a good opportunity to reprice, particularly given the major discount we are still trading to net asset value. So those are great references and that gives us also the opportunity in some cases that if we want to buyback stock, we have a buyback program in place. So when we have -- when we see that there's a major discount to net asset value, we will continue to be using it, as we have done in the past and create value for shareholders. Operator: [Operator Instructions] The next question comes from the line of [indiscernible]. Unknown Analyst: Congratulations on the results. I have a couple of questions. The first one is a follow-up on lease spreads. I mean we did see like a small decline quarter-on-quarter, but they're still really above 2024 levels where they were around like 7%, 8%. Do you think like going forward into the fourth quarter and next year, you will be able to sustain this double-digit increase? And the second question is on same-store portfolio occupancy. Could you give us like a little bit of color on why the occupancy in Tijuana dropped from like 97% in the second quarter to 85.6%? Lorenzo Dominique Berho Carranza: Great. Thank you, [ Elena, ] for your question. Yes, and I will start maybe with the second one. The second one, we saw a slight drop in the same-store occupancy given the fact that we addition new buildings to the same store. And actually, these were buildings that are currently -- we're in the marketing stage. They're still vacant. These are 2 buildings in Tijuana mega region, which are large and one of them in -- I think, in Ciudad Juarez. But I think that's why we saw that major -- that slight drop. However, since these are new buildings and we are in marketing stage, we are confident that, that particular decrease might not affect or it's something that will -- eventually will be able to recover. And then on your -- on your first question, well, I think that we will continue to see a sustained growth in terms of leasing spreads in the double digits, probably. I think so, particularly because we've seen that market rents have held steady in most of the markets, which is very positive. And that's why renewals have come at a major increase in -- and leasing spread in most of the markets, and we've been able to capture value from that. And that will be -- that will continue to be the trend going forward to capture leasing spreads on top of inflation. And that we're very optimistic on that. Operator: Your next question comes from the line of Alan Macias with Bank of America. Alan Macias: Just can you share the cap rate of the building you sold recently? And are you seeing more demand or more offers for -- to buy buildings? And the second question is, what are you seeing in the trend in real estate taxes and insurance costs? Any indication what the government will be looking for tax increases next year? Lorenzo Dominique Berho Carranza: Thank you, Alan. Let me work first on your second question. So currently, we have secured our insurance costs for the next, I think, it's a couple of years or 18 months. So we have not seen any major adjustments for the moment. Eventually, when we get back to renegotiate that, we will eventually see. And we have not seen any major adjustments in real estate taxes. Now more importantly, even that we burden part of the cost, remember that we transfer part of that cost to our tenants. These are -- in most of the cases, we have triple net leases, and that's a cost that can be absorbed by tenants. And even with that, we believe that it's not a major cost still to their total production cost to many of our tenants. So the rent together with some of the operation costs, it's still very competitive vis-a-vis other regions. In some of the cases, rent and some of the real estate-related costs represent only 7% to 9% of total production costs or in terms of logistics, total operation cost. That's still a very competitive number. So even that we will continue to look into reducing costs. I think that all-in-all, that could well be absorbed by tenants, and they will continue to be competitive. Secondly, to your third question regarding I'm sorry, the cap rate. Sorry, yes. Well, first, yes, we will continue to do asset sales. And this is a good example of an asset, which was a vintage asset that we acquired, I think it was more than 15 years ago. This was not developed by Vesta. And I think -- and the cap rate to in-place rent was 6.2%. And it was a $68 per square foot as a sale and a premium to a price of almost 10% but again, I think this is a good example because we -- there are some vintage assets that eventually we would like to sell and crystallize value from asset sales, sell at a premium and focus on capital allocation and allocate that capital to higher return investments, new buildings, for example, in terms of development and through that close the cycle on investment. Operator: The next question comes from the line of Francisco Suarez with Scotiabank. Francisco Suarez: Congrats on the great quarter. The question that I have is on Mexico City, it's -- why La Villa has taken so long to lease up? Is there any difference compared to what we saw on Punta Norte? And the second question that I have is related with the overall trend behind, for instance, concessions in the market, say, 3 months of rent or step-up considerations or any CapEx. Has anything changed when you renew leases or offer new leases to new clients to what has been the case in... Lorenzo Dominique Berho Carranza: Thank you very much for being on the call. La Villa, it's an outstanding project. It's a smaller building compared to Punta Norte. Punta Norte is a major fulfillment center for e-commerce. And I think on that one, it was a very unique opportunity for a larger e-commerce player to -- and for us to have a long-term lease in U.S. dollars. And I think that that's why that one was very, very particular. La Villa, it's the last mile. It's smaller. We have been having some potential clients. However, as maybe we are -- we have waited to finalize and find the right tenant to it. Even that it takes -- it took -- it has taken maybe a bit longer even than expected. The positive to that is that we have seen rents grow in the region. So even some downtime in terms of rents, we are going to be able to capitalize through a better rent going forward with a better client. So we're positive that -- we're optimistic about being able to lease that building up. And I think that eventually, at some point coming into next year, we are -- I'm pretty sure that that's going to be well leased. Actually, we are -- we -- Mexico City has had very strong dynamics. And actually, we recently acquired land last quarter, second quarter. And hopefully, we can start construction again soon. And then regarding concessions, well, I think this one plays out differently market-by-market, tenant-by-tenant. Remember that we do have -- when we establish a lease, we establish a relationship with the tenant. So our focus continues to be long-term leases in U.S. dollars with investment-grade, high-grade companies that we believe can add value to the buildings. And that's why there's always things to negotiate. There could be some concessions sometimes for -- in terms of rent. But in other cases, we get things in exchange to that. So I think that on that, we will continue to be creative but trying to collect rent as soon as possible and keep on focusing on the total return of the asset, not necessarily an immediate income. One of the things that we have stated in the past, and I think plays out even more today is that we rather have a vacant building than a lousy client just because they will be paying out rent. And I think we will maintain that discipline even if it takes a bit longer. Francisco Suarez: Yes, I love that. So no changes in your underwriting policies. Good to hear. Operator: Your next question comes from the line of André Mazini with Citigroup. André Mazini: Sorry for my connection issue. So my question is around your land strategy on a high-level basis, of course, now you have probably more than 90% of the land to reach the 2030 growth plan. So how do you think about maybe a trade-off, if there is one, a risk return trade-off. On the one hand, I think you don't want to have like a huge land bank because, of course, land does not generate cash flows, right, by definition. But on the other hand, if it's too little of a land bank, your growth plan would be jeopardized. So how do you think about that trade-off of having the exact -- the kind of the optimal land bank in order to not jeopardize cash flows, but not to jeopardize growth plans as well? Lorenzo Dominique Berho Carranza: Thank you, André. And that's -- I think that's a key question to Vesta's overall strategy, and that's why for us, it's key to have a strategy going forward. And we are pretty much relying on how successful we have been in the past. Remember that when we established Level 3 strategy, we focus also on investing in certain regions and certain markets. We were able to invest over the Level 3 strategy, approximately $1.1 billion in development in Guadalajara, Monterrey, Mexico