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Delphine Deshayes: Good morning, everyone. It's my pleasure to welcome you to ENGIE's 9 months conference call. Shortly, Catherine and Pierre-Francois will present our 9 months performance, following which we will open the lines to Q&A. [Operator Instructions] And with that, over to Catherine. Catherine MacGregor: Thank you very much, Delphine. Good morning, everyone. Welcome to the presentation for our 9 months 2025 results when we can report a resilient set of numbers in what we could perhaps say is the new norm of a choppy economic, political and geopolitical environment. We have continued to grow in renewables and flexible power, and we've done it as always, by executing with efficiency. We are dynamizing our performance, and we are further simplifying our asset portfolio. With our ideal combination of green and flexible energy plus expertise in energy management, we are putting ourselves in pole position to meet the challenges and opportunities of booming data center demand and in general electrification. In Nuclear, we embark on a new chapter with the restart of both reactors in our new joint venture with the Belgian government, triggering the transfer of the remaining waste liability off our balance sheet, a big step for ENGIE delivered at last. Finally, on the basis of our 9 months results and final quarter outlook, we are on track to achieve the upper end of our net recurring income group share guidance range of EUR 4.4 billion to EUR 5 billion. Before moving on, I want to take a moment to remind ourselves what we are at ENGIE. We are, first and foremost, a utility, which means that we are here to bring people something useful, something that they really need. And as a utility, we are focused on the energy transition, which means affordable, greener energy in a new environment of rising demand fueled by electrification and data center. Green Power is often quickest to market, the more so given procurement bottlenecks for new gas plants. Component costs have fallen drastically. But that alone doesn't automatically imply that greener output is cheaper than what we have today as there are negative prices, there is curtailment, which are undoubtedly a challenge, which shows that the system needs further optimization. And how are we doing this? We are moving faster to combining green output with batteries, pump storage and flexible gas. And also being pragmatic about what can be electrified, gas will remain an indispensable part of the energy system and gas in turn will need to be decarbonized. As a utility focused on the energy transition, we have an ideal combination of assets and market know-how that is making greener energy more affordable and more attractive, which is why I am more excited than ever about the ambition we have at ENGIE to become the best energy transition utility. Moving on to this next slide, some headline numbers. EBIT excluding nuclear was down 7.3% on an organic basis at EUR 6.3 billion, with a rising contribution from networks and recording a high basis of comparison in terms of energy pricing in SEM and hydro volumes in our Renewables and Flex Power GBU. Our performance actions achieved a tripling of boost to the EBIT over the first 9 months of 2025 versus last year to an unprecedented amount of EUR 477 million. You remember that we are targeting EUR 1 billion minimum of performance improvement over the '25 to '27 period, which represents an increase versus the previous years. In particular, a Culture & Competitiveness plan, also known as a C2 plan, is taking on a real momentum. The initial top-down approach is now complemented by a bottom-up approach, meaning that every manager is responsible for developing and implementing the most relevant action plan covering the key areas we have identified, bringing efficiencies in procurement, improving span and layer, reducing general and administrative expenses to name a few. I am really pleased to see the level of ownership from our management team on this topic and the promising results. Moving on. Cash flow from operations stand at a strong level of EUR 11.4 billion. The structure of our balance sheet remains solid with economic net debt equating to 3.2x of EBITDA at the end of September, well below the ceiling of 4x. In conclusion, we approach the final part of 2025 with confidence, and I can confirm our guidance for the full year with net recurring income group share at the upper end of the range. Turning to this next slide. We added over 2 gigawatts of renewables and BESS in Q3 alone, making 4 gigawatts for the first 9 months. Two major projects to mention, the Dieppe Le Tréport offshore wind farm, which in September installed its first turbine foundation. Also the signing of the 1.5 gigawatt solar project in Abu Dhabi a few weeks ago, our largest renewables project that demonstrates our global reach and ability to compete successfully for the biggest ticket project within our investment criteria. In terms of green PPAs, we saw a big acceleration in Q3 with 3.1 gigawatts signed to date. In the U.S., we are moving forward with 1.7 gigawatts under construction, supported by demand for PPAs where buyers are anticipating scarcity and are looking to secure their supply. An example of that is our recently announced PPA with Meta covering the entire output of our 600-megawatt Swenson project in Texas, which is due on stream in 2027. Some uncertainty in that market remains still with, for example, the risk of delays in permitting from the impact of the U.S. government shutdown. As with renewables, I want to stress a similar breadth of geographical presence and optionality in ENGIE's flexible power assets. This slide shows that we are expanding our portfolio in several European countries where we enjoy an integrated business presence. We've been actively contributing to Belgium security and flexibility of supply. Our 875-megawatt Flémalle CCGT is now operational. It achieved full power at the end of October and is currently undergoing final test to fine-tune processes. And at the start of October, we connected the first phase of our 200-megawatt BESS at Vilvoorde ahead of schedule. And early next year, we'll be starting construction of an 80-megawatt BESS at Drogenbos. In Italy, we acquired 2 BESS projects of 200 megawatts combined in the Puglia region in July, enhancing our 4.2 gigawatts of generation portfolio and our supply business in that country. In Romania, where we have 240 megawatts of wind and solar as well as a regulated gas distribution business, we are launching the Sibiu BESS project with 80-megawatt capacity due on stream late 2026. Moving on to this next slide, I want to share with you quickly how we are leveraging our key strengths in order to capture the opportunities presented by the data center boom, a boom that leads me to state with conviction that in the U.S., particularly, even those who don't believe in the energy transition believe in energy additions. What are these key strengths and how do they fit the needs of data center developers? First, we have a massive portfolio of over 1,000 generation and flexibility sites while data centers need land as well as grid access. So we can help. We aim to co-locate a substantial data center capacity with our production plan. Second, we will leverage our pipeline of over 100 gigawatts of renewables and BESS as well as our recognized capability to provide anything from basic as-produced PPA to sophisticated 24/7 as-consumed products. How? By stepping up the pace of new tech and data center PPAs and providing the quick-to-market additional energy that tech so badly needs. Worth mentioning here that ENGIE has so far signed a cumulative volume of over 505 gigawatts -- sorry, 5 gigawatts of renewable PPAs with tech and hyperscalers. And third, we have best-in-class B2B supply and energy management while data center developers want to maximize their energy competitiveness. So here, we can help as well. Finally, it's a pivotal year for our business in Belgium, one of our 2 home markets. I already mentioned the opening of our flexible Flémalle gas-fired power plant plus 2 further BESS projects to add to the Kallo project, which is already underway, bringing us to 380 megawatts of storage capacity. Since then, we won significant volumes in the recent Belgian CRM auctions with around 2 gigawatts in each of these 3 auctions, thereby giving long-term visibility to the operations of our existing fleet while contributing to Belgium security of supply. Last but not least, in nuclear, we are delighted at the success of the first stage extension work of the Tihange 3 and Doel 4 reactors and their timely reconnection to the grid with full availability for the winter season. This is the final milestone for our Belgian agreement, which is now fully in force, meaning that the transfer of nuclear waste liabilities has now been completed. Our liabilities are now limited to dismantling and low category nuclear waste. And for nuclear operation in Belgium, our exposure to merchant will end from the start of December. It is really a new chapter that kicks off for ENGIE in Belgium, nuclear, which encompassed relatively modest, but more importantly, derisked earnings and a derisked balance sheet. With that, I will pass it over to Pierre-Francois. Pierre-Francois Riolacci: Thank you, Catherine, and good morning, everyone. Thank you for being here with back-to-back calls. So apologies for this busy day. I'm pleased to present, of course, ENGIE's 9 months financial results for '25, a period which is marked by resilient earnings and also robust cash flow. EBITDA, excluding nuclear, reached EUR 9.8 billion; and EBIT, excluding nuclear, came in at EUR 6.3 billion. Both metrics reflect the normalization in our markets, lower hydro volumes and also some FX headwinds. Organic variance stand at minus 4% and minus 7%, respectively, after several years of exceptional performance. Against these headwinds, growth and performance, our growing momentum and our quality of earnings is evident in our cash flow from operations, which stands at EUR 11.4 billion. Net financial debt increased by EUR 2.7 billion only due to the Belgian nuclear agreement, while economic net debt decreased by EUR 1.4 billion, highlighting our disciplined approach to managing our balance sheet with credit ratios that leave us with significant headroom. Importantly, our 2025 guidance is confirmed. And based on Q3 performance, we actually expect to reach the upper half of the range for EBIT excluding nuclear and the upper end for net recurring income. ENGIE continues to demonstrate resilience and agility, positioning us well for the remainder of the year. Consequently, we foresee sustained growth in our fourth quarter, outperforming last year's Q4 and taking H2 '25 above H2 '24 as expected. This reflects our confidence in ENGIE's ability to deliver consistent and predictable growth over the coming years with a low point expected in 2026 net recurring income following the phase down of our nuclear activity. Let's now turn to the evolution of ENGIE's EBIT over the first 9 months. As you can see, EBIT excluding nuclear stands at 6.3%. The headline story is very simple. It's one of investments and performance initiatives offsetting the impact of market normalization and lower volumes. On the negative side, indeed, we faced significant headwinds from FX and scope as well as from price and volatility, particularly within our supply and energy management activities, where market normalization led to lower reserve reversals and also reduced results on gas and LNG. One-off items such as positive impact of renegotiated gas contracts in 2024 and increase in 2025 for gas transport tariff also weighed on the results. Those impacts were partly compensated by the tariff increase in our French gas networks. Volumes were another challenge, especially in renewables, where lower resources in Europe, most notably hydro in France, but not only drove a substantial decline. Networks also saw reduced consumption, particularly in Germany and France, contributing to the overall volume effect. However, these pressures were partly offset by strong commissioning activities, plus EUR 327 million with new assets in renewables, networks and local energy infrastructure coming online and contributing positively to EBIT. Performance improvements across all segments, a striking plus EUR 477 million, as Catherine was alluding to, added further support, demonstrating the effectiveness of our operational excellence and competitiveness programs as well as the successful upturn of some loss-making activities. Other effects include notably the cost of our employee shareholding plan for a bit more than EUR 50 million. Nuclear EBIT is down EUR 577 million with negative volume effect linked to the permanent shutdown of Doel 1 in February '25 as well as conformity outages of Tihange 3 and Doel 4. This decrease is also explained by some lower prices captured in Europe. In summary, while market normalization and lower volumes presented clear challenges, ENGIE's disciplined investment and performance initiatives are enabling us to land our EBIT trajectory at a much higher level than precrisis. If we review now ENGIE's EBIT evolution by reporting segments for the first 9 months, you should note that Renewable and Flex Power EBIT is negatively impacted by FX, minus EUR 75 million and by scope, minus EUR 97 million with exposure to Brazilian real and U.S. dollar for FX and also with disposal of cash generation assets in Singapore and Pakistan as well as the deconsolidation in Morocco. Renewables and BESS activities decreased organically by EUR 136 million. This was due to the normalization of volumes in Europe as hydrology in France returned to more typical levels after exceptionally favorable conditions last year. Overall volume impact in Europe, net of the hydro tax amounts to EUR 419 million. This was partially offset by the very strong contribution of new commission assets, plus EUR 255 million and improved operational performance, plus EUR 55 million. Q4 should benefit from a softer base effect, also supporting a more positive outlook, significantly more positive outlook. We are also pleased to report that we have resolved all pending disputes with Nordex U.S.A. and ENGIE Renewables and the parties anticipate continuing their strong commercial relationship. Turning to gas generation. EBIT declined by EUR 126 million organically. The main driver here was a continued drop in capture spreads in Europe, minus EUR 260 million, mostly in H1 and the high comparison base, however, this was partly balanced by favorable price effects internationally, especially in Chile and in Australia and the end, of course, of the inframarginal tax in France. In Infra, the picture is positive. EBIT from networks increased by an impressive EUR 705 million, driven by tariff increases implemented last year and related to the new regulatory period. Strong performance in French activities and the annual revision of distribution tariff in France further supported results in Q3. In Latin America, EBIT grew, thanks to new power line construction in Brazil and tariff indexation in both Brazil and Mexico. While the bulk of the profit increase was secured in H1 with the full impact of tariff increase in Europe, Q3 was a good quarter. Local Energy Infrastructure saw an organic EBIT decrease at EUR 36 million, which is actually an improvement versus the first half. The anticipated normalization of market prices impacted spread captured by cogeneration facilities, but this was mitigated by improved performance and selective development of new urban heating and cooling networks. Moving to supply and Energy Management now. EBIT in B2C activities declined by EUR 131 million organically, mainly due to a strong and atypical year in 2024. Still, good margins in Europe and a market environment that allows for full valuation of risk helped cushion the impact and are supporting a full year ambition close to EUR 0.5 billion. B2B EBIT decreased organically by EUR 129 million, reflecting a drop in timing effect that had positively impacted the 9 months '24. But again, commercial performance remains solid with margins in line with expectations, and we are all set for a strong year. Finally, Energy Management EBIT decreased by EUR 75 million organically, reflecting continued market normalization, softer activity due to geopolitical and economic uncertainties and lower market reserve releases compared to last year. A negative one-off related to gas transport tariff updates in Austria and the Netherlands also weighed on results in H1, whereas last year's third quarter benefited from a positive one-off linked to gas contract renegotiations. Overall, SEM performance is on track, and we expect B2B plus Energy Management to land the year slightly below EUR 2 billion as we tailor our offerings to evolving client needs and adjust our contract time lines accordingly. So as we look across our segment, it's clear that '25 has kept us on our toes, whether it's the weather, the geopolitical uncertainty or energy market evolution. But beyond the granular explanation of each business and taking some steps back, despite persistent soft trading in EM, you can see in Q3 the first tangible signs of some parts of the business going back to growth. For R&D, volumes and prices headwinds are stalling. For generation in Europe and for ADI, the decrease of clean spark spreads, including hedging is now largely behind us. And throughout the organization, our performance efforts are gaining momentum. With our team's agility and the portfolio built for all seasons, we are ready to keep moving forward. Let's now focus on ENGIE's cash flow from operations for the first 9 months. Again, our ability to generate cash remains exceptionally strong, supported by disciplined working capital management and a solid operational performance. One thing to mention is the positive cash impact from the phase down of our nuclear activities, which has contributed to a reduction in working cap for about EUR 700 million. This effect, combined with stable operating cash flow and the positive impact of lower gas prices on storage has enabled us to sustain cash generation at a very high level. For the period, cash flow from operations stands at EUR 11.4 billion, confirming ENGIE's robust fundamentals and our capacity to navigate changing market conditions. The strong cash generation and that we expect to continue is a key enabler of our strategy. It does fund our performance efforts in digital and restructuring, our investment program in generation, flexibility and infra and last but not least, healthy dividend to our shareholders. Let's now turn to ENGIE's credit ratios and debt profile as of September '25. Our leverage ratios remained stable and well within our targets with net financial debt to EBITDA at 2.5x and economic net debt to EBITDA at 3.2x. Over the period, net financial debt increased to EUR 36 billion, driven by the cash out impact of the nuclear deal in Belgium. Our cash flow from operation has more than financed maintenance and growth investments in addition to supporting dividend payments. It is worth noting that other impacts amounting to a decrease of EUR 0.3 billion debt includes the effect of disposals for EUR 0.7 billion. Economic net debt stands at EUR 46.4 billion, down from EUR 47.9 billion at the end of 2024. The group balance sheet continues to improve, driven by disciplined working cap management and the powerful cash machines at our gas networks and downstream operations. In short, ENGIE's financial structure is rock solid, providing us with the flexibility to invest, reward our shareholders and meet our long-term commitment even as we navigate the complexities