City, Tijuana, Juarez and some other markets in the Bajio. And it was very successful. And -- but the only way -- and we were able to achieve on that period returns in excess of 10% in U.S. dollars. And that -- you can see all of that in our Investor Day presentation, and I'm actually looking at Page 22, where we were able to make returns of 10% in Mexico City, 10.1% in Monterrey, 10.5% in Guadalajara vis-a-vis relevant transactions in those markets between 6% and 6.7%, which we believe that will continue to be a huge opportunity for -- in our investment strategy going forward, where we, again, anticipate on buying land, focus on the right markets and eventually we will be able to develop a -- we identified $1.7 billion investment for the Route 2030 strategy. And the markets where we will continue to focus is, the 3 main markets being Monterrey, Guadalajara, Mexico City, Juarez, Tijuana and Querétaro. So I think that there's really very few companies that have a strategy going forward that have the land -- the right amount of land. I agree with you, it's more an art than a science how much land we should use. But I think that today being well capitalized and being global in the market [Technical Difficulty] Monterrey, recent land acquisition, it's the right approach so that we can secure land, put infrastructure in place and be ready when demand might comeback. These are going to be very successful projects and [Technical Difficulty] so that you can see [Technical Difficulty] yourself. And again, I think that is unique in the type of [Technical Difficulty]. Operator: And it seems that we have no further questions for today. I would now like to turn the call back over to Mr. Berho for closing remarks. Lorenzo Dominique Berho Carranza: Thank you, everyone, for joining us today. Vesta's focus has been on ensuring we're well positioned to capture resurging demand. We are entering the final quarter of 2025 with a strong balance sheet, high-value operating portfolio and the strategic priority to continue executing on our long-term Route 2030 growth plan ahead of what we expect to be a strong 2026. Thank you. Operator: Ladies and gentlemen, this concludes today's conference. You may now disconnect your lines. We thank you for your participation.
Operator: Hello and welcome to the Coca-Cola FEMSA Third Quarter 2025 Conference Call. My name is Sophia and I'll be your moderator for today's event. Please note that this conference is being recorded. [Operator Instructions] I would now like to hand the call over to Jorge Colazzo, Investor Relations Director at Coca-Cola FEMSA. Jorge, please go ahead. Jorge Alejandro Pereda: Good morning and welcome to this webinar to review our third quarter 2025 results. Joining me this morning are Ian Craig, our Chief Executive Officer; Gerardo Cruz, our Chief Financial Officer; and the rest of the Investor Relations team. Before I hand the call over to Ian, let me remind all participants that this conference call may include forward-looking statements and should be considered as good faith estimates made by the company. These forward-looking statements reflect management's expectations and are based upon currently available data. Actual results are subject to future events and uncertainties that can materially impact the company's performance. For more details, please refer to the full disclaimer in the earnings release that went out this morning. As previously mentioned, after our management's prepared remarks, we will open the call for Q&A. [Operator Instructions] With that, let me turn the call over to our CEO to begin our presentation. Ian, please go ahead. Ian Marcel Craig García: Thank you, Jorge. Good morning, everyone. Thank you for joining us today. Before reviewing our third quarter results, I would like to take a moment to express our sincere support for all of those affected by the recent storms in Mexico. This year's Tropical Storm Raymond brought torrential rain during the first weeks of October, impacting Central and Northeast Mexico. In accordance with our principles and protocols, we're taking action to prioritize the well-being of our teams and their families while also supporting local communities. We're working hand-in-hand with FEMSA and the Coca-Cola Company on several community relief initiatives as we always do during these unfortunate natural disasters. We are hopeful that with everyone's support, the affected communities may soon be back on their feet. Also, we are deeply saddened by the recent passing of our esteemed Board member, Ricardo Guajardo Touché. Ricardo was a member of Coca-Cola FEMSA's Board since 1993, sharing his valued insights in its finance committee and was committed to advancing economic, educational and social development in his community and throughout the country. We offer our condolences and prayers to the Guajardo family. Now moving on to discuss our results. During the third quarter, Mexico continued facing a soft macro background, impacting consumer preferences and demand. On the other hand, South America enjoyed a more resilient macro and consumer environment, which supported positive volume performance. Despite this environment, our consolidated results improved sequentially as we implemented cost control and productivity initiatives. As we look beyond this year, we will leverage Coca-Cola FEMSA's ability to adapt to challenging operating conditions, including the impact of the recent beverage excise tax increase in Mexico. We are confident that focusing on our sustainable growth model, combined with RGM affordability initiatives, short-term productivity and cost control measures and the revised CapEx investment level is the best way to navigate these conditions, while maximizing value for our stakeholders. Now let me expand on our consolidated results for the third quarter. Our consolidated volume declined 0.6% to reach 1.04 billion unit cases, a sequential improvement versus the second quarter, which is partially explained by a softer comparison base in Mexico than the one we faced during the first half of the year. In particular, the quarterly volume decline was driven by contractions in Mexico and Panama that were partially offset by the growth achieved in the rest of our territories. Total revenues for the quarter grew 3.3% to MXN 71.9 billion, led by revenue management initiatives that were partially offset by a volume decline, promotional activity and unfavorable currency translation effects from the depreciation of the Argentine peso and most currencies in Central America. On a currency-neutral basis, our total revenues increased 4.7%. Gross profit increased 0.9% to MXN 32.4 billion, leading to a margin contraction of 100 basis points to 45.1%. This margin performance was driven mainly by an unfavorable mix, increased promotional activity and fixed costs such as labor and depreciation, partially offset by a better sweetener and PET cost. Our operating income increased 6.8% to reach MXN 10.3 billion, with operating margin expanding 50 basis points to 14.3%. This operating margin expansion is explained by expense efficiencies such as freight and marketing across our operations, coupled with an operating foreign exchange gain. These effects were partially offset by higher depreciation, labor and IT expenses. It is important to consider the recognition of a onetime income of MXN 218 million of insurance claims recovered in Brazil, net of expenses during the third quarter of 2025. Adjusted EBITDA for the quarter increased 3.2% to MXN 14.4 billion, and EBITDA margin remained flat at 20.1%. Finally, our majority net income increased slightly to reach MXN 5.9 billion, driven mainly by operating income growth that was partially offset by an increase in our comprehensive financial results. Now diving deeper on our key markets performance for the quarter. In Mexico, our volumes declined 3.7% as we continued facing a soft macroeconomic backdrop. For instance, consumption drivers such as remittances and formal job creation have declined year-on-year. In this environment, consumers are looking for the best value equation and our strategy remains clear, implement top line initiatives to incentivize demand by focusing on providing affordability and attractive price points, allowing us to capture share opportunities. To achieve this, we have made adjustments throughout the year to our promotional grid and [Technical Difficulty] across formats and channels. As I mentioned during our previous call, these initiatives have led us not only to recover share in the modern channel but also to surpass previous year's levels, achieving now more than 6 percentage points of recovery, which positions us at a record level in this important modern channel. In the traditional trade, promotions and execution are also contributing to share recovery, especially by leveraging refillable multi-serve packs. The adjustments we have made to our price pack architecture in multi-serve refillable packs from July to September are showing encouraging initial results, reversing volume declines in this segment of the portfolio. Moreover, Coca-Cola Zero continues delivering positive results, growing 23% versus previous year, [indiscernible] plans increased connect with consumers with the right communication and execution. Indeed, Coca-Cola Zero has grown more than 40% as compared with 2022. In addition, our flavor sparkling portfolio is also ahead of previous year's share levels, driven by the recovery achieved in the modern and on-premise channels. To achieve this, we are combining global strategies in core brands such as Fanta and Sprite with local heroes such as Mundet and other heritage regional brands. These top line initiatives are supported by our ambition to install a new record of 125,000 coolers during the year. In digital, we are encouraged to share that we are now rolling out our state-of-the-art salesforce tool, Juntos+ Advisor in Mexico. This digital tool has been fundamental in supporting share improvements and service levels in Brazil and we expect to see its positive impact in Mexico in the upcoming quarters as adoption matures. Now I would like to discuss recent developments in Mexico. As you know, last week, the House of Representatives approved a federal revenue law presented by the executive branch, including a significant 87% increase in the excise tax on soft drinks, taking it from MXN 1.64 per liter to MXN 3.08 per liter and installing a new excise tax on noncaloric formulas of MXN 1.5 per liter. The federal revenue law is currently pending approval by the Senate and once approved, it would take effect on January 2026. During the past month, we engaged with the government in conversations regarding the proposed excise taxes. As a result of these interactions, the Coca-Cola system in Mexico reaffirmed its commitment to continue incentivizing low and noncalaloric products as well as to maintain an open and constructive dialogue with the health authorities in Mexico. As we look to 2026, we expect another challenging year for volume performance in Mexico, with our customers and consumers dealing with the impact of the excise tax increase together with an economy that is expected to grow a modest 1.5%. However, we anticipate a positive impact on brand equity due to the World Cup as has been the case in host countries for these incredible assets. Taking all of these factors into consideration, we believe that the best course of action for our business in Mexico is to continue focusing on our sustainable long-term growth model while addressing the short-term headwinds with RGM initiatives, productivity and cost control measures and a revised CapEx investment. Now moving on to Guatemala, where our volumes increased 3.2% to reach 50.8 million unit cases. In this important market, we continue seeing a higher propensity from consumers to save. Amid this background, we continue outperforming the industry by gaining share in key categories such as sparkling beverages, water and energy. Notably, Coca-Cola Zero Sugar grew 16.9% year-on-year, while additional capacity is allowing us to strengthen our performance in flavors with Fanta and Sprite growing 8.8% and 3.8%, respectively. Commercial enablers are another area of focus, and I'm encouraged to report that Juntos+ and Juntos+ Premia continue growing at a fast pace. During the quarter, we surpassed 100,000 digital monthly active users in Juntos+, 25,000 more than the previous year, with more than 73% of these users active on the app. This is 23 percentage points more than in the first quarter of the year, underscoring our customers' fast adoption. Finally, in Juntos+ Premia, we have more than 46,000 clients redeeming points, which is more than double what we had in 2024. As we look towards the end of the year, we are adjusting our initiatives to continue optimizing our portfolio, capturing white spaces in key categories and executing rigorous cost control and productivity initiatives to grow sustainably and profitably. Now moving on to our South America division. In Brazil, despite lower average temperatures than the previous year and size of slower growth, we were able to increase our volumes 2.6% year-on-year, driven by share gains. As has been the case throughout the year, additional capacity, coupled with the reopening of our plant in Porto Alegre is supporting share gains in the nonalcoholic ready-to-drink segment. Notably, in the sparkling category, regions like Minas Gerais and São Paulo are more than 1 percentage points ahead of the previous year. And in Rio Grande do Sul, we have recovered approximately 5 percentage points of the total 8 points that were lost due to the temporary closure of our plant. Another highlight from our operation in Brazil remains the continuous growth from Coca-Cola Zero, which during the quarter grew volumes by 38%, supported by the Star Wars campaign that began last September in both Coca-Cola Original and Coke Zero. Regarding still beverages, we saw double-digit growth in juices and energy. In the case of Monster, last month, we launched a new flavor with a local Brazilian appeal, Monster Rio Punch, underscoring continuous innovation across the portfolio. On digital enablers, our monthly active user base in Juntos+ continues expanding with 18,000 additional customers and a 15.8% increase in average ticket size. Importantly, the Juntos+ Premia loyalty customer base increased 40% year-on-year. We remain encouraged by the results we are seeing from the nationwide rollout of Juntos+ Advisor, which, as I have mentioned in previous calls, is a game changer for our sales force and is supporting Brazil's positive share performance. Finally, in Brazil, we continue showing strong improvements in the supply chain front, which translate to increased customer satisfaction. For instance, order fulfillment during the quarter improved 1.9 percentage points as compared with the previous year to reach 94.5%. Similarly, our delivery service metrics improved 1 percentage point to reach 94.6%, supported by declines in product unavailability. For the remainder of the year in Brazil, we will continue striving to outperform the industry, leveraging our digital initiatives and our customer-centric culture as we aim to continue improving our profitability by controlling expenses and increasing productivity. In Colombia, our volumes grew 2.9%, reflecting a gradually recovering economy, driven by improving sectors such as commerce, services and agriculture. Notably, the consumption basket for fast-moving consumer goods has gradually recovered over the past 5 months, driven mainly by an increase in the average ticket. Our positive volume performance is supported by share gains in brand Coca-Cola, flavors and water with clear opportunities for us to reverse the trend in stills. Regarding brand Coca-Cola's category growth, we are leveraging affordability initiatives and managing price gaps in both multi-serve and single-serve, while supporting the growth of Coca-Cola Zero Sugar. Additionally, in flavors, we're encouraged that for the first time in our Colombia franchise's history, Quatro, our great fruit flavor brand, is the #1 flavored sparkling beverage in the country. On the digital front, we are enhancing adoption with monthly active buyers growing 27% year-on-year. We expect to continue leveraging the capabilities of our Premia loyalty plan to drive adoption and generate additional frequency. Finally, we're encouraged by the fact that the CapEx investments behind our supply chain have addressed key logistical pain points, allowing us to improve our cost-to-serve by reductions in primary freight costs and third-party warehouse expenses. Finally, despite facing what is still a complex environment in Argentina, our volumes increased 2.9%. Our strategy during 2025 can be summarized in 4 key elements: enhancing the affordability of plans we implemented since 2024 during the sharp macro adjustment; two, accelerating single-serve mix; three, leveraging digital with the rollout of Juntos+; and four, maintaining a lean and flexible cost structure. During the quarter, we continued delivering positive results across these elements of the strategy. For instance, we have consolidated the execution of what we call [ Sección de Ahorros ] sections or savings home section, which are attractive promotions and price points for our consumers. [ Sección de Ahorros ] is now present in more than 87% of our customers and growing. Regarding our single-serve mix, we reached 25.8%, which represents a 1.8 percentage point increase as compared to the previous year, driven by an 11% recovery in the number of on-premise clients. In digital, we began the rollout of Juntos+ last June. And thanks to its rapid adoption, more than 40% of our client base are now monthly active buyers. Amid Argentina's complex context, we have and will continue emphasizing responsiveness in managing a flexible and lean cost and expense structure. As we look to the last chapter of 2025 and adjust our plan for 2026, we feel encouraged to be a part of a resilient beverage industry. We have a clear long-term strategy, supportive shareholders in FEMSA and the Coca-Cola Company and a committed team focused on continuing to make Coca-Cola FEMSA a stronger and more adaptable organization. With that, I will hand the call over to