of the energy transition. Now let's wrap up with ENGIE's full year '25 guidance. Guidance remains unchanged. However, we expect now to reach the upper half of the range for EBIT excluding nuclear, and the upper end for net recurring income group share. This reflects the group's strong operational performance and well-controlled financial expenses due to strong cash generation. Our dividend policy remains attractive with a payout ratio of 65%, 75% based on net recurring income and a floor set at EUR 1.10 per share. Our strong investment-grade rating is maintained, and we continue to target an economic net debt-to-EBITDA ratio below 4 over the long term. Key assumptions for the year include updated market commodity prices and foreign exchange rates, average weather condition and recurring net financial costs between EUR 1.9 billion and EUR 2.1 billion. The recurring effective tax rate is expected to be in the 24%, 26% range, including the special tax in France. Looking ahead, we expect Renewables and Flex to deliver healthy EBIT growth in Q4, and we anticipate a very solid Q4 in B2B, continuing the momentum established in Q3 for the quarters that are not fully representative of the longer-term trend as the tail of market normalization for B2B will still impact 2026. We expect Energy Management to deliver growth in the fourth quarter versus Q4 '24 with results stabilizing in the middle of our midterm guidance in the years ahead, of course, subject to the usual ups and downs and market volatility. Q1 2025 benefited from unusually high market volatility, which set a strong benchmark. While Q1 '26 may not reach the same level, we expect solid fundamentals to continue supporting performance throughout the year. In summary, ENGIE is well positioned to deliver on its commitments with robust earnings, disciplined financial management, strong balance sheet and a clear strategy for shareholder returns. With that, I pass it back to Catherine. Catherine MacGregor: All right. Thank you, Pierre-Francois. So to conclude, the first 9 months have seen excellent execution of our growth and performance strategy. And looking forward, we will continue to build on our track record of strong delivery. We will continue to push through our cultural transformation, make fullest use of our portfolio, which is built for all seasons, and we will continue to develop and engage our top-class teams for the benefit of all our stakeholders. Now back to Delphine for the Q&A. Delphine Deshayes: Thank you, Catherine. Operator, can you please open the lines to Q&A. Operator: [Operator Instructions] The first question comes from Alex Roncier of Bank of America. Alexandre Roncier: I have three, if I may. The first one is on operational performance. And I think we've seen good and/or improving results in flexible generation and commodity trading at some of your peers and within the wider energy sector actually. So I'm surprised a bit by the guidance upgrade today that is not necessarily supported by that. But equally, I wanted to check with you that perhaps given the more volatile than expected power markets this year, you had to book more market provisions this year perhaps than expected. You did talk, I think, about lower release, which is somehow equivalent, which could explain some of the upper end conservatism in the guidance there for those specific drivers, but would support earnings into next year, I would assume. Second question, if I'm not mistaken, your guidance to 2027 does include some not -- insignificant M&A, in particular in networks. And given that opportunities are not easily seen today, at least on my side, and given the increased focus on storage at the European level, the pipeline you had acquired in U.S. and your overall strategy of 24/7 green energy, why would you not take the route of active power networks investment instead of passive ones and really boost your CapEx allocation to batteries? Last question. If I'm not mistaken, you said the 22% to 25% recurring effective tax rate for the '25, '27 guidance was excluding potentially new French taxes. So wondering if you could give some more number around that. I think you guided previously to around EUR 150 million perhaps of extra taxes in France for 2025. Any view on the current budget and potential impact, being mindful, of course, that everything could collapse in the coming weeks. Pierre-Francois Riolacci: Okay. I will start maybe with one and three. And Catherine, you will pick the number two. So yes, there is indeed some volatility in power markets. But when you double down on the numbers, you see, for example, that the intraday volatility has been reducing. You see also that the bid-ask is not what it was. And that does explain why indeed, we have a lower -- also reversal of reserves. It's also because we had a lot in '24. So you always need to look when we explain year-on-year to what was the reference. And in 2024, we had to release significant reserves. So I would not say that we have been booking more. Actually, again, the volatility -- some KPIs on the volatilities are rather going down, and we had actually less to book even if compared to '24, of course, we released less. And we are not that pleased with the current market in EM and Q3 is still soft as it was in Q2. That's not a surprise, and you may have seen that in the market everywhere. And that we have seen as well, not that much on power, but more on gas. On the tax rate, yes, the rate is -- our guidance is 24%, 26%. It does include the French [indiscernible] tax or extra tax, whatever for about 1.3%. I think it does account in these numbers. One thing which is important is that -- we -- you know that we have -- indeed, with the Belgian transaction, we are in a situation where holdings now are potentially more efficient in terms of tax, and that is supporting a lower tax rate in the long run. But we have not taken any consequence of that in 2025, and we do not plan to. That's the reason why you see that kind of guidance. It doesn't mean that we will not do it in the years to come. And our long-term view on tax is more lenient than what you see in 2025. That doesn't mean, of course, that there won't be an extra tax in '26 in France and maybe some other countries because you may have noticed that many countries are running for money. So we are on our toes and defending, of course, our position. But so far, we have not identified anything that would jeopardize our global view and also our ability to manage our tax rate in the long run. Catherine MacGregor: And maybe just to add to the noise that we are hearing from Parliament as a lot of quite exotic measures are being voted by the current parliamentary sessions, the probability or the likelihood that all this noise gets materialized into the real budget at the end is actually quite low at this stage. So obviously, we're monitoring the situation. But as you guys know, there is a difference between all the noise and what will actually happen eventually. And then maybe a point on our investment strategy. Just to remind that we have obviously 2 levers we want to action to deploy the growth and the strategy of ENGIE to further the utility and the energy transition. It's generation, green power, green electrons and indeed, in the network arena, it's about power networks. And we believe that we have a very clear capital allocation policy along these 2 levers. What is for sure is that -- on the generation, we are probably more excited than before on the opportunity set on batteries and in general storage, but battery for sure. We were very U.S. focused. And when you look at our numbers, most of our operating batteries today are in the U.S. But lately, you will see, and I showed that in my prepared remarks that there is an acceleration finally in Europe. There is also opportunities, obviously, that we are seizing in the markets where we are present in Latin America. Chile is a good example of that. But Europe is really behind. Europe has been very ahead on renewables. Also distributed solar is proving its limitation in some markets with a lot of negative hours. And here, batteries are very, very urgent. So in our key markets in Europe, we are accelerating on batteries, and that was obviously, the purpose of the examples I gave you. So remember, when we said to 2030 and 95 gigawatt, that used to be 80 gigawatt on renewables. So now it allows for quite a big envelope on battery and energy storage for sure. And on Power Networks, as you guys know, we're very focused on what we can do organically in Latin America. Inorganic, we are looking at it. We said that we would take some time. We'll be patient because, obviously, we want to do the right thing. But we do believe that is the right path to go on, and we will deliver on that strategy. Timing, obviously, will depend on a lot of things. Operator: The next question is from Harry Wyburd of BNP Paribas Exane. Harry Wyburd: So two for me. So first, it's probably one for Catherine. On gas, just thinking about the overall group strategy here. I think the strategy over the last few years has mainly been on, as you said, the green electrons. And for a while now, you've had a target or a long-term target to reduce gas capacity. But I'm wondering in Europe, given all of the newfound excitement again over data centers, I mean, I'd say my observation would be that in Europe, your biggest issue around that topic or indeed any other -- of the many other drivers of demand is around the peaks and particularly around the sort of [indiscernible] times when you don't have any winds. And given you have one of the biggest gas fleets in Europe, is there scope perhaps for a rethink on that? I mean the way I see it, you're going to be building tons of batteries and you alluded to that seeing an uptick in Europe, that's going to dilute the daily evening spark spreads. And really, the end game here, if you look at the sort of resource adequacy reports from ENTSO-E is that probably you're going to have to move to a capacity market system everywhere in Europe and capacity payments are going to go up to make sure these gas plants all stay open. So is there anything you can say to us to maybe make us a bit more interested or even excited about how much you could earn from your gas fleet in Europe, which I think we all value at a pretty low multiple. So that's the first point. And the second one is the next time you speak to us early next year, you're probably going to come out with maybe some new longer-term targets and thoughts. Has there been any advance on your thinking about how you might grow the dividend from next year? And indeed, the earnings because, of course, as you mentioned, earnings are going to trough next year. Any views on what we could think about as a sustainable long-term EPS CAGR from ENGIE once earnings trough next year? Catherine MacGregor: All right. I think -- Harry, I think you did the question, but also the answer because I mean, you're totally right. We are obviously super excited about the value that is carried by our CCGT fleet in Europe. And you're very right that batteries are really, really important, but they tend to be a fantastic complement to solar. When you don't have wind in Europe, it generally typically lasts for a few more than -- a little bit more than just a few hours. And here, the gas plants play a critical, critical role, plus the gas can be stored. So you really have a very important power insurance in these gas fleets. And you can see that the CRMs indeed, which we saw first deployed in Belgium actually pioneering a little bit the scheme, but now is being deployed at a varied degree of speed in many, many other countries in Europe, and that's obviously a positive for Gas fleet. So we are excited. In fact, if you look at the load factor in Europe recently, you have seen that -- we have seen that the load factors have increased. If you remember, last year, we were at about 15%, and now we are above 20%. So they are actually being called more, which is exactly reflecting the reality that you are describing. So Yes, overall, we are really -- I mean, we like our gas fleet. We have just put Flémalle online under the CRM scheme in Belgium. And Flémalle is for sure going to contribute to the security of supply and play that role. So that's for sure. And of course, eventually, we'll have to make sure that we can decarbonize the gas. But frankly, we see that the CCGT play a role for years to come and a nice complement to a battery. And so that's great asset for us. In terms of the dividend, we're very, very attached to the consistency of our dividend policy. And as you know, it has this 65% to 75% of net recurring income formula that has not changed, and we like that. Obviously, the way we have shaped ENGIE and our aim is really to make sure that we deliver this predictable gentle earnings trajectory, which will turn and should turn into a gently growing dividend for our shareholders. That's our intention. Obviously, a bit early to talk about next year's dividends, and we'll come back to you in February. We're hearing from the market this eagerness to see this trajectory materialize. But let's talk about it again in February. Pierre-Francois Riolacci: Just an add on EPS CAGR. Going forward, I think that -- I mean, clearly, we are pleased with the development of operation in Q3. And of course, we see some headwinds. I mean, clearly, the regulations are unstable in some countries. FX is not pointing into the right direction. I mentioned that the volatility for EM was lower in Q2, Q3, but this is a short-term point. On the other side, again, we see that Renewables are still going at pace in some significant geographies for us like India, like in Middle East. Power demand, clearly, we see that it's going in the right direction. Expectations are rising actually in the U.S. and in Europe. And also the interest rates, I mean, clearly, we had a peak and now it looks like we are going back to a normal level, and we are very pleased with the way we have been handling that in the future. So there are pros and cons. I think that today, what we see in the business -- at the end of the day, our growth is delivering EBIT. Our performance plan is getting momentum at pace. So yes, we see the good drivers of a sound EPS CAGR from 2026. And the story that we shared in the market update is absolutely the good one, and we stick to it. Operator: The next question is from Ajay Patel of Goldman Sachs. Ajay Patel: I guess mine is around Slide 7, where you highlight the booming data center demand slide and your capabilities to take advantage of it. I'm thinking, well, look, at the moment, your current CapEx program didn't really have that much demand growth put into it. And it feels by this presentation like your confidence on leveraging ENGIE's portfolio to take advantage of this demand is effectively pointing to more CapEx, more opportunity, more growth. So I'm trying to think, well, as your targets roll, are we going to see ENGIE demonstrate that leveraging in the form of CapEx, i.e., you'll start to see the benefits of it in CapEx programs? And then the other thing is just on also capital allocation. As you see it, as this has developed, has this maybe changed the emphasis in the geographies? Any insight, any sort of high-level things here would be really helpful. And then more of a just specific numbers question. Just wanted to check if there are any one-offs that I need to take into account for Q4 when modeling the full year results, just make sure that I've got everything in the bridge. Catherine MacGregor: Yes. So Ajay, just to -- the price and the opportunity that we see in data centers for ENGIE today is threefold. It's speed to power, and this is really about leveraging our existing footprint to co-site, co-locate data center near existing energy assets and taking advantage of the fact that we have connection, we have land, we have acceptability levers. We are in an ecosystem that we know very much, and we can partner with specific data centers to allow them to develop their data centers faster, including helping them on the energy side. Then we have decarbonization on energy addition depending on what your driver is, and this is about PPAs. This is about 24/7. And this is really about supporting our renewable developments. So the reason why we don't see today any need to have dedicated additional CapEx allocated to that is that this is in our underlying CapEx plan to get to the 95 gigawatts. But think of it as very supportive about -- of the quality of those gigawatts. Because obviously, when you provide energy to data center, you are providing something. And as you guys know, the cost sharing of operating a data center, the energy part is actually quite significant. And so we are an important supplier to them. There is scarcity. And so this is supportive to obviously the quality of the gigawatts that we have in our portfolio developing our renewables assets. One point here, which is really important is as you -- I'm sure you know, data centers, the acceptability topic is gaining importance. And why is that? Because if data center is only a load and doesn't contribute to energy addition, then will turn into increase cost inflation for the people, for the consumers and the acceptability is going to be a problem. We see signs of that already in a few places, particularly in the United States. So this whole notion that data centers need to contribute to the energy transition, the energy addition is obviously supportive for us in terms of having renewable projects an impact on PPA. But again, not necessarily additional CapEx for us, at least not that we see today. And then the last point, which is, in general, it's more plain vanilla B2B. So here, it's supportive to our B2B business. This is more traditional energy contracts. Again, here, there's not much CapEx associated with that, which is why you don't see these numbers. Then the question about the capital allocation. Obviously, U.S. -- I mean, as you guys know, we have a good plan on capital allocation in the U.S.. Data center is a big driver for quick energy addition in the United States. Caveating this, the fact that there is this uncertainty on permitting, for example, tariffs and that we are working around, we're managing quite well. But we have decreased a little bit our capital allocation in the U.S., not because we don't like the data center, not because we don't have customers that want what we can provide, but really because there is a bit too much uncertainty to our liking to deploy as much as we thought we would. Maybe that will change. That's a nice thing about the U.S., things change quickly. But right now, we are a little bit less -- shy in the U.S. We are excited about other places. Europe, obviously, even though the scale in Europe is not significant, but we are seeing data, digital sovereignty big topics in Europe where people want to have data center in their country. So that's one opportunity. And then the other opportunity somehow related to data center is in the Middle East and India. In these regions, it's very interesting what's happening because here, again, it's not so much about ideology, but obviously, the need to have power, fast power and a lot of power, competitive power. And here, obviously, depending on the resources, renewables are very attractive, which is why we are able to do big projects. The one that we signed in Abu Dhabi is obviously fitting well on this criteria. Ajay Patel: May I just add [indiscernible] just on the [indiscernible] securing land [indiscernible] what degree does that [indiscernible] this proposition of basically maybe signing a contract with a data center, developing a site. Can you give us any order of magnitude what kind of value it creates because it's