Jerry. Gerardo Celaya: Thank you, Ian and good morning, everyone. I will begin by summarizing our divisions' results for the quarter. In Mexico and Central America, volumes declined 2.7% to 612.1 million unit cases, driven by volume declines in Mexico and Panama that were partially offset by growth in Guatemala, Nicaragua and Costa Rica. Revenues decreased 0.2% to MXP 42.5 billion, driven mainly by volume decline, unfavorable mix effects and promotional activity. These effects were partially offset by our revenue management initiatives. On a currency-neutral basis, revenues remained flat. Gross profit decreased 2.6% to reach MXN 20.2 billion, resulting in a gross margin of 47.5%, a 110 basis point contraction year-on-year. This margin contraction was driven mainly by unfavorable mix effects and promotional activity, coupled with higher fixed costs such as labor. These effects were partially offset by lower sweetener costs and the appreciation of the Mexican peso as applied to our U.S. dollar-denominated raw material costs. Operating income increased 1.1% to MXN 6.8 billion and our operating margin expanded 20 basis points to 16%. This expansion was driven mainly by a decrease in freight expenses and an operative foreign exchange gain on MXN 159 million as compared to a loss of MXN 298 million during the same period of the previous year. These effects were partially offset by an increase in expenses such as labor, IT and depreciation. Finally, our adjusted EBITDA in the division declined 1.4% with a 20 basis point margin contraction to reach 21.9%. Moving on to South America. Volumes increased 2.6% to 423 million unit cases. This increase was driven by positive volumes across the division. Our revenues in South America increased 8.7% to MXN 29.4 billion, driven mainly by our revenue management initiatives and favorable mix. These effects were partially offset by unfavorable currency translation effects into Mexican pesos. On a currency-neutral basis, total revenues in South America increased 12.5%. Gross profit in the division increased 7.2% and gross margin contracted by 50 basis points to 41.6%, mainly driven by labor, restructuring and maintenance costs. On a currency-neutral basis, gross profit increased 10.4%. Operating income in South America rose 19.7% to MXN 3.5 billion, with operating margin up 110 basis points to 11.9%. This improvement was driven by expenses -- expense efficiencies such as freight, marketing and the recognition of onetime income, net of expenses of MXN 218 million related to insurance claims from the floods that impacted Brazil in May of 2024. Finally, adjusted EBITDA in the division increased 12.6% to MXN 5.1 billion for a margin expansion of 60 basis points to 17.6%. Now let me expand on our comprehensive financial results, which recorded an expense of MXN 1.2 billion as compared to an expense of MXN 823 million during the same period of the previous year. This increase was driven mainly by, first, a reduction in interest income as a result of a lower cash position and interest rates in Mexico and Argentina. Second, we recorded a foreign exchange loss of MXN 65 million as compared to a gain of MXN 49 million recorded during the same period of the previous year. And third, a loss in financial instruments of MXN 39 million as compared to a gain of MXN 86 million in the third quarter of 2024. These effects were partially offset by a higher gain in monetary positions and inflationary subsidiaries. Finally, I would like to take a moment to expand on the cost environment and commodity hedging strategies for the remainder of the year and into 2026. We feel confident about our ability to manage costs effectively. Although the trade environment may continue to generate some ongoing volatility, especially in aluminum prices, we are seeing more stability in the rest of our key commodities than in prior years, especially regarding sweeteners and PET. Additionally, our teams continue to focus on efficiency, productivity and disciplined procurement, which should continue to help mitigate pressures to our margins. On the hedging side, our approach remains disciplined and proactive. For the remainder of the year, we have already locked in a solid portion of our main commodities, including more than 90% for sweeteners, 75% for PET resin and 65% for aluminum, which gives us good visibility and comfort for the fourth quarter. As we move into 2026, we will keep a flexible stance, protecting against potential volatility while taking advantage of favorable market conditions in raw materials such as sweeteners and PET. For instance, given current market conditions, we have already hedged more than 90% of our needs for the year in sweeteners and 40% for PET. Regarding currencies for 2026, we have hedged approximately 70% in Colombia, 40% in Mexico and 20% in Brazil at levels that are below 2025. Finally, I am pleased to report that our supply chain team has reached our savings commitment for the year ahead of time, generating $90 million year-to-date, approximately $43 million coming from primary distribution, $32.5 million from cost-to-serve and $14.5 million from cost-to-make. With that, operator, we're ready to take questions. Operator: [Operator Instructions] Our first question comes from Ricardo Alves with Morgan Stanley. Ricardo Alves: A couple of questions. I think that on our side, the main surprise of the quarter came on Mexico and Central America profitability. When we try to calculate the adjusted margin, so taking out the insurance gains from last year, we actually see Mexico and Central America margins up about 50, 60 basis points, if I'm not mistaken. So clearly, a big improvement from the 200 basis points decline that we saw in the second quarter. So to us, that's a remarkable improvement, obviously. But when I look forward, I'm interested in -- is this something that was mostly driven by a better operational leverage because volumes improved on a sequential basis? Or is it much more about internal initiatives and cost-cutting initiatives that you may have put in place to adapt to a new reality of volumes? So I just wanted to go a little deeper on eventual efficiencies that you are looking within KOF in Mexico and maybe Central America because we don't have the breakdown exactly. So that would be my first question to explore a bit more the improvement on profitability. My second question -- it's -- I do have another one in South America but I'll jump on the line again. But I wanted to explore this time Central America, Argentina and Colombia because typically, we spend a lot of time on Mexico and Brazil. And I think that after a while, it would be helpful, Ian, if we could explore again these markets. I remember, for example, a couple of years ago, we were talking about per caps in Guatemala, the opportunities that you saw when you took over in improving per caps. Given that Argentina has surprised us to the upside, I think that Coke FEMSA is outperforming a couple of other bottlers in the region. Colombia is getting back on track and it's been a while that we don't discuss Guatemala in more details. I wanted to see with you, when you take a step back and you reflect on this past couple of years on the lead of the company, what were the strategies that worked for these 3 main markets outside of Brazil and Mexico? What are the things that didn't work that you still see an opportunity? So I just wanted to take a step back and take the opportunity to talk to you to see if -- it seems that there is something coming. Things are improving. So I just wanted to revisit the strategy for these, let's call it, secondary markets outside of Brazil and Mexico. Gerardo Celaya: Thank you, Ricardo. I'll jump on the first one, first on profitability on Mexico and Central America. And there's a few parts to this question. So starting first on gross profit. We are continuing to see pressure on gross profit, even though we see volumes performing better versus last year, that's mostly related to having a lower base from the third quarter of last year. But we are seeing some gross profit pressures coming from mix that are affecting at the gross profit level. But going further down the P&L, the main reason for us turning around our profitability are savings initiatives. We're working all across our P&L to identify and execute savings initiatives starting from raw materials cost and expenses that has been a tailwind for us this quarter. We're optimizing marketing spending. We went through also restructuring in our teams to adapt to our current volume conditions, also preparing for what we're expecting for next year and the supply chain initiatives and other smaller savings initiatives that we are working on. And also, there's a virtual effect that you see in EBIT margins also that we are benefiting from. This is related to operating expenses, accounts payable denominated in foreign currency with a peso -- with a strong peso that is providing also relief to our EBIT margin as well. Ian Marcel Craig García: Jerry gave a very detailed explanation. But in terms of the strategy, it really was bringing our productivity back in line, Ricardo, the main driver. So like I had mentioned, this is such a resilient business that even if you have challenging volumes, you can still deliver on results, positive results, if you have your structure aligned for that sort of environment, which was our big miss in the first and second quarter where I could say it was tough to read because of the consumer backlash. But by the time we got around to having the real sense of what was going on in April, then in May, we started adjusting very quickly. And now our productivity is back in line and we have a much more lean structure. So that's what explains the turnaround in Mexico. In the 3 markets that you mentioned outside of Mexico, Argentina, Colombia and Guatemala, it all follows under the same umbrella but with different recipes. And what do I mean? As I mentioned, our strategy is to have a sustainable long-term growth model. And why? Because this is a scale business, and it is critical that we continue to improve our relative competitive position because when you don't do so, then it becomes very complicated. Price gaps are stickier with competitors, you give them scale and you end up in a bad place. The way that played out in Argentina, which was the first one you asked about, was knowing that we were going to go into a very deep recession, we did not want to leave Argentine households. So we wanted to maintain household penetration. So we did not pass along all of the increase in inflation in the initial shock. And that obviously implied to us a hit on the P&L. But when the bounce -- the recovery came, we were much better positioned. And that's why when you compare the system, for example, versus 2 years before the crisis, our volumes and our results are much better. And it has been a more resilient strategy to have not lost that relative scale. It was just -- all strategies are valid but I think ours played out well in the end. In terms of Colombia, it's a big learning for us in Mexico because in Colombia, we faced a large tax increase such as the one that we're going to have to face in Mexico starting January. And what that essentially does is it shifts your volume 2 years out. So the growth that we were -- we had planned for '26, now instead of that growth in Mexico, we're going to have, like we had in Colombia, a volume decline to be followed by a recovery in the following year. So in essence, it shifts your curve 2 years out. And what we've done in Colombia is a full review of our OBPPC, focusing on key price points, focusing on key flavors leverages. And in Colombia, you see that year-over-year, we continue to gain share. And now that we've cycled the impact of the tax, we should be continuing to have, I wouldn't say easier comps but comparable comps without the effect of a tax. So now it's -- we're on a comparable basis going forward in Colombia and we entered out of that tax disruption in a more favorable competitive position. And in Guatemala, as we have mentioned, it's just a jewel of a market with a very young population becoming more urban with more disposable income. We hit a short-term turbulence there because with all of this risk on remittances, even though it has been more perceived than real because remittances haven't actually declined but they have slowed there. That anxiety, I would say, has trickled into consumers saving more. So we see nothing more in Guatemala other than a short-term adjustment to consumers saving more under the risk of them -- their family members losing the remittance sending capacity. But everything else being said, I would say this was an adjustment here there. We've also adjusted our structure, become more lean and are ready to resume growth there in Guatemala, where, by the way, our elasticities continue to work very favorably because of our share position. So there's still plenty of headroom there. I hope that was a good overview, Ricardo. Operator: Next question from Alejandro Fuchs with Itaú. Alejandro Fuchs: Congratulations on the results. I have just one very brief one related to CapEx. I saw the comments Ian here and on the release about kind of rethinking CapEx a little bit for next year. We have seen at least 3 years of high investments. I wanted to see if you can share a little more color what are the initial thoughts, right? Where would be kind of the savings in CapEx coming from? And this is -- is this just a delaying of the CapEx, as you were saying with volume recovery probably 2027. So if you could give us a little bit more detail, that would be very helpful. Ian Marcel Craig García: It's exactly that, Alex. So let me give you an example. And it's mostly in Mexico but it's in a couple of other countries where volumes weren't as high as we expected, for example, Guatemala. Let me give you the example of Mexico. We were putting in a couple of new lines, 3 new CDs. The lines are going ahead as planned but the distribution centers, for example, we've taken the land site but we're not going ahead with the construction. Because the worst thing that we can do is if we're going to have a low to mid-single digits volume decline next year due to the tax is to put in 3 new distribution centers and have those distribution centers be unproductive. You just get the extra depreciation, labor cost and you don't need it if our volumes are going to be facing that contraction from the tax. So it's really pushing out Mexico 2 years out. That's basically it. Operator: Next question from Lucas Ferreira with JPMorgan. Lucas Ferreira: Ian, first of all, a follow-up on your comment now. You mentioned low single digits decline in Mexico. Was this just sort of to illustrate or this is the number you are working with for Mexico next year? That wasn't exactly my question. My follow-up on the tax story. If -- well, first of all, the transition towards that around 30% reduction in the calories for the sugary drinks, how fast you guys are thinking on getting there? And if you think there could be any sort of impact on the flavor, on the consumer adoption, anything like this you can comment on sort of the risk of going towards that 30% reduction? And then the other question I have is, if this adjustments towards a sort of a new more leaner structure for Mexico right now, if it's -- how far we are from getting there? So you mentioned the CapEx. Is there anything else to be done still on the expenses side, cost side that you can help us understand to better model Mexico next year? And if I may, a second point is on Brazil, another clarification. If you look at your operations, let's say, in regions outside Rio Grande do Sul with the ramp-up of the plants, how the business is working? I mean you mentioned market share gains. Is this like sort of a better go-to-market strategies? Or is there anything related to pricing there, execution? So just to understand a bit how the operations, let's say, excluding the effect of the ramp-up of Rio Grande do Sul is going, if you're seeing sort of a bad weather, consumer dynamics? I'm asking because we see a lot of other consumer companies complaining right about the consumption in Brazil kind of slowing down. So wondering if you also noticed this happening in Brazil. Ian Marcel Craig García: So let me -- there were several points there, Lucas and I'll ask Jorge to help me on some of those. But just in general, in Mexico, the big thing was, like we mentioned, starting May, downsizing to what needed to be done in terms of our operational structure. And there is some remaining adjustment there to be done in terms of productivity in line with the volume impact that we expect from the tax increase. You have to -- when you look at the 2026 numbers, you have to normalize internally what the effect was of the backlash. So the effect of the increase in the tax per se is a little worse but it gets masked or it doesn't look as large because we don't no longer have the backlash that we left after the first -- that we also ended around May of last year. So that's sort of taking all of those effects into account, that's why we were saying low to mid-single digits is what we expect. And there's a lot of uncertainty on that. So we have to see what the impact is in the first quarter to see if we have to do further adjustments and what depth of adjustments. We do have a shock plan in terms of savings in all sorts of instances of that. And it's a large plan to go and accompany this tough tax -- excise tax impact. In terms of how we move consumers gradually to low or noncaloric options, that -- it's something that we'll do with our promotional grill -- grid with adjustments to some of our formulas, always taking care to make sure that we are the best choice out there and giving the consumers choice. We don't expect in that sense, really material savings from sweeteners or such. That is not the case. We don't expect that. And we have to be very respectful to consumer space and what they want and how the mix evolves naturally. We can't be too forceful on that. It's just something that we need to be working and it will be gradual. Going back into Brazil, in Brazil, we do see consumption softening. We have the advantage of a really tough base last year with the closure