quite a number of sites. Catherine MacGregor: Sorry, I'm just silent because I'm trying to understand the question. I mean it creates -- it's the value that you can derive from having something someone wants. It creates the value that you can derive from having a partnership with a data center. And obviously, it's supportive. Now to be honest, these projects, they take a long time to develop because obviously, they are quite complicated. So today, we have numbers. It's a single-digit number of projects of that kind that we are working through. and it takes some time to develop because they are quite complex. But eventually, obviously, these will be good deals because we have something quite unique that these guys need and want. And so these are good partnerships. But in terms of numbers and time, it takes a bit of time to develop. Pierre-Francois Riolacci: Maybe just to cover your third question, which is not allowed, but still -- any one-off in Q4. By design, one-offs are not supposed to be known in advance. That being said, what we know is that Q4, there was, last year, quite a chunky number of negative one-offs. Part of it also being -- we are very keen to make sure that when we close our books, we prepare for the future, and we also discuss with our customers so we can actually help them to manage the energy transition. And you can expect that in Q4, to a certain extent, there will be also the same kind of deals that we can structure. You remember in H1, we said that we are a bit under pressure, [indiscernible], I mean maybe you should indicate that you are going to land above mid point and say, no, we want to make sure that we can deliver a good 2025, but also taking in account the request of our customers. So we are in that situation. So I think that we will deliver a strong Q4 that we are pretty confident in and that will still allow some room to accommodate the request of our customers and our views on the market. Operator: The next question is from Louis Boujard from ODDO. Louis Boujard: I will stick to two questions then. And maybe the first one would be related to the performance of the plan. Your performance plan has contributed to more or less EUR 500 million in the first 9 months, which is, I think, quite strong. Can you elaborate on the key levers that enable this performance in terms of cost base, procurement, generation efficiency or other elements that could have sustained it? And to which extent it could be sustainable going forward according to you and if it could enlarge in the future? And the second topic would be -- maybe more related to current uncertain environment, I would say. I appreciate that you already provided some indication regarding the Supply & Trading future business performance. But considering the evolution of the lower volatility in the energy markets and potentially lower gas prices that could come in the future, do you continue to see that it's going to remain in the same level that you initially anticipated for '26 to '27? Or do you foresee eventually some headwinds to adjust this target on the Supply & Trading business? Catherine MacGregor: Maybe I'll start to talk a little bit about the performance plan because, yes, indeed, we are really happy with the progress. And we have 3 key big buckets. We have the operational excellence. We have what we call a C2, the Competitiveness & Culture. And then there is the loss-making entities. The loss-making entities has been quite strongly contributing because unfortunately, we did have a few loss-making entities. So the reversal and the correction of these entities is contributing to the plan. So this contribution of the loss-making entities is a bit front-loaded. That is expecting to come down, while the other pieces of the plan obviously will take on momentum, which is why we are following very closely the C2 and its impact on the performance result. And that's why I pointed out to the fact that it is indeed gaining momentum, and we're expecting it to gain more momentum towards the end of the plan, towards the end of the period in relation. So we have said about between EUR 1 billion and EUR 1.3 billion over the period of contribution to performance plan. And given these good results in 2025, obviously, we're comfortable that we will deliver on this with a bit of a different mix. And in terms of example, I gave a few, the span and layer. And these are really important because they contribute to the numbers, but they also help us be more efficient, change the culture, increase transparency. It has agility, the speed, the digital systems deployment are faster. So it has a lot of other benefits than obviously just contributing to the EBIT. So that's really very exciting. And of course, procurement continues to be a big lever as well that was fairly untapped at the group scale a few years ago. And now we are really working through making sure that every business benefits from these procurement gains also helped by the deployment of our ERP system, which is in early phase, but also allows us to further our procurement gains. And then customer environment. So for sure, the margins that we have embarked in our deals in general have a little bit correlated with the absolute value of the energy price. On the other hand, as we are driving our business to be more power and within power, to be more green power, we see that we are able to support good margins by shifting our business in that sense. And the other thing that we are seeing with our customers today is that they tend to want to strike longer-term deals. So the longevity of our contract or the tenure of our contract is increasing, and this is really good because it gives us obviously more visibility on the earnings of the supply business specifically. I'm not talking about energy management, but supply the B2B, where we are seeing more predictability. We have more visibility on this business than ever because of this trend to have longer tenure in terms of contracts. Pierre-Francois Riolacci: And we -- I think that we did indeed socialize some numbers on the contribution of the former GEMS, you remember, I'm sure, before and saying that after normalization, the contribution should come north of EUR 1.5 billion. And to your question, we are still comfortable with this view, even if you're right. I mean, today, we have rather at the low end of the volatility in the market. But -- so therefore, lower EM contribution, which -- that we had in 2025. But again, the point that Catherine made about B2B and the commercial margins, the longer duration of contract is a clear support to that, and that gives us confidence that we can indeed confirm what we said about the contribution of these businesses. And with regard to B2C also, we are for, again, a more normal year. And I had the opportunity to mention in H1 that today, our hedging, our sourcing process in B2C has been drastically improved during the crisis. It gives us more comfort and more visibility and our capabilities to stick to this good contribution and grow it actually in the future throughout the years. Operator: The next question is from James Brand of Deutsche Bank. James Brand: Just a couple of questions on data centers, surprise, surprise. First question, could you give us any details around how we should be thinking about pricing when you're signing a PPA? You obviously highlighted you signed a lot of PPAs in the last quarter and in general. Are you broadly pricing in line with the forward curve? Or is there a premium? And if there is a premium, is there anything you can say about how material it is? I obviously accept that this is quite commercially sensitive. But anything you can say on that would be super interesting. And then you mentioned the scale in Europe is -- I think you said not significant. I don't know if you meant not as significant as the U.S. But I guess my question is, obviously, European markets are not particularly tight at the moment, and you're seeing the margins coming down rather than up for the gas fleet. And obviously, in the last few years, we've seen overall demand come down quite materially in the major European countries. So the question is kind of if we do start to see demand picking up meaningfully over the next few years, like how long do you think it will take before we start to actually see some tightness before the volatility picks up again for the gas fleet? Obviously, it depends a bit on the market, but are there any kind of general comments that you can make that kind of help us conceptualize when demand growth will start to drive market tightness in Europe? Catherine MacGregor: Okay. So PPA dynamics. So we signed 3.1 to date. So we are pretty much in line with what we did last year with a bit of a contrasted market between the United States and Europe. Europe is a little bit more -- it's a bit softer PPA market, and that obviously translates into less premium over market price. In the U.S., there is indeed a premium for PPAs over market price, and it is sizable without going too specific, but it is -- indeed PPA prices are higher than what you can see in the forward. So this dynamic explains why we are pleased with what we've done, but we are not seeing 2025 much higher. We don't expect 2025 to be higher than 2024 just on the basis of the first 3 months on the basis of Europe being a little bit more -- less busy, let's say, as the United States. In terms of the demand dynamic in Europe, and again, you have to be careful when we talk about volatility because we do see intraday volatility in Europe today, even though that the demand has not been super strong. And this is, frankly, the reflection of the asset mix, which is why we are so excited about batteries and the CCGTs in terms of load factor and the start-stop and et cetera, which play fully their role today. The demand in 2025 on power in Europe today is increasing a little bit year-on-year. I think it's about 1%. So we're starting to see a little bit of demand pick up. And expectation is that it will continue, obviously, on the basis of the electrification. You've seen that European commitment to climate targets is still strong. Even though there are questions about, for example, electrification of vehicles, 2035 might allow for hybrid vehicles. Still, we do think -- and there is still the heat pump demand that is being pushed by quite a few member states. So we do think that demand for power will pick up. I don't know for how long it will take to get to the same level as the U.S., but we do expect power demand to increase in the coming years. Remember also that there is the demand, but there is also supply. And on the supply side, there is quite a few assets that are being retired in Europe. So we don't need a much demand increase to see tightness on the supply side. If we don't continue to develop the right renewables, the right storage and all that stuff, that needs to continue in order to just replace what is being retired in various countries, not to mention, obviously, the one in Belgium, the 5 reactors that we are stopping, but Germany is also stopping quite a few assets. Operator: The next question is from Arthur Sitbon of Morgan Stanley. Arthur Sitbon: I have two. The first one is a follow-up question on the performance plan. So you did very well in the first 9 months of the year and you seem quite ahead of your target for the plan. I was wondering if we should understand from that, that this is one of the key pillars you will develop on at full year results when I imagine you would provide 2028 targets? And how important is it going to be as a vehicle -- driver for your earnings growth post trough in 2026. And I was wondering as well if you could just tell us in the EUR 477 million, if all of that is a cash improvement on EBIT or if part of that is noncash? And the second question is, as you were flagging lots of different amendments and taxes were proposed in France as part of the budget discussion. I think several of them could apply to you. There is one on power margin cap, one on a change on the corporate tax calculation methodology. I was wondering if you could just flag to us maybe the ones that even if we're not sure that they will, at the end of the day, be adopted, the ones that could be the most material to you and if you have a rough sense of how material they would be if ever they were to get implemented? Pierre-Francois Riolacci: Thank you very much, Arthur. So we are not going to comment the full year results ahead of the full year results on the performance plan. Very pleased indeed with the strong start. Of course, performance plan will be a solid and sustainable pillar of our growth in earnings for many years, and that goes beyond '27. You're right, there will be some coming in '28, of course. Now it's important to mention and you know, I'm the CFO, so I'm the guy who is always looking at the half empty glass. It's important that we deliver on performance. This year, it was important for us because we had headwind in FX and the performance plan start was coming nicely to match what we were missing in translating some of the earnings abroad. So I think it's also -- be careful that we do manage globally our results. So yes, performance plan, a strong pillar that will stay. And I'm pleased to report that most of it indeed is cash. It doesn't mean necessarily in EBIT because there might be some costs which have been last year booked elsewhere. But really, it's cash which is moving in big time. And then on French taxes, I mean, we -- again, we see a lot of fireworks going everywhere. So far, we have not seen -- first, as Catherine said, I mean we need to stay calm and look at what is going to come through at the very end of it, and we don't know yet. There are sometimes even some provisions which contradict each other. So when our experts try to figure out what does that mean, just cannot make it. So I think that so far -- but we have not identified a catastrophe that I can tell you. But now we need to go through the full process, and we will see what comes out of it. But so far, we are reasonably confident that should land in something which is manageable for us. Delphine Deshayes: Operator, can we take one last question, please? Operator: And the final question is from Bartek Kubicki of Bernstein. Bartlomiej Kubicki: Two questions. First of all, I would like to discuss your PPA book in the U.S. If you could maybe tell us a little bit what is the duration of this PPA book and what is the size? And consequently, where I'm going to is, when those PPAs expire, do you see a potential for margins improvement in the U.S. or to the contrary? That's in the light of the increasing power demand. So consequently, can your existing renewables portfolio in the U.S. increase in profitability in the future or rather decrease given the power demand? Second of all, if we can go for your B2B book. I just wonder if we translate whatever you are saying into an absolute margin per megawatt hour of power sold, do you currently see those margins on new contracts increasing or decreasing versus the prior contracts? And this lower volatility or normalization of volatility, what specifically it impacts in your B2B portfolio? Because I guess, on one hand, you have increasing power demand. But on the other hand, you also have, for instance, decreasing gas prices and decreasing volatility. So I just wonder how to understand it better what exactly moves up and down in your B2B portfolio. Catherine MacGregor: Maybe just in the U.S., our PPAs, obviously, they tend to be quite long term. And our renewable portfolio in the U.S. is actually quite young. So right now, the PPAs are ongoing. And so we don't have a lot of expiration, at least not in the short term. In theory, you're right to point out that existing assets in the current environment and hopefully, that environment is here to stay, they have the value of the PPA today, but they will have the value of future green power, existing green power at the right place for future customers. So we see that value. But today, the PPAs are still quite young in the U.S. So we'll have to be a little bit patient to value that. Do you want to say a few comments on... Pierre-Francois Riolacci: Yes, sure. It's a very good one, Bartek. So if we take B2B, so you remember, and we have been pretty open about that. We have about 75%, 3/4 of the business, which is pure B2B market where we are selling and you're right to point to the commercial margin. What we have seen in our portfolio is that the commercial margin over the last 2, 3 years, has been actually pretty stable, maybe slightly down. And of course, part of it is coming from the prices, which are coming down. You cannot book the same absolute numbers margin depending on the absolute price of energy. But the mix has been actually going in the right direction because, again, more power rather than on gas, more green power rather than gray power. Also lengthening the duration, lengthening the duration helped to keep margins at a decent level because, of course, there is a risk management. So all in all, I mean, we have been pretty good actually in defending the absolute margin level of the portfolio, again, with a limited decrease. And to be very candid, that's one of the reasons why we have been able to keep our former gen business at a very strong level for more than expected because clearly, the market is today pricing the quality in these margin. And then there is a second part of the business, which is more limited, where we do book quantities and volumes with some customers, but then we have risk management. And the margins on this category of customers, which are significant customers, they are slightly small, but then we have risk management, and we can make money out of the portfolio out of managing the risk for these same customers, and that is more exposed to volatility. So I would not say there is none in B2B, but much less -- and because we have, again, this big bulk of contribution coming from now a duration of contract, which is above 3 years. So it's a big change also compared to where we were a few years ago. So that's why we are very happy with this business with much stronger visibility. Operator: So this is the end of the Q&A session. Thank you for joining the call today. And of course, if you have any follow-up questions, do not hesitate to reach out the IR team. Wishing you a very good day. Thank you.