of the plant. So when we normalize what's going on there, that's why we mentioned the type of share gains that we're getting outside of the Southern region. And that's really what has been the differential for us. That's what's been driving our growth there. It's really share gains because you're right, we do see softer consumption. That being said, remember that next year, we're going into an election cycle in Brazil. So I don't think, at least for the remaining of the year and 2026 that we expect anything other -- you know that, still a resilient Brazil. I think the big risk in Brazil is more relating to 2027. We have mentioned that. At that point in time, the selective tax on soft drinks should be coming into effect. And also, there may be as historically has been the case in certain elections, a post-election hangover, for example, like what we saw in Mexico. So I would say, Brazil, we see a softer consumer but it's not a contraction for us and we are not worried of 2026. We have to keep an eye out though on 2027. I don't know, Jorge, if there's anything you'd like to complement. Jorge Alejandro Pereda: Perhaps the only thing I would add, Lucas, the first part of your question, you referred to Ian's comment on volume outlook for next year. So of course, this is a very preliminary early take. Now we have to put everything into consideration. We have to think about the implications, of course, of the excise tax. So this is, I would say, like a very early preliminary take on that, where we expect volumes to decline in the low to mid-single digits range -- for Mexico, of course, yes. Operator: Next question from Benjamin Theurer with Barclays. Benjamin Theurer: Just coming back to that point on the volume outlook. And obviously, you tend to have a lot of flexibility as it relates to like packaging mix and trying to offset and help profitability. So I would like to understand, in first place, what has been driving over the last couple of quarters, actually in Mexico but to a degree as well in Central America in contrast to South America transactions being somewhat even weaker than volume. So kind of like that relationship would like to dig into that. And as we look into next year, the way to offset maybe some of that with different packaging or trying to drive transactions, what strategies can you implement to kind of like boost the transactions at least into next year, even if volume might be under pressure, as you've just said, low to mid-single digits? Ian Marcel Craig García: Well, I'll let Jorge dive into the details on that, Ben. But I would say the main point is whenever you see a more challenging economic environment or disposable income for consumers and things get tight, usually single-serve mix suffers and you move into multi-serve. And within multi-serve, you move into multi-serve returnables. And that's just a natural mathematical result of looking for lower price per liter, okay? And that correlates a lot with transactions. So that's the main directional point. What we do then is, focus a lot on the magic price points. And if you take that -- I mean, I think transaction, like you said, is important. But really the biggest, biggest thing is maintaining our volume base and our household penetration. So for us, the main focus that we have now in Mexico, when we look at our relative competitive position, the biggest gap is in traditional channel, refillables and that's what we are addressing. And what we're addressing that is with the 1.25 liter glass at the MXN 20 price points, which competes with Pepsi 1.75 liter and 2-liter Red Cola at that same price point. So we didn't have anything there. And now we're having the 1.25 liter glass there and that's a very big and important price point. It also drives transactions when you look at multi-serve per se. And then upsizing our 2.5 liters [indiscernible] PET to 3 liters and that's around the MXN 33, MXN 34 price point, which competes with 3 liters [ one way ] of Pepsi and Red Cola. So obviously, we have a very good brand that commands a brand equity lead and that allows us to be able to inconvenience our consumers with a returnable presentation that they have to carry to and from the point of sale but that really is the way that we're able to have that revenue management initiative there. That's our big focus per se. You see all of the transaction growth, for example, the biggest example is Argentina, will recover naturally with single-serve mix as the economy improves. So I would say the biggest and most important question for us with the excise tax increase looming is maintaining our household penetration and volume base really more than the transactions. Benjamin Theurer: And real quick on pricing. I mean, obviously, you need to pass through the tax. Are you planning to anticipate some of the pricing already in the fourth quarter to kind of like get the consumer kind of like used to a new price point because of that? Or are you simply just going to wait and do the regular pricing as we move into next year, coupled with the tax as it might has to be applied? Ian Marcel Craig García: The base plan basically is maybe at the very end of the curve but it's really preparing and passing through the excise tax that will commence in January. It's how -- there are certain time that you have to give, especially the modern trade to process that change in the pricing lists. So it's basically going to be that. It's the pass-through of the excise tax, getting ready by giving the modern channel enough time to have that ready to start in January. Operator: Next question from Ulises Argote with Santander. Ulises Argote Bolio: Sorry, I was having some technical issues here. This is kind of a follow-up question that I had on the pricing side of the equation. But given those changes in taxes and the differentiation there between sugar and nonsugar products, we wanted to get some color on how you're thinking about the price gaps on the 2 kind of going forward, right? Any color there on how you're thinking on the strategy? And maybe if there's any major shift there happening on pricing on one versus the other, that would be really helpful. Ian Marcel Craig García: Well, one of the things that we've committed to is to incentivize a move towards noncalalorics. And in that sense, be it through differentials in baseline prices on the aisle or through a more intense promotional grid or both, a combination of both, we expect in the end to have that sort of differential above the size of the tax between those 2 to try to incentivize a move on -- in the mix. That being said, like I said, we are very respectful of being pro choice, offering the consumers what they want and we'll always have the full original formulas and the zero-calorie formulas and we'll let the consumer choose. It's just how do we nudge them with either increased promotional grids or different baseline prices, okay? We do expect, in the end, a lower effective price by either of those 2 measures. Ulises Argote Bolio: Okay. No, that's super clear. Yes. And maybe a quick follow-up, if I may, just looking there a little bit on the capital structure side of things. I mean net debt-to-EBITDA is below 0.8x. Obviously, you've made those comments on lowering the CapEx. You don't have any major debt commitments in the short term. So how should we think about the capital allocation priorities kind of for the next couple of years? Gerardo Celaya: Ulises, as we've been talking to the market throughout the past few quarters, we certainly are aware of our inefficient capital structure and are looking to address it. In 2026, obviously, with the excise tax coming to play, we will put -- evaluate how we start the year and what implications it has. As Ian mentioned in regarding our previous question, this results in a delay of a couple of years to cycle the impact of the tax in Mexico, which in turn will have some impact in our cash flow projections for the year. So we'll evaluate that further and let you know of any news during -- starting next year. Operator: Next question from Thiago Bortoluci with Goldman Sachs. Thiago Bortoluci: I have also 2, right. And those are follow-ups in Mexico. The first one and I think this is for Ian. Just to understand, Ian, how you see your company position versus the state of the consumers, right? If I can summarize what we saw in the quarter, you obviously declined volumes a little bit more than apparently where the industry is, while you keep pricing growing with inflation but decelerating the pace versus the first 6 months of the year, right? In your comments, you alluded to the need of promotional activity to keep demand somehow healthy. But going forward and imagining that macro shouldn't improve that much in the near term, at least, how you think about the fit of your pricing on a like-for-like basis versus the demand sentiment that you're getting from consumers? So how you're seeing your average price list and effective pricing to accommodate the current situation? I think this is the first question. And then the second one related to this topic but now on the excise tax, to the extent that you can comment, how much and, or