Operator: Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the Third Quarter 2025 BPER Consolidated Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Nicola Sponghi, Head of Investor Relations of BPER. Please go ahead, sir. Nicola Sponghi: Thank you, and good morning, everyone. I'm pleased to welcome you to our third quarter and first 9 months 2025 earnings conference call. Before I give the floor to our CEO, Gianni Franco Papa, please be reminded that our slides set and press release can be found on our corporate website. I would also advise you to take note of the disclaimer on Slide 2 of the presentation document. That said, after the presentation, our CFO, Simone Marcucci; and our CRO, Emanuele Cristini, will take care of the Q&A session. I will reiterate that this is reserved for financial analysts whom I will kindly request to ask a maximum of 2 questions each. So that everyone will have the opportunity to contribute to today's call. Thank you very much. I will now leave the stage to Mr. Papa, CEO of BPER. Gianni Giacomo Pope: Thank you, Nicola. Good morning to everyone, and welcome to our Q3 earnings presentation. Before giving you details on the financial performance of BPER, I would highlight a number of key features of the third quarter 2025. First and foremost, the 23 work streams identified for the integration of BPSO into BPER are all up and running and will be completed by the end of the first half of 2026. Secondly, in the context of our new organizational model, we have decided to regroup 90 overlapping branches in the central and northern part of Italy. And given our market share by branches in Lombardy, where we can almost boast a share of the market of 18%, we decided to create a new regional headquarter called Lombardia North. As far as our human capital is concerned, we are aiming to further invest in young talent. In order to accomplish a generational change in the bank, we have initiated discussions with trade unions to implement additional voluntary exit, which should amount to about 800 employees. As you have seen in our press release dated October 21, BPER signed a derivative contract, which can be summarized as a synthetic exposure to its own shares of up to 9.99% of the share capital. We decided to take this action as we strongly believe in the enormous potential to shareholder value generation of the new banking group, combining BPER and BPSO. On the rating side, we have received important recognitions from the credit rating agencies with improved ratings post the successful outcome of the business combination with BPSO. And finally, as you can appreciate on the slide, in the last 24 months, BPER shareholders have benefited from a total shareholder remuneration, which is shy of 280%. This would increase to 315% at the end of October when the market cap reached EUR 20.2 billion. The trajectory is similar if we look at the main tangible banking asset drivers, which have increased by almost 50% in the same period. And let me add that compared to our peers, I'm convinced that we continue to trade at a discount. Let's now move to our Q3 financials on the next slide. I'm very pleased about Q3 because along with the ongoing business integration, both banks performed extremely well. These outstanding results have been possible because of the remarkable commercial performance, which led to continued and robust commission growth, resilient NII and an increase in the number of net new customers. This particular slide highlights the financials of the new group based on the consolidation of BPSO Q3 results. As such, the impact of BPSO on the consolidated financials accounts for only 3 months. And in a similar way, Q4 will include only 6 months of BPSO results. Please note that balance sheet items, on the other hand, include the full 9 months consolidation of BPSO. In order to ease the reading on the right side of the slide, we have included on the bottom part of each box, BPER like-for-like results. As you can see, total revenues now amounts to EUR 4.6 billion and net profit amount to EUR 1.5 billion. On a like-for-like basis, these are the best ever 9 months results by BPER with a net profit of EUR 1.3 billion, an increase of almost 20% 9 months on 9 months. The cost/income ratio stands at 46%. BPER on a like-for-like basis decreased cost-income ratio by over 270 basis points to 46.8%, underlining the continued focus on cost efficiencies. The cost of risk stands at 24 basis points, while like-for-like, the cost of risk landed at 35 basis points, lower by 5 basis points 9 months on 9 months. The return on tangible equity stood at 19.8%. If we would operate with a CET1 ratio of 13%, our return on tangible equity would surge to 21.6%. The CET ratio continues to be very solid at 15.1% or 15.7% following the deconsolidation of Alba leasing in Q4. Organic capital generation by BPER like-for-like amounted to EUR 1.7 billion or 272 basis points in the last 9 months. In a similar way, the liquidity profile of the new group is sound with short- and long-term ratios well above regulatory thresholds. Before we start, please note that the figures reported on the left side of the table concern BPER on a like-for-like basis. For ease of reading, we have included 2 columns with the consolidated financials, which embed only 1 quarter of BPSO contribution. As already mentioned, BPER is reporting a set of outstanding results 9 months on 9 months. As you can appreciate, total revenues were up by over 2%, 9 months on 9 months, driven by resilient net interest income and a very robust result in net commissions. Please bear in mind that Q3 is normally a lackluster quarter in terms of commissions given the summer holiday period. Moreover, the resilient performance of NII, as I will later explain, was supported particularly by commercial efforts of our network, which translated into an increase in new loan origination. Our continued focus on operational efficiency ensured cost to come down by 3.5%, 9 months on 9 months and 2.4% quarter-on-quarter. Loan loss provisions stood at EUR 230 million, 9 months on 9 months. In the quarter, reported LLPs stood at EUR 88 million, increasing by almost 22% quarter-on-quarter on the back of our continued conservative approach. As a result, BPE stated net profit exceeded EUR 1.3 billion, up by almost 20% 9 months on 9 months. As you can see, given these outstanding results, we maintain our guidance unchanged. Please take note that the left part of the slide is related to BPER on a like-for-like basis, while the table on the right side is related to the consolidated financials, which includes the 6 months contribution to the 2025 group accounts. This is the first time we provide 2025 guidance on consolidated figures, including BPSO. There is an exogenous factor which needs to be taken into account that it is related to the new banking levies in Italy. The topic is being discussed at banking system level with the auditors to understand whether the impact will start from 2026 or 2025. On a conservative basis, we have taken into account the impact of the so-called extraordinary tax on the increase in interest margin, which relates to the redemption of the nondistributable reserve created in 2023 and which amounts to approximately EUR 116 million or 14 basis points on the CET1 ratio. It is yet unknown if the impact will pass through the P&L. One last note is related to the combined cost/income ratio for the end of the year, which will land at below 48%. Guidance is adjusted for approximately EUR 300 million of integration costs related to the merger. Let's move to the core part of the presentation. After some 12 months since the launch of B:Dynamic Full Value 2027, a quick glance at the progress of our plan is a must. The plan, which I remind you, remains to date stand-alone, must be read in the context of the additional 23 work streams launched for the integration. As I mentioned several times, the merger with BPSO is an accelerator of B:Dynamic Full Value 2027. Some highlights. On Pillar 1, the strong commercial push enabled new lending to increase by 20% 9 months or 9 months to almost EUR 15 billion, close to EUR 20 billion, including BPSO. Commission income growth continues to be very robust, particularly in Wealth Management, and our customer base continued to grow significantly. On Pillar 2, currently, 26% of new customers become BPER's clients via digital channels. And similarly, BPER has been awarded a leading position among the digital leaders in Italian banking. As far as Pillar 3 is concerned, our conservative risk approach enables BPER to boast the most conservative asset quality ratios in Italy. And finally, on Pillar 4, on technology, security and AI, the group data center rationalization process is fully completed with the adoption of AWS cloud services, ensuring data protection and business continuity while improving the digital customer experience. In this context, CapEx is running according to plan. Our commitment to ESG-related lending continues to be strong with some EUR 2.7 billion of new ESG lending in the 9 months. And finally, over 3,700 colleagues have already been involved in BPER's academy and training path. Let's now turn to our financial performance. Despite the overall scenario characterized by an acceleration of the reduction of interest rates and the summer months, BPER produced very positive results on a like-for-like basis. As such, total revenues increased by 2% 9 months on 9 months, and these are extremely satisfying results. Core revenues, 9 months or 9 months were stable at EUR 4 billion, driven by continued strength in commission growth, thanks to AUM, life insurance and bancassurance products. In this context, the ratio of net commission income to total revenues rose from 36.4% in the 9 months 2024 to 37.8% in the 9 months 2025, proving the high quality of our revenues. As you will see later, I wish to highlight the commercial driver on NII, where the negative impact of decreasing interest rates was compensated to some extent by the commercial push of the bank in terms of loan origination. In the quarter, lower NII was compensated by a strong performance in commissions, whereas dividends and other income were particularly affected by dividend seasonality and lower trading activities, which is customary in Q3. As you can appreciate, our productivity index measured as net revenues on risk-weighted assets has improved year-on-year to 9.8%. Let's move on to the next slide, which focuses on net interest income. Although net interest income came down by some 3.6% 9 months or 9 months, the reduction in NII, principally driven by lowering interest rates was better than expected. As you can appreciate on the slide, commercial spreads came down from 3.7% to 3.4% in the last 12 months, negatively impacting the NII line item. In the quarter, NII was basically stable, down by less than 1% and was driven by the interest rate environment, which clearly had a negative impact on NII. Lower interest rates had an important effect on commercial spreads. And in an opposite direction, but to a lesser extent, the important commercial effort of the bank had a positive effect on new loan origination. In this particular context, commercial actions aimed at increasing the quality of loan volumes have been extremely effective. This had a positive effect on credit risk-weighted assets, which we will illustrate later. As I mentioned in the slide on progress of our business plan, new lending in 9 months increased by 20% to almost EUR 15 billion. Finally, I would like to highlight that our NII sensitivity to 100 basis points movements equal to EUR 184 million in the quarter versus EUR 150 million in the previous quarter. The increase in sensitivity is related to seasonal repricing of floating rate assets. The increase of approximately EUR 30 million in the quarter is in line with the increase between Q2 and Q3 2024. Now let's move on to the development of net commission income. Commission income continued its strong progress, up by 6% 9 months on 9 months and 8.4% year-on-year. It is noteworthy to underline that net commission income contribution on total revenues increased to 37.8% in the 9 months 2025 versus 37.3% in first half '25 and 36.4% in the 9 months 2024. This is a clear indication of the increasing high quality of our revenues. The bank relentlessly focuses on capital-light, high-quality wealth management products. This accounts for over 43% of total commissions from 41.5% 12 months ago. All this was achieved despite the summer season, which is a remarkable result. In fact, contrary to 2024, net commission in Q3 were higher than in Q2. That said, the most important contributor, which represents more than 50% of commissions remain banking services fees, which reached EUR 820 million. This increased by 6% 9 months on 9 months. The fact that BPER is gradually being perceived as a go-to bank by its customer from a purely relationship bank allows the bank to capture a higher share of wallet and increasing net new customers. As I already mentioned, normally, Q3 is a weaker quarter in terms of commission generation, so we do expect a pickup of fees in Q4 versus Q3. Let's move to the next slide. Total financial assets, the most important driver of commission income grew by 5.3% since the launch of our plan, reaching EUR 320 billion. On top of the market-driven effect, TFAs are growing significantly because BPER is being increasingly perceived as a relevant player in Italian asset gathering. In this context, the contribution of BPSO increased TFAs by almost EUR 100 billion to almost EUR 415 billion. This will allow us to further strengthen our focus on asset gathering activities and will ensure the exploitation of further commission-related potential. Key drivers in the quarter have been AUCs and AUMs. Although deposits have been flat, there has been an important asset rotation from deposits to AUCs, mainly due to the issuance of certificates. This is important as we are now increasing penetration of liquidity management for both corporate, SMEs and private clients. In fact, in Q3 2025, the loan-to-deposit ratio stood at 76%, stable quarter-on-quarter, one of the lowest amongst Italian peers, which will enable us to continue to grow the loan book and to transform client liquidity into AUCs and AUMs. Let's move on to our performance on the cost side. Total costs were down by 3.5% 9 months on 9 months, underlying our relentless focus on operational efficiency. Our planned actions continue to reduce the cost/income ratio, which decreased to 46.8% from 49.5% 1 year ago. Non-HR costs were slightly lower, below EUR 250 million, in line with the previous quarter. As you can appreciate, the waterfall chart reports the key drivers of HR costs in the quarter. The reduction was mainly driven by organic turnover, which more than compensated the increase related to the national collective labor agreement. At the end of September, headcount stood at 19,144, a reduction of some 1,100 compared to September 2024 related to actions which are already in place. In terms of the combined group, the integration of BPSO will increase the headcount to approximately 22,900. This will decrease by some 260 in Q4 once Alba Leasing will have been deconsolidated. Before we move to cost of risk, let me anticipate that costs in Q4 will incorporate approximately EUR 300 million of integration costs as we previously indicated when we illustrated the BPER BPSO business combination. Let's move to the next slide. In a similar way to costs, the trajectory on the cost of risk 9 months or 9 months is decreasing from 39 basis points to 34 basis points, including BPSO. The cost of risk would stand at 24 basis points. The increase in Q3 to 38 basis points is related to our continued conservative approach totally devoted to increasing coverage and translated into an improved NPE coverage ratio, which increased to 56.3%. This remains one of the highest among Italian peers and will act as a further buffer against any potential deterioration in asset quality. Our conservative approach is further confirmed as we report a Q3 2025 coverage ratio on performing loans stable at 0.63%, among the highest in Italy. In this particular context, total cumulative overlays in the 9 months amounted to EUR 146.6 million after a reallocation of EUR 67.2 million between provisioning categories, keeping stable the performing coverage ratio at 0.63%. When including BPSO, coverage ratio are somewhat lower due to a technical factor. BPSO nonperforming loans are reported only on a net basis. As a result, the total NPE coverage ratio, which decreases from 56.3% to 50% in Q3 is driven partly by this reporting difference. On a comparable basis, the consolidated NPE coverage ratio would stand at 58% instead of 50%. Moving forward, once full integration will have been accomplished, coverage ratio and NPE ratios will be calculated in a homogeneous way. Let's move on to asset quality on the next slide. On asset quality, let me state that Q3 was characterized by lower loan disposals. This is important as there was literally no positive effect on stocks from such divestiture activities. As in previous years, we expect NPE disposals will pick up in Q4. As a result, the gross NPE stock was minimally higher than in Q2, but flat year-on-year and the gross NPE ratio was slightly higher at 2.7%, although improved year-on-year. In any case, as in previous quarters, the quality of our loan book continues to show a very healthy state with net NPE ratios almost flat at 1.2%, one of the lowest in the Italian banking system. As far as the combined banks are concerned, attention should focus on the net NPE ratio, which stands at 1.2% in Q3 and not on the gross NPE ratio. The reason is exactly the same as previously explained, which is that BPSO only reports on a net basis. Having finished with asset quality, let's move on to the development of the bank's risk-weighted assets. As you can see, in Q3 '25, total risk-weighted assets decreased from EUR 55.6 billion to EUR 54.6 billion, partly because of almost flat loan volumes and thanks to higher quality lending. As such, credit risk-weighted assets came down by EUR 0.9 billion. While in Q1 2025, operational risk-weighted assets were impacted by EUR 1.5 billion due to Basel IV, we do not expect any material impact related to operational risk due to the annual update in Q4. On a final note, the combination with BPSO would lead to a total risk-weighted asset of just over EUR 82 billion. I will now turn to organic capital generation on the next slide. In the last quarter, we mentioned that we approached the merger with BPSO in a very robust position as our CET1 ratio stood at over 16%. The combined CET1 ratio at the end of September stands at a very comfortable 15.1% or 15.7% following Alba Leasing deconsolidation. BPER on a like-for-like basis, continues to generate a very high level of organic capital with approximately 272 basis points or EUR 1.7 billion in the last 9 months. This result reaffirms BPER position as a highly resilient institution. Moving on to liquidity. Let me point out that at the end of September 2025, the bank's liquidity ratios remain high. The LCR is equal to 165% at the end of September '25, in line with the 163% reported at the end of June. With the deconsolidation of Alba Leasing, the group LCR would stand at 173%. The NSFR is equal to 132%, stable compared to the end of June '25 or 135%, including the deconsolidation of Alba Leasing. As in Q2 -- in Q3 '25, the loan-to-deposit ratio stood at 76%, stable quarter-on-quarter, one of the lowest amongst Italian peers, which will enable us to continue to grow the loan book through increased loan origination and to transform client liquidity into AUCs and AUMs, thanks to our ability to attract customer liquidity. Turning now to the bond portfolio. Italian government bonds were flat at EUR 14.8 billion and accounted for around 49.8% of total bonds. In Q3 '25, the duration decreased majority due to the position of CCTs equal to EUR 4.4 billion that were repriced in mid-October. Now a brief look at our latest bond issuance. In the first 9 months of '25, as far as main wholesale issuance is concerned, BPER successfully placed a EUR 500 million senior non-preferred bonds with BPSO placed -- while BPSO placed EUR 500 million of covered bonds. On top of all the previous upgrades, in October, DBRS upgraded BPER long-term deposits from BBB high to A low. Moreover, all credit rating agencies have positively viewed the BPSO business combination and as a result, have also increased the credit rating of BPSO itself. Following the successful completion of the voluntary exchange offer for BPSO in July, we have launched a joint project between BPER and BPSO aimed at IT and organizational integration as well as the corporate merger to be completed approximately -- by approximately mid-April 2026. Specifically, the projects involves 23 cross-bank work streams, which are all up and running. To ensure the IT and organizational migration in line with the time line, we launched discovery sessions in August to identify relevant functional and IT gaps between the 2 banks, which will be addressed and implemented through the integration. Additionally, we have defined an IT migration plan, which foresees technical migration tests and simulations in Q1 2026. In parallel, we have initiated the step leading to the merger between BPER and BPSO. On November 5, the merger plan was presented to the Board of Directors of both banks, including target organizational model, share exchange ratio and IT integration plan. Thereafter, the request to DCB for the merger authorization will be submitted. Finally, we believe that the merger between BPER and BPSO will be carried out effectively, enhancing the strength and resources of BPSO and resulting in a bank that will be even better positioned to achieve the strategic and business objectives of both entities. As previously stated, we confirm that we fully -- we will fully achieve EUR 290 million in synergies in 2027. We also confirm that integration costs amount to EUR 400 million. Of this, 75% will be booked in Q4 '25, the remaining in 2026. Now let's turn to timing and next steps. As of today, the next key regulatory step will be the extraordinary shareholders' meeting of BPER and BPSO in order to approve the merger plan in March 2026. From an operational and business point of view, we expect the IT migration and the launch of the revised organization and distribution model to be finalized by approximately mid-April 2026. On Slide 28, we report the divisional financials for BPER on a like-for-like basis. I would like to draw your attention to the important results achieved on total wealth commission income across our divisions, which amounted to EUR 689 million in the first 9 months compared to EUR 840 million achieved during the entire 12 months of 2024. These results underline the important focus of the group on asset gathering activities. Let's move to the final remarks. In conclusion, in this important quarter, the group has been focusing on business growth, execution of B:Dynamic F Value 2027 and the regulatory, IT and business integration of BPSO. As we previously stated, the acquisition of BPSO must be seen as an acceleration of our plan. The commercial strength of the bank has been remarkable despite the summer holidays. Net commissions continue to grow at an important pace with wealth management playing an ever-increasing role. Reported NII was better than expected despite declining interest rates. In this context of geopolitical headwinds, asset quality remains one of the best in the Italian banking sector. Let me underline that the bank has been able to generate an important profitability, coupled with an outstanding organic capital generation amounting to 272 basis points in the last 9 months. As such, we are confident in the potential for further superior value creation. The recent derivative transaction of 9.99% of share capital needs to be viewed as a proof of management's confidence in the enormous potential for shareholder value generation of the new banking group, combining BPER and BPSO. And finally, we are fully on track to ensure a smooth, efficient and effective integration of the 2 banks by approximately mid-April 2026. We are now ready to take your questions. Operator: [Operator Instructions] First question is from Marco Nicolai, Jefferies. Marco Nicolai: First question on capital. Can you explain all the moving parts in your above 14.5% common equity Tier 1 target for December? During the call, you mentioned 14 bps negative from the extraordinary profit tax. Is this all for this item? Or do you expect to have more, say, in the coming years if you pay dividends out of that reserve? Then another question on this EUR 300 million integration cost, is it pre or post tax? Do you include also the 60 bps positive from Alba Leasing in the consolidation? So do you have also the 60 basis in your December targets? And what is the impact of the total return swap transaction? So this is -- and is there anything else I've missed here in the capital -- in the moving parts between September and December? And then a second question on the total return swap transaction. When do you expect to deliver this roughly EUR 2 billion buybacks? Shall we consider something like 1/3 per year or so? And are you confirming that you're going to cancel the shares you buy back? And sorry, just last follow-up on this point. So where does it leave your common equity Tier 1, say, long-term common equity Tier 1 targets for BPER? Like where is the right level to run this bank? You mentioned in the past in the previous plan, 14%. Is the target still there or now closer to 13%? Gianni Giacomo Pope: So thank you very much, Marco, for your question. I'll answer first your question related to the buyback. as we already mentioned, at present, no decision has been taken in this respect. So we made the transaction to provide a strong sign of confidence in the bank's strategy. However, if we were to proceed with sale buyback, obviously, subject to all the necessary corporate and regulatory approvals, this transaction would provide us with macro hedging with respect to the planned cost to the benefit of shareholders. But let me repeat that no decision have been taken in this respect. And now I'll put through Simone Marcucci, our CFO, for the other questions. Simone Marcucci: Okay. Thank you very much for your question. Starting from 15.1% CET1 ratio at September. These are more or less the building blocks. We will have, as you highlighted, the 55, 60 bps from Alba positive deconsolidation. We will have 70, 75 bps conservative effect one-off from the derivatives, depending on how the position will be built between now and the first month of 2026. We will have the positive effect from the PPA. We do expect it to be 2 middle digit, but still under analysis. We will have minus 10 bps around of update operational risk. This is like every year, but this year is much, much less. Then we will have a business dynamic. We do expect 2 middle digit negative clearly. As we already -- as has mentioned, we will have EUR 116 million, minus 14 bps. New Italian law, as you requested, this is the first of the 4 fingers. The other 3 fingers will happen in 2026 or will not be significant for us. Then we will have EUR 190 million around net integration cost that is the 270 percent of the EUR 400 million, and this accounts for around minus 25 bps. And the rest will be positive net profit net of dividend and other minor effects. I think that on this, I have covered both questions. The last item, if there are profit and loss effect of the derivatives, it will be negligible, let me say, slightly positive among the years. Marco Nicolai: Okay. And when do you expect to take a decision on the buybacks? So when do we get clarity on this front? Gianni Giacomo Pope: As I said, it's too early. When we take the decision, we'll let you know. But for the time being, no decision has been made. Operator: Next question is from Andrea Lisi, Equita. Andrea Lisi: The first one is on the revenue dynamic, in particular on the NII and fees. Related to NII, there are several peers hinting to third quarter NII having reached bottom and 2026 to be at least in line with 2025. Is it this indication that other banks have provided something that is also suitable for you? Or do you think that the movements of the NII can be slightly different and in case which are the main drivers? The second related to fees is related to fees and in particular, on the seasonality you indicated in the fourth quarter last year. Looking at BPER stand-alone, it was more than EUR 50 million, if I remember well. Do you think that a similar seasonality should be expected this year as well? And the last point really on the distribution, you have indicated that the instrument the derivatives gives you flexibility on potentially launching a buyback. If you can provide us at the current moment, given also the conditions, which is the trade-off between potentially on a higher dividend or launching a buyback. So which are the pros and the cons that you see of both situation? And so what makes feeling that some solutions could be better than the other? Gianni Giacomo Pope: Thank you very much for the question. So yes, I can confirm that inasmuch as you are concerned on the NII side, we can give a guidance that '26 would be, let's say, broadly in line with 2025. Obviously, we believe that we are working on interest rates at 175%. Today, we are at around 2%. So we believe that there might be a further decrease of 0.25 point by the ECB next year. On the other hand, we will keep on growing and keep the trajectory that we have had in the last few quarters in terms of growth on the loan side, both on the corporate side as well as on the retail side. In as much as the fees are concerned, yes, also for last year, we had the top-up, let's say, for the premium that we received on the bancassurance activity that was around EUR 30 million, EUR 31 million. We will have this the famous [ raffle ] also this year. We are yet not in a position to indicate what is going to be in terms of overall amount, but this will be also this year. But as you've seen from our presentation from this quarter, we are taking away the indication of this because this has become, let's say, a deferred payment that we received at the end of the year in December, but it is part of the overall activity that we have across the year. So we will not be indicating anymore what is this top-up at the end of the quarter. But I confirm that we will have this raffle also this year. In terms of distribution, what is the trade-off. So as you know, we promised in our strategic plan to pay a dividend of -- I mean portion of the dividend up to 75%. I also mentioned several times that as we have a very strong organic capital generation and the capital piles up, we might be in a position also, but this is a decision that will be taken at a later stage to pay maybe slightly more than 75%. On the other hand, let's say that there has been quite a strong request quarter after quarter, and you have been present to all the quarters, the presentation of these quarters, a very strong request coming from the market for a launch of a buyback plan given the fact that we are growing our capital. Now we are going through the process of integrating BPSO, so by subscribing the derivative, we have basically taken the chance to have a macro hedge in case we decide to do it. This might be something that in the future can come to the market. But there's no very different trade-off between the 2. So we will keep on paying a dividend of up to 75% as a payout ratio. And then on top of that, there might be a share buyback in case we have a very strong capital generation as in the past. Operator: Next question is from Matteo Panchetti, Mediobanca. Matteo Panchetti: I have 2 on derivatives and on cost savings. The first one, you have decreased your CET1 target by 50 basis points, of which 40 basis points coming from the banking tax. Is it correct to say that the maximum loss amount from the derivatives, including the hedges will be worth 35 basis points? And can you tell us the sensitivity on capital for each 10% share price increase, decrease in deferred share? The second one is on -- still on the derivatives. You have announced the merger plan, which now consider the acquisition on Sondrio minorities. If you were expected to deliver the share from your total preferred swap, can those be used as a part of transactions instead of doing a share buyback? Is this something that you have considered? And finally, on cost savings, you -- can you quantify the impact from the 800 exits? And can you confirm this is only a BPER derivative? Gianni Giacomo Pope: Thank you, Matteo. I take the last 2 questions, and then I'll let Simone Marcucci to answer the first 2. So in terms of M&A plans, so the possibility of using the shares coming from the derivative to be distributed to the minority, no, this is not possible because this is a cash transaction with no delivery -- physical delivery of shares. So this is not possible to have -- there will be not shares to be distributed to minorities because of the typical structure of this transaction. Last question you put was about the impact of the 800 exits. In the -- you know that in terms of cost, we have synergies up to EUR 190 million. Of this EUR 190 million, around EUR 70 million to EUR 75 million will come from the FTE reduction driven by the agreement that has to be reached with the unions. Simone Marcucci: Okay. Regarding the building blocks, I have already mentioned before, I understand that you would like to have a clarification about the building block of the derivative. The derivative for, as I mentioned before, for the 2025, we do expect 70, 75 bps, another little part in 2026 negligible. This is the effect that we will have in '25. Clearly, it's conservative, less impact in 2025, higher impact in 2026. The sensitivities of 10 percentage of the derivatives on the EUR 2 billion, clearly will be a profit and loss, EUR 200 million up or down, but no impact CET1 ratio because all the impacts have already impacted now as a one-off. I hope I clarified. Otherwise, please let me know. Operator: Next question is from Lorenzo Giacometti, Intermonte. Lorenzo Giacometti: I have actually 2. So the first one is on synergies. And given that the integration seems to go as planned or even faster than planned, are you confirming the estimated synergies? Or do you see those numbers as actually a floor? And the second one is on the merger. And assuming, as you said, it will take place in April 2026, will it have a retroactive effect? And if so, does that mean that you won't have to pay minorities in the Q1 of 2026? And actually, I have a third one on the business plan update. And so when are you publishing an update of the business plan targets? Gianni Giacomo Pope: Thank you for the question. So in as much as synergies are concerned, I can confirm synergies up to EUR 290 million at 2027, so not in 2026. And believe me to have EUR 290 million synergies, both on cost side and revenue side by 2027 is going to be a very difficult exercise. Having said so, when we merged Carige, we have indicated -- we had indicated some synergies. And at that time, the bank was able to achieve better results. But we confirm only the EUR 290 million. And obviously, we'll see whether we are able to extract more synergies out of that. In terms of retroactivity of the merger, yes, the merger will be retroactive as at 1st of January 2026 and will have a retroactive effect, which means that the minority shareholders that will become shareholders of BPER will receive the dividends once the dividend is paid by BPER, of course. And then in terms of business plan updated, we mentioned already that we are going to present the market with a business plan update by, let's say, by the end of June in July. We'll see. We haven't decided yet when. What I can -- what I can tell you is that for the time being, the 2 banks are proceeding in terms of the strategic plan that has been presented. So for us, October last year, for VPs, I think, in March this year, obviously, within the activity of the group. So we keep on going to deliver what has been promised to the market by the 2 strategic plan. Operator: Next question is from Giovanni Razzoli, Deutsche Bank. Giovanni Razzoli: Two questions on my side. One on the share buyback. When you say that there is no decision taken on the share buyback, you mean that you have not decided yet whether to leverage on the derivative to proceed with the share buyback? So that's the first clarification. And Simone, you mentioned that there are 75 basis points of impact of the share buyback in the 15.1% CET1 ratio at year-end. So shall I read this guidance as the fact that if you were ever to proceed with the decision of the share buyback, you would consider an impact of EUR 600 million, given or taken, given the 75 basis point impact that you had guided that is 1/3 of the EUR 2 billion in total. That's my first question. And the second one is on the interim dividend. You decided to pay EUR 0.1 in interim, which I guess there will be a quite significant catch-up dividend in May. There are a lot of moving parts, clearly in the Q4, you guided for a 75% payout ratio. And the net profit in the 9 months for the combined entity was EUR 1.5 billion and the run rate of the quarter is EUR 500 million. So I was wondering whether we shall look at something like EUR 2 billion as a reference point for the final catch-up dividend at year-end because this EUR 0.1 has crowded out a lot of investors. Gianni Giacomo Pope: I'll take a couple of questions. And then for the more technical one, I'll let Simone answer. So first, no decision has been taken means nor if neither when. So I think I'm clear now. So no decision has been taken for a buyback. So neither nor on whether we are doing it, neither if and when we do it. So no decision taken, close discussion, I hope. Secondly, we paid EUR 0.10 of as interim dividend exclusively on the profit accumulated by BPER, not by the group. The dividend is equal to 17% -- almost 18% of the accrued dividend of BPER, which is whatever it is, equal to EUR 1.099 This is the accumulated amount. The 17.8% equal to EUR 186 million is the first year, as you know, that we are paying an interim dividend, and you have to consider the fact also that we are -- we had to -- we have been working on the exchange ratio for the exchange for the minority shareholders of BPSO. So we could not pay more. Otherwise, this would have moved the exchange ratio for the minority shareholders. Simone? Simone Marcucci: Yes. Regarding the effect of the derivatives in the fourth quarter, I mentioned 75 bps, but I never mentioned share buyback. This is the effect of the derivatives regarding share buyback. Nothing has been decided. I cannot comment. Operator: Next question is from Manuela Meroni, Intesa Sanpaolo. Manuela Meroni: The first one is on the total return swap. I'm wondering if there are some costs associated to this total return swap that will be accounted for in the P&L or on a recurrent basis, or the impact on the P&L will be just related to the sensitivity that you mentioned before of EUR 200 million without any additional impact on the capital? The second question regards the banking tax. You provided some guidance concerning the reserve. I'm wondering if you can share with us your thoughts about the potential impact of the remaining part of the banking tax in 2026 and going forward, both in terms of impact on the earnings and impact on the capital. And then I have just a clarification on the moving parts that you mentioned on the capital in the fourth quarter of this year. You mentioned the PPA. Could you please repeat what is the assumption that you are taking for the PPA? Simone Marcucci: Okay. I start with the cost of the total return swap. At the profit and loss level, the costs are negligible because there will be some cost, but there will be also some revenues that we will get from the remuneration of the dividend. Both effects will go in the line there for trading. We see the effect there. So negligible unless the sensitivity that I mentioned before, plus 10, minus 10, but not other effect, CET1 ratio, as I mentioned. So regarding the other questions, so for the banking tax, as we mentioned, we had EUR 116 million in the fourth quarter that is a one-off. We are not clear if we go to profit and loss or not. Then we will be -- we will have -- this was the first finger of the 4 fingers. The other 2 fingers, the ERA rate will happen in 2026 for us will be around 7 bps. And instead for the partial deduct of passive interest, this is the third finger should be in 2026 for us 4 bps decreasing in the following years. For the fourth finger, we shouldn't