how at all would the new rate fit in your discussions with Coca-Cola Corporation for the concentrate prices going forward? Ian Marcel Craig García: Thank you, Thiago. Let me put things into perspective. Remember that this year, January started strong. And then in February, we had the backlash, which we exited by the end of May, June. So Mexico is a very big country, not as big as Brazil or the U.S. but it's a very big country and it has different economic performance in different regions, by the remittances impact and different depth in the backlash that we face was different along the regions, mostly impacting our region, which is where most migrants have family members in the U.S. So I think when you look at and break that -- break out that effect, you see our share, if you look at our monthly chart, taking a big hit in February and then recovering month over month over month. Well, today, if you look at September, for example, the point data in share of value versus September of last year, in flavors, stills, fruit drinks, teas, water, energy, sports drinks, ARTDs, we're above last year. So we had a value and we're above last year. In colas, we still have about 0.6 points to recover. And that has -- is really what explains the increased promotional grid. And really, the point that we have missing is, like I said, traditional trade multi-serve refillables. That's the share point that we have left. And with the latest adjustments that we've done, eventually, we're hoping or thinking that we should get to cover that gap and we'll be above last year and having cycled everything. So I would caution that we are doing well versus the industry. But like I said, we took a big impact that other competitors didn't take in February, right, Thiago? So you have to normalize with that. So we took that impact but we're every month getting back to where we need to be. And we're back in every single segment and only missing 0.6 points in colas still. So that's the context. I think your question is very pertinent going forward because when you have a region that is with soft macros and now we have a large excise tax increase, obviously, our pricing power, we believe, is going to be limited. So we're not expecting anything above inflation because our customers, it's also a big impact for customers and consumers are going to be dealing with that excise tax. So to assume that we're going to have real pricing above that, I don't think is very realistic. It's already going to be a lot for customers and consumers to digest just with the excise tax impact, okay? Does that help? Thiago Bortoluci: It certainly does. Anything you could share on the relation between Coke under the new excise tax? Ian Marcel Craig García: Yes. Well, the way our model works, like I said is, we look at how the system profits behave and then divide those profits. Obviously, when you have an impact such as a tax, well, it's going to have an impact in our profitability and that's taken into account in the model. So it remains to be seen because you have to look at both companies' relative performance on what that trickles to and whether it's some sort of support or cost avoidance. We don't have enough visibility on that yet. But what I can say is that, that is included as well as when we do very well, that's also included in the model. So yes, that effect will be captured but it's too early to tell -- to see if there's going to be really an impact for us on that. It's -- we don't know yet. We'll have to see in the first quarter how customers and consumers deal with this excise tax pass-through. Operator: Next question from Rodrigo Alcantara with UBS. Rodrigo Alcantara: As a means of just staying a bit out of the tax discussion, I would like to explore on some interesting commentary we heard a couple of days ago in [indiscernible] conference call regarding their dairy category, right? They already mentioning the Coke system already a market share leader in terms of value, right? Volumes growing 13% in the third quarter, right? So my question would be here how this figures or how this category is shaping for you guys specifically, right? And what is really driving this good performance and the relevance of overall the Santa Clara brand for -- and the dairy category for you guys? That would be one question. And the other one very quickly, I mean, unfortunately, right, we saw what's happening in Costa Rica, Veracruz, right? In addition to that, weather is not improving and macro is still weak, right? So any preliminary read on Mexico volumes ahead of the fourth quarter? And kind of like a similar question would say to, to Brazil, right, where you somehow mentioned about the share gain momentum, et cetera but also some commentary on volumes on the 4Q would be also very, very helpful. Those would be my 2 questions. Gerardo Celaya: Rodrigo, thank you very much for your question. I'll start with the dairy question. And indeed, Coke mentioned that we're now leaders in value-added dairy, which is great news. This is the main focus for us with Santa Clara. As you know, this is a great brand, a brand that we're very proud of that has grown amazingly when it was brought into the system. This year, as you mentioned, dairy has been an outperformer for us in the still business. Stills business growing at a rate of 20% for the year, year-to-date. So this is great growth, especially when you look at it in the context of macro weakness overall. So we expect dairy to continue to be an outperformer. This is something that we're very excited about and that we can leverage the brand, the umbrella of the brand of Santa Clara to bring innovation and do all sorts of interesting things in this space. So that's good news for us. In terms of our fourth quarter, we -- I think a good thing that we are seeing is, we see patterns of improvement in weather that certainly we expect to continue to help. And we expect to see a little bit of an uptrend in volume performance for the remainder of the year as compared to what we've seen in the year-to-date. This is Mexico. Jorge Alejandro Pereda: Yes. This is Jorge. On the comments about the fourth quarter and weather as well expectations for Brazil, I think something that we certainly saw in the early weeks of October in parts of the South Cone and especially Brazil was a little bit of unfavorable weather. That seems also, as Jerry mentioned, it seems that it's going finally to end. It seems that weather is finally improving. Throughout the third quarter in Brazil, we saw about 1 degree Celsius on average below the previous year. But I think the good part is that it, that seems to be out of the road for us. And you mentioned about the unfortunate events also going back to Mexico, in Veracruz. That's definitely very -- as Ian mentioned during the prepared remarks, we are working hand-in-hand with FEMSA and with the Coca-Cola Company on several community support relief efforts. Specifically for the business, we have taken into consideration also support to our teams on the ground. I wouldn't say that the region represents a big material part of the big Coca-Cola FEMSA Mexico volumes. So we think in terms of -- if you are asking about a specific impact about that, you can think maybe around 350,000 unit cases over the first 8 days of the disaster there. So not material. And as I said, I think the most important part is that we're working on community and support relief efforts there. Ian Marcel Craig García: Yes. This difference to last year -- year before last, where we had either lost a plant or equipment, in this case, our infrastructure was not impacted other than a couple of vehicles and routes but not really large infrastructure. Our clients, however, were very impacted. So we have around 1,600, 2,000 clients that we're sensing to see if our coolers still work, if they got damaged, we'll replace them. And we did have, unfortunately, for us, for the first time, some loss of life in our collaborators' families. So that was the worst part. And obviously, we're supporting our collaborators that were impacted in these unfortunate floods. Operator: Next question from Renata Cabral with Citi. Renata Fonseca Cabral Sturani: I have 2 quick follow-ups here. The first one on Mexico. You are discussing right now about the weather that's going better. And it's possible to try to have an evaluation on how much of the current performance, I mean, from the year is more related to weather and/or the economic situation. I know it's super difficult to make the assumptions but a best guess. Or if you also could give some color of the performance per month, so we can try to make here some correlations related to the weather, it would be really helpful. And another follow-up is related to Argentina because we saw an improvement for the company in terms of volumes and margins, I mean, compared to last year, naturally. So for now on, we know that stability is great but at the same time, we are seeing also a slowdown in terms of overall consumption in Argentina. So the outlook for -- to conserve the current improvement or even continue to improve in the country. Gerardo Celaya: Thank you, Renata, for