have any effect. Sorry, PPA, I forgot to mention the PPA. The PPA, we are still, as I mentioned, discussing. We don't have absolutely no final numbers. You can assume a middle 2-digit number, but still absolutely under discussion at the moment. Operator: Next question is from... Gianni Giacomo Pope: I'm sorry. No, sorry, just to specify the previous answer. The first finger that equals to 14 basis points or EUR 160 million, we conservatively deducted from CET1 ratio of this year. Obviously, if the decision would be not to charge, and this, as I said, is a decision taken at system level, not by us. So if this will not be charged in 2025, we will have 14 basis points higher in terms of CET1 ratio in '25 and the deduction in 2026. Operator: Next question is from Hugo Cruz, KBW. Hugo Moniz Marques Da Cruz: I have two questions. First is on the dividend for 2025. If you could clarify what are your intentions for the final dividend? My colleague, [ Razzoli ] just asked if you could pay EUR 2 billion. Yes, like if you could clarify that, I think it would be very helpful. And then the second question on the synergy potential, especially in light of the business plan that you announced middle next year. Do you see the potential for higher synergies after 2027 than what you currently target or not? Gianni Giacomo Pope: Thank you, Hugo, for the question. So dividend, as I said, we are paying 10 basis points on BPER's accumulated profit. And this 10 basis points equal to 17.8% of the accumulated profit of BPER, which equals to EUR 1.099 so far. Obviously, as we promised and we mentioned in our strategy presentation, strategic plan last year, we will pay 75% of the combined profit of the 2 banks. When it will be -- so will be decided by the Board and the assembly and then we'll pay. So we confirm the 75% on the combined but we need to have the merger, hopefully, as I said, depends also on the authorizations coming from regulator and so on with retroactive effect from the 1st of January. So automatically, this is going to be the situation. In terms of synergies, as I mentioned, we confirm the EUR 290 million at the end of 2027. Obviously, the bank doesn't cease to operate in 2027. We will keep on going in 2028. So hopefully, we'll be able to extract even more synergies. But it's too early to say because we have to proceed first with the integration, and then we will see what we'll be able to deliver. The only note that I can say is that if I look at the past, when BPER acquired Carige, at the time, the bank had indicated some synergies, both on the cost and on the revenue side and was able to beat the indication. On the other hand, we -- which means that the bank is always struggling to get better results than what indicates. On the other hand, we have to consider that these are completely 2 different situations. Carige was a bank that was suffering because of the problems that it had for many, many years. BPSO is a good bank with a good track record. So there will be, for instance, in terms of revenue synergies, there will be some synergies, for instance, as we indicated from the liquidity because we'll be able to address liquidity at a lesser cost, but will not be as much as Carige because Carige obviously was paying much more in terms of liquidity from the market. So it's a much different situation. But hopefully, we'll be able also from 2028 to deliver more. Operator: Next question is from Ignacio Ulargui, BNP Paribas Exane. Ignacio Ulargui: I just have two. One is on Alba Leasing. So do we expect any impact in the P&L from the deconsolidation of Alba Leasing in the fourth quarter? And the second one is on credit quality. If I just look to your guidance of below 35 basis points cost of risk and I compare that with the 9 months that there's a very big gap potential increase in the fourth quarter. Given the comments that you've made during the presentation about the solid credit quality, we shouldn't see any meaningful impact. But just wanted to get a bit of a heads-up on how do you see credit quality evolving from here? And what should we expect on the cost of risk in the fourth quarter? Gianni Giacomo Pope: Thank you, Ignacio. In as much as the impact from Alba Leasing deconsolidation will be negligible, really EUR 10 million, so really negligible, nothing compared to the overall activity of the bank. In as much as credit quality is concerned, I will ask Mr. Cristini, our CRO, to answer your question. Emanuele Cristini: Thank you, first of all, for your question. In general, it's worth noticing that as highlighted in the presentation, the credit risk profile of the bank remains very, very positive with very low both gross NPL ratio, stable annual default rate around 1%, stable probability of default and very high coverage ratios, both for performing and nonperforming exposures. Having said that, of course, there are still some uncertainties related to the macroeconomic scenario and the potential related to the U.S. trade tariffs. And so we prefer to be conservative as we usually do regarding credit risk. So our guidance is of the cost of risk on an annual basis lower than 35%. We continuously monitor the evolution of the credit risk profile of the bank. But as I have already highlighted, we haven't detected currently any particular signals of deterioration of the credit risk profile of the bank. Ignacio Ulargui: So we shouldn't expect any meaningful top-up of provisions in 4Q at this stage? I mean just that you are very conservative in the guidance? Emanuele Cristini: No top-up. You have seen that we keep a high level of overlays. We consider our current coverage ratio, both performing, nonperforming. Nonperforming exposure had a weight. Anyway, we will continuously monitor the evolution of the macroeconomic scenario. Operator: Next question is from Juan Pablo Lopez Cobo, Santander. Juan Lopez Cobo: And sorry for a new follow-up question on the total return swap. I don't -- I'm not sure if you are able to answer, but can we understand the counterpart will need to cover by physical shares in the market? This is my first question. And then one regarding OpEx. I don't know if you could comment in the last business plan presented both by BPER and BPSO, there was a hiring of more than 1,000 new employees in the case of BPER and more than 200 new employees coming from BPSO. Is that something that is still in place? And the last question, and probably this is for the business plan for you in July, but that's almost 6, 7, 8 months from here. Your latest guidance for the combined entity was more than EUR 2 billion for 2027. The consensus is above that figure. I don't know if you could provide any update on that one. Gianni Giacomo Pope: So for -- I don't know if you -- because we couldn't hear properly your voice. But for the TRS, there's no delivery of shares, if this was the question. This is a cash transaction. So it is a derivative, which does not provide for the delivery of any physical stock, okay? So there is no way that we receive stocks. In case of winding down of this, we will be receiving or paying the financials, so whatever is going to be, if the stock has increased in value or decrease, but no delivery of physical stock. And so this is what it is. In terms of the OpEx, when we presented our plan last year, we indicated a reduction in employees and we reached an agreement with the unions, which provided for 1 new hiring for 2 exits basically. And this is what has been happening so far. In fact, as I mentioned during the presentation, we had a reduction in 1 year of 1,100 employees year-on-year. In terms of Sondrio, they were providing for hiring. I don't remember the exact number because it was their plan. Nevertheless, as we are putting together the 2 banks now, we are coming up -- we came up with a new plan, which is under discussion with the unions for the reduction of 800 employees always on voluntary basis, which means retirement or preretirement schemes basically. And this is the number that I can indicate. So from the number we put there, which is 22,900, less the 260 I think that is the Alba Leasing employees. And once we have reached an agreement with the unions, it will be minus 800 plus the one that we will have to hire following the agreement with the unions, hopefully, will be the scheme -- will be the same as in the past. So 1 new hiring, every 2 exits, but this is under discussion with the unions, as I said. The last -- the third question was this. I don't know if I answered all your questions because we couldn't hear well. So please let me know. Juan Lopez Cobo: Yes. The last one was regarding the combined target, that was net income above EUR 2 billion for 2027. I don't know if you could provide some update on that. Gianni Giacomo Pope: No, no. Yes, yes, we confirm because if we add the 2 coming from the plan, we will be about EUR 2 billion. Operator: Next question is from Luis [ Manuel ] Pratas, Autonomous. Luis Pratas: My first question is again on the derivative structure. So we completely understand this gives you extra flexibility in executing a share buyback in the future. However, when BPER was trading well below the book, the bank always refused to do share buybacks. So my first question is essentially what led to this big change? And sometimes the press also speculate on this being a proactive M&A defensive action. Can you comment on this? And then just a clarification on the 70 to 75 bps day 1 impact from the derivative. Could you split the impact on the numerator and also the denominator? Is there any market RWA inflation from the derivative? Or is it just a deduction? Gianni Giacomo Pope: Okay. So I'll take the first question. No, definitely, it's not a defensive move. Then the market reads this as the market wants to read it. But I can confirm that it's not a defensive move. We decided to do it now, and we were not doing it in the past because in the past, we were BPER on a stand-alone basis. And the transaction on Sondrio, so the OPS on Sondrio was positive, but we knew only at the end of July. And so until we knew what would be the outcome of our offer, we could not decide whether to do this or not as we were able to reach the over 80% shares of Sondrio. And therefore, we were -- it was very clear to us that the merger of the 2 banks would have happened. Then considering, as I mentioned before, that we believe in the growth prospect of the bank, considering the integration of Sondrio into BPER and the full development of the related synergies, then we decided to do this transaction in order to show the strong confidence that the management has in the bank strategy following the completion of the public exchange offer on Banca Popolare di Sondrio and again, in view of the integration of the 2 banks. So this is the reason why we decided to do that. In as much as the exact impact of the derivative is concerned, Simone will answer. Simone Marcucci: So the 70, 75 bps impact estimated for 2025 are almost totally due to the deduction while the effect on risk-weighted assets is negligible a couple of bps. Operator: [Operator Instructions] There are no more questions registered at this time. Gianni Giacomo Pope: Okay. Thank you very much to everybody, and see you soon. Thank you. Operator: Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.
Operator: Good day, and thank you for standing by. Welcome to the Q3 2025 DENTSPLY SIRONA Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Wade Moody, Investor Relations. Please go ahead. Wade Moody: Thank you, operator, and good morning, everyone. Welcome to the DENTSPLY SIRONA Third Quarter 2025 Earnings Call. Joining me for today's call is Dan Scavilla, President and Chief Executive Officer. I'd like to remind you that an earnings press release and slide presentation related to the call are available in the Investors section of our website at www.dentsplysirona.com. Before we begin, please take a moment to read the forward-looking statements in our earnings press release. During today's call, we may make certain forward-looking statements that reflect our current views about future performance and financial results. We base these statements and certain assumptions and expectations on future events that are subject to risks and uncertainties. Our most recently filed Form 10-K and any updated information in subsequent Form 10-Q or other SEC filings list some of the most important risk factors that could cause actual results to differ from our predictions. On today's call, our remarks will be based on non-GAAP financial results. We believe that non-GAAP financial measures offer investors valuable additional insights into our business' financial performance, enable the comparison of financial results between periods where certain items may vary independently of business performance and enhance transparency regarding key metrics utilized by management in operating our business. Please refer to our press release for the reconciliation between GAAP and non-GAAP results. Comparisons provided are to the prior year quarter unless otherwise noted. A webcast replay of today's call will be available on the Investors section of the company's website following the call. And with that, I will now turn the call over to Dan. Daniel Scavilla: Thanks, Wade, and good morning, everyone. Let's start with Slide 3. I recently completed my first 90 days as CEO of DENTSPLY SIRONA. During my first week at the company, we held the Q2 '25 earnings call, where I shared my listen, learn, lead approach, along with my initial thoughts on the organization's focus areas. Since then, I've continued to assess DS through meetings with customers, partners and employees, where I've been learning our strengths and areas of improvement. These discussions have helped validate initial observations, gain alignment with my leadership team and shape our Return-to-Growth action plans to improve performance and deliver sustained profitable growth over the next 24 months. This plan requires us to go deeper, move faster and be bolder to reshape and improve the customer experience. I believe the potential for DENTSPLY SIRONA has never been greater, and we have at our fingertips what we need to achieve this. First, I'll discuss our Q3 '25 results and full year outlook. Then I'll share a deeper view of our Return-to-Growth action plan and its 4 key pillars. Before I begin, I want to note that as announced in this morning's press release, Matt Garth, our Chief Financial Officer, has departed the company. This action is not the result of any dispute, disagreement or financial reporting matter. Matt was not the right fit for me and where I plan to take the enterprise in the finance organization. He is a talented [ finance ] leader, and we wish him the very best. A transition plan is in place to ensure continuity and that we maintain financial discipline as we select the right leader to join us driving DENTSPLY SIRONA forward. Moving to Slide 4. Let's discuss our quarterly financial results. For Q3 '25, global sales were $904 million, decreasing 5% as reported or negative 8% on a constant currency basis. Excluding the Byte impact, sales declined 5%. And as disclosed in last year's Q3 earnings call, Q3 '24 included a $24 million onetime dealer prebuy in advance of the U.S. ERP implementation. Adjusting for this onetime headwind, Q3 '25 sales on a constant currency basis were down 2.5%. Adjusted EBITDA was 18.4%, up 50 basis points versus prior year, driven by lower sales on favorable product and geography mix and tariff impacts that negatively impacted gross profit. This was offset by reduced spending in OpEx. Non-GAAP earnings per share was $0.37, down $0.13 versus prior year. Approximately half the EPS decline reflects the impacts of sales mix and tariffs on gross profit with the remaining half driven by higher non-GAAP tax rates in the quarter of 32% versus 16% last year. This is due to shifts in profit between the U.S. and international markets. Q3 cash from operations was $79 million and ending cash balance was $363 million. We recorded a $263 million noncash after-tax charge related to the impairment of goodwill and intangible assets. These impairments were driven by the impacts of tariffs and lower projected volumes of equipment, implants and prosthetic products, particularly in the U.S. In the third quarter, DENTSPLY SIRONA returned $32 million to shareholders through dividends with $96 million returned to shareholders through dividends year-to-date. Now moving to Slide 5. For Q3 results from a regional perspective, U.S. sales were $291 million, down 22.2% versus prior year, driven by lower sales throughout Essential Dental Solutions, CAD/CAM, Imaging and Implants, partially offset by strong performance in treatment centers and in health care, our Wellspect business, which delivered 22.3% growth. Adjusting for the Byte impact and the onetime $24 million prior year, U.S. sales were down 9.7%. European sales were $382 million, increasing 9.9% as reported or 2.6% on a constant currency basis, driven by growth in Connected Technology Solutions and Labs, partially offset by softness in restorative. The U.K., France, Italy and Spain had strong constant currency growth, partially offset by lower sales in Switzerland. Germany sales were flat in Q3 versus prior year. Wellspect sales grew 5.3% in Europe on a constant currency basis. Rest of World sales were $231 million, down slightly versus prior year, with strength in Essential Dental Solutions offset by declines in Connected Technology Solutions and Implants. Strength in Australia and India were offset by softness in Japan. Wellspect grew 87.3% off a small base in Q3. Now turning to Slide 6 for our business segment results. CTS sales on a constant currency basis decreased 7% versus prior year. Equipment & Instruments increased by low single digits, reflecting growth of Imaging in Europe and Rest of World and growth of treatment centers across all 3 regions, partially offset by a decline in Imaging in the U.S. E&I growth was offset by double-digit decline from CAD/CAM in the U.S. and Rest of World. Distributor inventory levels for both CAD/CAM and imaging products remain below our historical averages. Moving to EDS, which includes Endo, Resto and preventative products. Sales on a constant currency basis decreased 6.2%, with the decline entirely attributed to the previously described dealer prebuy. Shifting to OIS. Sales in constant currency declined 17.1%. Excluding the Byte impact, OIS sales were down 5.8%. In Ortho, SureSmile declined low single digits in the quarter as we saw softness in the U.S. market, partially offset by growth in Europe and Rest of World. IPS declined mid-single digits in the quarter, driven by lower implant volumes in the U.S. and China. We saw a slowdown in the activity in the Chinese market in anticipation of the implementation of the second phase of the VBP program. In Europe, IPS increased slightly. Wrapping up our segment results. Sales in constant currency for Wellspect Healthcare increased 9.3% as we saw growth across all 3 regions. Now I'd like to discuss the outlook for the remainder of 2025 on Slide 7. The company is revising its 2025 outlook based on the results of the third quarter, tariff impacts and targeted investments we've already begun making in key areas to accelerate growth momentum in 2026. The revised outlook includes net sales in the range of $3.6 billion to $3.7 billion, and constant currency sales are expected to be in the range of negative 5% to negative 4% year-over-year. Adjusted EPS is expected to be approximately $1.60. Now on Slide 8, I'd like to look forward and discuss our detailed Return-to-Growth action plans designed to improve performance and deliver sustained profitable growth over the next 24 months. This will be achieved by going deeper, moving faster and being bolder, and based on 4 pillars: putting customers at our center, reigniting the U.S. business to win, empowering people to power performance, and evolving operations to fuel innovation. I will now discuss the actions we will take in each pillar. Putting customers at the center. What I've learned in my first 90 days is in our businesses where the customer is the center of everything we do, we win. I know that may seem obvious, but one of the reasons we're not growing as an enterprise is that we have some parts of the company where we can serve the customer far more effectively. By putting the customer at the center of everything we do, every employee and every team at DENTSPLY SIRONA, now starts with the mindset of delivering a better, more positive, easy to do business with customer experience to earn their share and loyalty. The customers defined as any practitioner who uses our products regardless if they purchase directly through a DSO or a dealer. They're our customers, and we will partner with DSOs and dealers to deliver the timely, consistent support they need. We will achieve this by creating a global customer service and technical service organization that delivers high-quality support worldwide, while maintaining the agility needed to meet local market needs. We will also enhance our support for customers and our field-based employees through simplifying interactions, speed of response and increased strategic investments. The field is and will become even more so a strength of our company, the tip of our spear. Reigniting the U.S. business to win. Second, we're making the return to health of our U.S. business a top priority with a comprehensive plan to reignite growth and strengthen our commercial foundation. Under the leadership of Aldo Denti, our new Chief Commercial Officer, we're aligning our teams, accelerating decision-making and positioning DENTSPLY SIRONA to compete and win with greater speed and focus. Here are specific actions we're taking to drive this plan forward, many of which are already underway, including organizing our commercial teams to better reflect the requirements of the market with the aim of enabling improved coordination, clear strategic focus and stronger competitiveness supported by defined decision-making processes, performance indicators and accountability frameworks. As mentioned before, combining customer service and technical service into a single globally led team under experienced leadership to improve the customer experience and strengthen coordination with our dealer partners. Pursuing a multichannel approach to retain direct sales in specialty areas while reengaging and expanding our network of U.S. dealer partners in CTS to accelerate market penetration. We're also aligning with DSOs by offering simpler and more comprehensive support such as all-in-one de novo offerings, which leverages the breadth of our portfolio. Investing in our sales team to fill open rep positions, expand coverage and deploy growth-based compensation and retention tools to better serve existing customers and acquire new ones. Increasing our investment in clinical education for dental professionals, focusing on advanced training areas like connected dentistry and single-visit care. At the same time, we're strengthening our sales training to better reflect the needs of dental offices, giving our teams a deeper understanding of practice workflows and the tools to deliver tailored solutions that improve both clinical and operational outcomes. The initiatives outlined are focused on North America, but have clear applicability across the EMEA and Asia Pac. We plan to increase regional investments in 2026 to accelerate growth. At the same time, we're exploring new go-to-market models in Asia Pac to strengthen CTS market penetration in Japan and refining our strategy in China. As the U.S. business gains momentum, we will strategically shift additional investments towards EMEA and Asia Pac. Empowering people to power performance. To lead DENTSPLY SIRONA through this turnaround, we're strengthening our organizational foundation to empower our people to power performance. Our teams need the right tools, systems and information to operate effectively, supported by greater automation and clearer priorities with aligned leadership and bringing new expertise where needed to accelerate our progress. This balanced approach leverages the strength of our existing organization and complements them with leaders who have deep experience in global transformations, sustained growth and consistent financial performance. With our finance organization, we're taking steps to elevate capabilities while ensuring continuity as we identify the right long-term financial leader for DENTSPLY SIRONA. As I shared at the top of the call, Matt Garth has departed the organization and a transition plan is in place to ensure continuity and maintain financial discipline. A search for his successor led by Heidrick & Struggles is underway. During this interim period, Board member, Leslie Varon, former Chief Financial Officer of Xerox Corporation, will provide governance and oversight of the finance organization in her capacity as Audit and Finance Committee Chair. In our commercial organization, we're sharpening our focus on the customer experience and market competitiveness. Under the leadership of Chief Commercial Officer, Aldo Denti, we're strengthening execution in North America and rebuilding the U.S. commercial leadership structure. This includes a search for a new U.S. VP of Sales and broader efforts to deepen partnerships, improve service delivery, drive customer loyalty. Coming from a distinguished career at Johnson & Johnson and given Aldo's experience in the orthopedic industry, he knows how to fix customer experience and to enhance our approach in competitive and evolving markets. We've also established a transformation office responsible for oversight of our Return-to-Growth plan. This office will advance our enterprise AI and automation strategy, fundamentally improving how we work. To lead this critical effort, Dustin Shields has been appointed Chief Transformation Officer, joining DENTSPLY SIRONA in December. Dustin brings extensive global experience in commercial and operational functions, integrations and business optimization, most recently at Globus Medical. Under his leadership, the transformation office will focus on delivering cross-functional improvements that enhance efficiency, agility and long-term value creation. We've also appointed a leader of digital transformation who will lead the integration of AI across our operations to increase speed, strengthen data-driven decision-making and improve the effectiveness of our support functions. Evolving operations to fuel innovation. With a commercial organization more closely aligned to customer needs and improved product development processes, we'll focus our investments on innovation that help clinicians enhance care, streamline workflows and grow their practices. In parallel, we'll continue to increase and accelerate R&D investments to improve the health of our commercial engine. We're also taking steps to enable our supply chain to move faster and go deeper than before to create stronger, more profitable and scalable manufacturing and distribution network, building on the ongoing work of the supply chain transformation team. This includes a plan to enhance operational efficiencies through: resource consolidation, standardized packaging, and establish more advanced planning and forecasting to favorably impact working capital and product costs. We need to further streamline our support department cost structures to optimize resources, processes and systems to reach benchmark efficiency levels, reduce complexity and release capital to be redeployed into our commercial and innovation priorities. This will be accomplished by implementing common processes, common systems and establishing regional support centers. This will include a significant reduction in legal entities and the continued implementation of SAP as our global ERP system. We plan on deleveraging the business through profitable growth and disciplined execution to drive improved EBITDA, working capital and cash flow to support future capital needs, debt reduction and shareholder returns. The Wellspect business will be a key role in achieving our financial goals. As previously announced, following an evaluation of strategic alternatives for Wellspect, we determined that retaining the business will deliver greater financial and strategic benefit to shareholders than the other options available. Specifically, keeping the business as part of our portfolio allows us to realize previous investments not yet monetized while benefiting from the strong cash flow generation and preserving optionality for future growth beyond dental. As evidenced by our recent results, we know how to penetrate this market and grow this business. Moving to Slide 9. In summary, we made progress over the past 2 years in footprint consolidation, SKU rationalization and resource streamlining. We need to move faster and act bolder to reshape the customer experience and strengthen our competitiveness in the dental market. I'm continuing to work through my onboarding to better understand the complete enterprise and market to set the appropriate financial targets, but we expect to be able to free up additional capital in our operational structure and products while reaching benchmark levels in our support functions and improve rep effectiveness. Accomplishing this will free up capital to invest in additional field-based resources, increased rep and clinical education, and higher levels of investment and innovation to drive growth and shareholder returns. I'll end my formal remarks with a statement I opened with. I believe the potential for DENTSPLY SIRONA has never been greater. I recognize that the company has undergone change over the last few years. The change has not been fast enough for you or the DENTSPLY Board. That is why I stepped into the seat at their request. It's time for bold change, and we're entering a new era for DENTSPLY SIRONA. One that's rooted in discipline, ownership, acting with urgency and a mandate to deliver results. Our Board of Directors and my leadership team believe deeply in our ability to reposition DENTSPLY SIRONA as the market leader it once was and will be again. We're committed to doing the work necessary to get there, even if it means making tough decisions. I couldn't be up for this more than anything in my life. I'm excited to do this and drive forward with this making changes. I look forward to keeping you up to date on our progress, and I'm committed to communicating with you in a direct and transparent manner every step of the way. Thank you. We will now open the call for questions. Operator: [Operator Instructions] Our first question is from Elizabeth Anderson with Evercore ISI. Elizabeth Anderson: I was wondering if you could maybe talk a little bit more about the U.S. market. I think based on what you put in the slides, ex the onetime items, it looks like it's still down about 10% year-over-year. So could you just sort of talk about where that is? Is that a result of the sales situation? Is it a lingering impact of the sort of prior Patterson situation? Just a little bit more color on what you see driving those shorter-term results would be very helpful. Daniel Scavilla: Thanks, Elizabeth. I think it's really a list of many things. What I'm going to say is our focus in the U.S. from our structure and how we go at that competitively is one thing throughout the products. I think it's the relationships with the dealers that we need to make a move on. Honestly, getting deeper with the DSOs and more meaningful strategies. Many of these things all come together. It's not just one area. I really think it's more about our structural approach and our execution in the U.S. market and how we, as an organization, can give our team the better tools to do that throughout the portfolio in a better way. That's really what the return to health plan is about is addressing what I see as shortcomings that we can allow to continue and drive improvement in each one of these segments with a deeper focus through structure and funding. Operator: Our next question is from David Saxon with Needham & Company. David Saxon: So I just wanted to ask on this returning to profitable growth kind of framework over the next 24 months. I guess how should we think about the cadence of getting to growth over that 2-year period? Is that kind of -- should we think about flat next year? Or any guardrails around 2026 growth? And then just in terms of that target of growth, like is that absolute growth? Or is that market growth? Would love just some more color there. Daniel Scavilla: David, I appreciate the question. Listen, my desire is to Return-to-Growth tomorrow. I would say don't model that just yet. What I do need is a little more time. We're going through the 2026 plan now, and I'm really working with every department in every country to do this with the team. So give me a little bit of time to come back at this. I will tell you, it's not a January 1, everything is rosy, but it sure can't be that you're exiting the year the same way. And so how we lay out those sequential improvements, I need a little more time to refine, but I require that we have sequential improvements as we get through the year. I just need more time to figure out when I can tell you with confidence when they begin at what section of next year. David Saxon: Okay. And then just in terms of capital allocation. I believe you talked about deleveraging in the script. So can you just remind us your philosophy around capital allocation, and specifically on the dividend, like how important is that? Are there areas in other parts of the business or mechanics that you could direct that cash? Daniel Scavilla: Yes, you got it, David. And listen, I think that is a legitimate question. I think discussing dividend and its value is something we need to explore further with the Board and with the shareholders to understand how important is that in adding shareholder value and where could that be used differently. The main tool of deleveraging isn't buying down the shares. We're actually retiring debt. To me, it's about growing the business first through the U.S. and then consistently through the rest of the world, to raise EBITDA so that your ratio changes. I really think it's more about growing that piece of it, the denominator, if you will, that is the health of this. And yes, with that, comes better profit, better cash flow, which we then can and will, at some point, redeploy into debt retirement and when needed, share repurchase. Operator: Our next question is from Jon Block with Stifel. Jordan Bernstein: It's Jordan Bernstein on for Jon. Just on the R&D aspect of the Return-to-Growth action plan. You heard some recent comments from you about trying to take that number up and accelerating investments in R&D. Just if you could talk through that dynamic? And is that a multiyear type of acceleration and where your heads are at for the R&D organization? Daniel Scavilla: Yes. Great question, Jordan. So a couple of thoughts here. One of the reasons I'm adjusting down EBITDA now for this year is we are pulling forward millions of dollars of R&D investment into the fourth quarter that will help us position better strength in '26 and beyond. And so we are beginning that. I would like to get up to the right benchmark. I know we've always talked around 6% to 7%. We'll evaluate that. It's probably a likely thing. I'm not sure we can get there in one fell swoop. I am looking at that now. And while I have the desire and we will increase the investment in R&D, I'm also going to look deeper with the R&D leadership to make sure we're spending it efficiently, and that we are spreading it out to make sure that we mitigate risk. So there's a couple of steps there as well of are we really spending the dollars we have today in the best way. And then once we have that in a good spot, how do we increase it in a way that maximizes the output for the market and for the shareholders. Operator: Our next question is from Jeff Johnson with Baird. Jeffrey Johnson: Dan, maybe I could just follow up and stay on the track you were just on, on the R&D side and really the OpEx side. If I look at the guidance takedown for this year, I mean, no real surprise to see a new CEO come in and kind of flush the current year out, and I think all that makes sense. But it looks like maybe your OpEx spending, R&D included going up maybe $50 million in the back half of this year to kind of get to that new guidance range. Is that something we should think about as $50 million in the second half of this year up, and so we carry that over to another $100 million next year, just to annualize that. Is that kind of the new run rate spend? And if it is, I know you're nowhere close to talking about 2026 at this point, but the Street is hanging out at like 16% EBIT margin. It feels like to me, if you have to take OpEx spend up 2 to 3 points, maybe we should sharpen our pencils on that 16% op margin. Daniel Scavilla: Yes, Jeff, again, I appreciate that, too. And like I said, let me wrestle through 2026 with the team and see. The real thing I'm doing right now is taking a loan to increase investments so that as we go forward and we find efficiencies, we can actually make it self-funding. So I don't think it's a new add-on top thing. It's -- say, I'm going to pull some money up now, get this engine running. And as we find efficiencies and redeploy it, I'm going to expect to see decreases over time in those OpEx numbers with an increase in EBITDA. But again, to jump start it, I'm going to pull down, as you just said, some EPS, investing in the right areas so that we can start delivering these efficiencies I've talked about as we get through 2026 and into 2027. Jeffrey Johnson: All right. Fair enough. And I've been jumping between calls, so if you asked us to hold the one call or question, I apologize. But I'd like to hear on the European market. I don't know if you're still doing some of the surveys that your predecessor was doing. But some of our checks, and I think even if we look at 2Q results from some of the manufacturers and the dealers out there, it seems like the European dental market has maybe gotten back on a little bit better footing and really even the international market ex-Canada. So I would love to just kind of hear your overall overarching view of the international markets at this point, market more so even than your performance in the quarter. Daniel Scavilla: Yes, you got it. So a couple of things. We do our surveys every 6 months. We didn't do it for the third quarter with that. But nonetheless, we didn't see any drastic shifts from where we had done before. And anecdotally, as I was out in the field and talking with people. A few people said it would slow down, a few people said it's speed up. So I'm going to kind of call it as kind of normal and nothing changed. The European side is interesting because while I do think it may be improving, I think the credit of the growth in Europe really goes to our leadership team. I think the person leading it is a fantastic leader, who has done a great job organizing the resources cross-functionally and driving growth. I think the cadence is improving. And I really think it's more about the approach that team has taken, which, to be honest with, I'm looking at as applicable to the U.S. and it's pretty much included in these points I laid out. Therese, we can move to the next one, if we're not hearing the question right now. Operator: Our next question is from Erin Wright with Morgan