your question. I'll start with weather patterns in Mexico. I think in this third quarter, weather was less -- significantly less relevant as a comp effect versus last year. Even though we didn't have good weather, it wasn't consumption promoting weather, we had bad weather during the third quarter of last year as well. So when you see weather compared to this same period last year, it seems to be less of a factor. What has been playing out to be an important impact for consumption certainly has been overall macro development. I think for the first time this quarter, we saw the whole Nielsen basket underperforming or decreasing altogether. We had in previous moments seen consumption in certain industries underperforming versus others. But this quarter, we did see an outright underperformance in all consumption products. So I mean, macro has been, I think, the main driver of underperformance during the third quarter. Looking a little bit forward, I think we do see a little bit of better macro performance next year, although nothing exciting but certainly a marginal improvement from the base that we have in 2025. Ian Marcel Craig García: Moving to Argentina, Renata, I think there -- it's very clear that things have started to slow down especially since the Buenos Aires province election. And remember, we have very important legislative elections this weekend. So consumption really took a -- slowed down going into this election. What we're seeing from our advisers in Argentina is there's a lot riding on the outcome of this weekend's legislative elections in the sense of whether the government's position, how much will it be strengthened and will they be able to avoid logjams in the legislative branch regarding reforms. So Argentina, I would say, let's wait and see what happens this weekend and that will give us a guide. That doesn't mean we expect a recession next year. That's not in the cards, at least from what our advisers tell us but there could be a case of sluggish growth next year instead of continuous recovery. So that's really what we're going to look at. Will it be a scenario of sluggish growth next year, or will we continue and reaccelerate as the government has a more favorable position that will allow it to push through reforms? So it's a bit early to tell, Renata. But like I said, we think this slowdown has a lot to do with the elections this weekend and we'll see what happens. Operator: Next question from Antonio Hernandez with Actinver. Antonio Hernandez: This is Antonio. Just following up on those beverages sweetened with noncaloric sweeteners. I mean you've already mentioned a couple of times during the call that there's not going to be a specific push from you towards the consumer. But just wanted to get a sense if you have a type of a target going forward of maybe how much they can represent as a percentage of total sales? And also, how do you see competition specifically in that segment? Ian Marcel Craig García: Antonio, we don't have a specific target per se. But like I said, even before the excise tax, to us, Coke Zero is a big, big silver bullet. It's great for the health of the category. It does fantastic for the Coca-Cola trademark brand umbrella. And we were already focused on growing Coke Zero and this type of alternatives. So when you think of what we've been able to do in Brazil, where we've taken the mix of Coke Zero all the way to 28% and it's still growing high double digits. There's plenty, plenty of headroom in Mexico. We don't have a target yet but we're around [ 4% ] mix in Mexico. So there's plenty to grow our Coke Zero and other noncaloric alternatives, Sprite Zero, so another fantastic product. So I don't have a -- we don't have a target per se, Antonio. But that more or less gives you a sense of the difference on the market that has already developed Coke Zero getting to 28 percentage points versus a market where we're starting to crack the code such as in Mexico, where we're around 4%. So there's plenty of headroom there. Antonio Hernandez: Okay. And in terms of competition in that space? Ian Marcel Craig García: I would say we have a leadership position there. It's not that much that will come out of share gains there. Really, it's more a portion of growing the mix and growing the total category. We -- there are some share gains opportunities there but that's not the big driver at all. Operator: Next question from Felipe Ucros with Scotiabank. Felipe Ucros Nunez: Most of my questions were asked, but I had a few smaller ones. So Ian, you talked about Coke Zero in recent quarters and you talked about being able to break the code finally in Mexico. So just wondering how your perception has changed, if at all, since obviously, there's an expectation that it's going to accelerate from the trend that it already had. Still feeling very confident about cracking that code? And the other 2 questions. One, on the World Cup, what kind of historical impacts have you guys seen in the portfolio when the World Cup is going on? And obviously, the occasions increase. Just to get a sense of what we expect for 2026 when it comes to KOF. And then in Brazil, obviously, your plant is back up and running and back up at capacity. Wanted to see if you could give us a sense of where the competition stands with regards to their capacity in that region. Are they also back up and running? Or did they not have disruptions? Just any color you can give us on that side would be great. Ian Marcel Craig García: Thank you, Felipe. So I would say on Coke Zero, we're very confident that we're on the right track. I think the biggest measure of that was that during the consumer backlash in the beginning of the year, Coke Zero grew double digits and continued to grow double digits. And it's even under this softer macro environment, it's still growing double digits. So Coke Zero is doing nicely. It's going to get a boost also from the World Cup. It's going to be a hero product there. It's going to be highlighted in all of our publicity and marketing campaigns. So I think our confidence on Coke Zero and our care towards making sure we keep that ball rolling and we keep all of the 5 elements from the Brazil playbook that we call for Coke Zero being there is a huge source of focus. Like I said, we think of Coke Zero as a silver bullet for us and we're taking great care with that. Regarding the World Cup, it really -- when you look at historical effects, I think it's like a 5% uplift in volumes -- relative volumes during the World Cup months. It's not a big volume thing per se but it's huge in terms of brand equity. I was there in Brazil during the World Cup and I remember clearly that the most recalled and remembered favorable brand post the World Cup was Coca-Cola. It's an incredible asset and we're going to leverage it fully for both Coke brand, including Coke Zero and for Powerade. And finally, your final point on Brazil capacity in the South, I would say that during the floods, only Coca-Cola FEMSA was impacted. So we were the only ones to lose a production facility, which was also our biggest distribution center. So that's why we lost 8 points of share, Felipe. It was only a Coke FEMSA impact thing. We're back on track, like I said, since midyear. So we're producing at full capacity now and we've recovered 500 basis points of those 800 basis points that we lost. Obviously, the last remaining points of share are going to be the hardest but we have plans to recover them fully. So no, the rest of the competitors did not receive the impact. And we're starting also on the way -- by the way, on the remediation plan, meaning the containment walls and pumps to be ready to face any future natural disaster. So that has -- we're back on track producing. We are not yet finished with the remediation to face a future flood and that should be done by next year. Felipe Ucros Nunez: No, great color on that. If I can do a very small follow-up on that World Cup. When you talked about the low single digit -- low to mid-single-digit volume decline expectation in Mexico due to the tax, is that purely containing the effect of the tax? Or is that net of everything else that you have going on? So for example, is the World Cup impact included in that number [indiscernible]? Ian Marcel Craig García: It's net of everything else. Just the tax, it's a higher impact. But we are cycling a backlash that we no longer have and we're including the World Cup. So that includes everything. Operator: Thank you. This concludes the question-and-answer section. I would now like to hand the floor back to Coca-Cola's team for closing remarks. Jorge Alejandro Pereda: Thank you very much for your interest in Coca-Cola FEMSA and for joining us on today's call. As always, we are available to answer any of your remaining questions. Thank you and we wish you a great weekend. Operator: Thank you. This does conclude today's presentation. You may disconnect now and have a nice day. Jorge Alejandro Pereda: Thank you, Sophia. Thank you, team.
After years of decline, businesses are a far cry from the glory days of being the “Furniture Capital of the World” amid price hikes and supply chain snafus.