Stanley. Erin Wilson Wright: How are you thinking about your relationship with distributors? I think you talked a little bit about kind of supply chain in your prepared remarks, but how does this intertwine with some of your strategies around return to growth and profitable growth? And are you entertaining more of a hybrid approach or not? What makes sense over the longer term? And I'm sure there's still stuff that's up in the air, but I'm curious your view right now as it stands. Daniel Scavilla: Yes. Thanks, Erin. Listen, I think like many people in the market, we need to look at this with open eyes, and I think there's several ways to get there. In my prepared remarks, I called out a multichannel approach. And so what I am signaling is, we have direct businesses, and we intend to keep those and go more direct in those areas and support them holistically. Anything with our disposables that we use, I'm saying, I think that's fine. I'm not looking to make any meaningful shifts there and keep those alone. But reengaging with dealers, Schein and Patterson, when I say that, and new dealers, which I won't call out at this point, so that we have a broader reach and more presence, I see that as the model that we need to use to go forward. I have personally spoken with all of the CEOs. We have these in play. I'm not going to comment further on that because they're all at several different stages of maturity with where we can line in or not. But I would envision us next year having that locked in, in a way that is beneficial for everybody. Operator: Our next question is from Vik Chopra with WF. Vikramjeet Chopra: A couple of questions for me. So on this Return-to-Growth action plan, Dan, I appreciate it's early, but can you just talk about some of the key milestones that you will use to measure success for each of the pillars? And then I have a follow-up, please. Daniel Scavilla: Yes. Vik, you got it. So let's start with the -- obviously, a focus on the U.S. market there. I'm really setting out metrics, which are obviously going to be stabilizing sales and then returning into growth over some period of time. It's going to be one of the key metrics. Doing that by actually hiring out and retaining reps is going to be a key one. The rate of training we do for not only the rest but our clinical partners as well will be another key metric through these investments. So as we start training more and seeing more of both the field and the dentist that's going to be key. Holding on to them is going to be key. Seeing the sales turnover as a result of that is going to be one of the major moves that I see. And I didn't mention this in my prepared remarks, but having a stronger presence in universities and teaching institutions is a focal point as well to create those long-term seeds. And now while we're there currently again, we need to go deeper there and be more present to create that longer-term health. That's really one of the things. I've already called out what's almost finished when it comes to the organizational build to supplement a great team with even stronger talent that's out there that way. I think with the supply chain and operations, there's really a couple of measures there. We're going to see a lift in gross profit naturally as we get through these things. And certainly moving facilities or people and all that take a longer term, that doesn't pop within a quarter. With the R&D, we'll see it as a percent of sale and product launches. So I think they're really the main ones, right? If we know how to free up cash and we see changes where we can redeploy this. We watch the sales stabilize and grow. And as a result of that, we see the profit lift through our customer experience. I think they are the ones that I'm trying to wrap around now, make sure the team is aligned with that in a simplified way, so we know how to react faster and move and address these as needed. Vikramjeet Chopra: Great. I appreciate the color. And a quick follow-up question. You recently appointed Aldo Denti as your Chief Commercial Officer. Just curious to get your early thoughts and what impact do you expect him to make over the coming months? Daniel Scavilla: Yes. Thanks, Vik. So Aldo is honestly a great one. I had the opportunity to work with him side by side when we were in Johnson & Johnson Vision Care. And that company needed a turnaround. And we had come in with several people, and we're all part of bringing that back to the strength that it had. And he was driving force of that in the commercial side of that coming in. Again, his role in Orthopedics in J&J, which is no small task running that really had a lot of activity. So bringing that strength and that experience with a known person to come side-by-side with me is really important to me. I think that his drive to actually create a focused, trained and well-resourced commercial team is going to be one of the keys here. I think that his professional approach out with dealers and DSOs will be a lift for us. I think, again, he's a main ingredient. Operator: Our next question is from Michael Cherny of Leerink Partners. Ahmed Muhammad Rahat: This is Ahmed Muhammad on for Michael Cherny. I appreciate color on the Return-to-Growth action plan and fully understand that FY '26 planning is still underway. But if you think about things bigger picture, which areas of your business do you think are best positioned to start stabilizing growth both from a competitive and innovative standpoint? Daniel Scavilla: Yes, it's a good question, and my easy answer is all of them. But at the end of the day, each one of these requires a different approach. So the CTS move is more about getting the dealers lined up, trained and out with us. I think the biggest part of changing both customer service and technical service under one team and one focus be a major lift and not only the ongoing customer experience, but new customers through the implementation of capital and training. And so those things are going to be one of the big return to health type of items. I think setting up implant strategies and how we can get the right training and the right holistic approach and using DS Core as one of the drivers of that will be a major thing to go through. And while strong in EDS, making sure that we continue to have the right investments in Endo. The right training with those type of things throughout EDS are all going to be key to actually lifting them up. So really, if you ask me, is 1 more important than the other, the answer is no. That's the benefit of having a diverse portfolio, and it's well balanced, but they all require different approaches, and they're all addressed in this plan. Operator: Our next question is from Michael Sarcone with Jefferies. Michael Sarcone: I'll ask my two upfront. Just first, can you talk about the characteristics you're looking for in a new CFO? And then just related to that, Dan, I guess, how do you think about your guidance philosophy right now? And do you expect that may change as you bring on a new CFO? Daniel Scavilla: Michael, good question. Looking for main attributes of CFO, and I'm not saying that the person before didn't have these, but what I really need right now is a person who can dig down into the data and get the meaningful metrics that we need. And then in a consistent fashion, communicate those and educate the team to follow those to go. Right now, we have plenty of data, but how we use it isn't the best way. And so I really need someone to harness all of that power to create the focus we need, to show the metrics and driving this return to health thing. That's first and foremost. An enterprise leader right now, who has deep experience throughout so that they can look at this and work with all of us to guide us through and help us do it, it's going to be one of the key factors that are out there. So it's kind of both, a broad person with a lot of strategy who can dig very deep and use numbers and make sure that everyone understands and follow us along, communication is going to be key. Guidance strategy, I would say, look, where I came from, I'm going to follow that when we get this back to health, right? It's one of those ones where we put out conservative estimates with the goal to beat and raise as we go forward, demonstrating a cadence of sustained profitable growth. That's ultimately where I want to get to. I don't think that would change with a CFO coming in. I think that's got to be the mantra of this company going forward. We need the right person to fit that approach. Operator: The next question is from Allen Lutz with Bank of America. Allen Lutz: Dan, you mentioned a lot of different investment areas in your prepared remarks: global customer service and technical service organizations, clinical education, shifts in regional spending. I would think that not all of that spending is going to take place in the fourth quarter. Can you talk about what you are spending money on in the fourth quarter? And maybe what we should expect to start in 2026? Daniel Scavilla: Yes, it's a great question, and thanks for it. So listen, there's a couple of things, and I won't lay out every single put and take here for you, but there are big moves that we need to make contractually to free up some of the things that we have done historically that don't make sense these days. Some of those will involve some penalties that we're going to pay in the fourth quarter to create freedom to free up cash as early as the first quarter. So I'm taking a few hits to free up some strategic moves that allow us to go into that right away into next year. In the fourth quarter, there is an acceleration of R&D that I have set up to go. And while we don't have the execution of clinical education, establishing those programs and putting in place anything that we can do for that is there. So what I would tell you is some acceleration in R&D, a little bit of prep work in the clinical side. You mentioned customer service, tech service, that probably won't have an impact in the fourth quarter because they are existing people we are reorganizing. And we're beginning to recruit, but most likely will be negligible in the fourth quarter, more prominent by the first half of the year is really where I'm going with that. Operator: Our next question is from Brandon Vazquez with William Baird. Brandon Vazquez: I just want to ask kind of a high-level question on kind of the initiatives you laid out here. Obviously, encouraging to see kind of an action plan here. But the story has been a bit of a -- it will be -- this is my phrase, maybe not yours, but the story under the prior management team has been a turnaround story. And then a little bit now, it looks like, once again, again my phrase, a bit of a turnaround story again. Many of the initiatives here feel like ones that we've been focused on for years, frankly, like getting closer to the customers and supporting them, improving efficiencies. So I guess what would be helpful is can you just talk a little bit at a high level about what of these initiatives do you think are incremental to what has been attempted to turn things around at DENTSPLY SIRONA in the past couple of years that you think will start to eventually lead to some more durable improvements? Daniel Scavilla: Yes. I think that is a great question. And so I'll give you a couple of thoughts, right? There is no doubt that the customers, the employees and the Board are tired, right? There's fatigue coming through with these words and not quite getting where we need to go. My assessment would be, while there are many right things that were done in the past, I feel like we were trimming branches when we should be cutting down trees. So when I talk about going faster, bolder, deeper, I think that's really what I mean with that. And a lot of these things were in the right move, but not deep enough to go. And I think Aldo and Dustin and I have experience in these that we can bring in. But I don't know, was there as strongly as before. Now there's great folks on the team who are already in place. But I think the real thing is to drive deeper and push there. And it is a turnaround story. And the goal for me isn't to convince you why we know how to do this or that I'm the guy, I'm going to prove it to you through results. We just got to get past the talk and into the action. And I think there's enough talk that's been done. It's time to start getting this done through execution and pointing to the numbers as opposed to saying where we'll be. Operator: Our next question is from Kevin Caliendo with UBS. Dylan Finley: This is Dylan Finley on for Kevin. Wondering if you could talk a little bit about Implants. You go direct there, so not necessarily impacted by your relationships with dealers in that area of the market. What are the specific pain points that you're facing there today? And why do you think your predecessors have not been able to close the gap within the market? Daniel Scavilla: Yes. Again, good question. I can't answer why people before me did or didn't do things because I wasn't here. So I'll focus really on where we're going to go from here. I don't think we have the right amount of reps present throughout the world. I'm not convinced they have the right training. I don't believe the branding and coordination is laid out in the way that can add strength. I don't think we're leveraging some of the other infrastructure like a DS Core type program that we have to benefit these. I think all of those have to occur with a significant increase in training not only of the reps, but of the dentists, of our products, and quite frankly, in that area, we need to be present. It's honestly not that different than orthopedics, where you need someone there in the room, someone well trained, who can offer a lot of optionality out for the dentist. And I think we've got to take that type of model and apply it more effectively here than it has been done in the past. Operator: Thank you for your question.This concludes the question-and-answer session. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the DHL Group conference call. Please note that the call will be recorded. You can find the privacy notice on dhl.com. [Operator Instructions] I would now like to turn the conference over to Martin Ziegenbalg, Head of Investor Relations. Please go ahead. Martin Ziegenbalg: Thank you, and a warm welcome from my side to the Q3 '25 results call. As it says on the title, I have here with me our Group CEO, Tobias; and the Group CFO, Melanie. We aim to cover all ground within the next hour or so. So therefore, without losing any further time, over to you, Tobias. Tobias Meyer: Yes. Thank you, Martin. Thank you all for participating in this call and your interest in our company. On Page 2, the highlights for the quarter. Firstly, on the short term, dealing with the changes in the global landscape, particularly the outfall of the changes in U.S. trade policy. Within the quarter, we had the abolishment of the de minimis also for the rest of the world. I think we have been able to deal with that very effectively by adjusting and shifting capacity, especially in our more asset-intensive global transportation networks that being Express, especially to do adequate yield management to overall mitigate the impact on the U.S. trade lanes and continue to take advantage where there is growth, and we'll talk about where there is growth in a minute. What is also very important to us not to only be observed with the short term, but continue to spend time and execute measures to accelerate our growth through the focus on the industry verticals that we've laid out in our Strategy 2030, but also and very importantly, to invest in those geographies that are growing and will continue to grow. We have a list of countries, which we call GT20 Global Tailwinds 20 with related trade lane development measures. And I think we can say that we also made good progress on that in the third quarter. Cash flow generation was strong. Melanie is going to talk about that in a minute, and we continue to be committed and execute on our promise on attractive shareholder returns through dividends and share buybacks, which also continued in the quarter. On Page 3, you see a statistic a graph that we published in conjunction with our global connectivenness tracker. Those of you who follow us more closely, we have been doing this for some years in collaboration with NYU Stern. And we found it worthwhile to highlight that the average distance of trade has continued to grow, actually reaching a record high. There is a strong narrative out there that talks about regionalization and french shoring and there might be reasons for such trends. But the fact of the matter is that long-distance trade continues to grow. We have massive shifts that we see in our company, but also beyond due to the changes in U.S. trade policy. But we also see that other trading partners continue to expand. I think most notably that was visible in the September export figures of China, where trade to the U.S. was down 27%, but you had double-digit growth in the trade with Southeast Asia with the trade of Europe as well and particularly the trade to the Middle East and Africa was growing a lot, Latin America as well. These being long-haul trades and that compensating for some of the decoupling that we see as it relates to the U.S., which clearly has a lower share of participation in global trade as is increasingly replaced by China as the most important trading partner for many countries in the world. That is also visible on Page 4 when it comes to our volumes here, a focus on the time-definite international piece. So that specific segment of DHL Express. You see, by and large, the trend from the second quarter continuing. So especially the decline on the U.S.-bound trade, the U.S. inbound that is, but we see also some other trades, also U.S. exports being somewhat under pressure as input factors for U.S. producers get more expensive if aluminum is double the price in the U.S. than it is in other parts of the world, it's obviously difficult to produce cost competitive products. So that is something that will continue to influence global trade and thereby our customers and the business that we do with them. As spoken, the de minimis now being abolished also for Rest of World that had a notable impact on volumes, less so for us on profitability because we were able to counteract that. But also we see that some volumes are declining that have been not so profitable for us to start with. So that also impacts our overall results. But the cost action is very important. And on Page 5, you see some details on that. Aviation costs down 8.5% in the quarter. That's hard work, and we are really pleased to see that the Express Aviation team has been able to deal with that very professionally. Service was very good in the quarter. And we are also really looking forward to the fourth quarter across all divisions. I think we're very well prepared with our setup to deliver excellent quality. But we do that in good balance with strengthening our cost competitiveness. So we have adjustments that are more cyclical, ramping down capacity shifting capacity. But on top of that, structural measures, which we have under the program Fit for Growth that really makes us a better company in many ways. Cost competitiveness is an important part of our growth journey going forward as well. So we see ourselves in making good progress on that. We keep the discipline that you used from DHL Express, but also the other divisions when it comes to yield. That's clearly also supportive of the result in the quarter. Some more examples on P&P on the following Page 6. Maybe before I go on to the profitability accelerators, it's important to note that the volume in the quarter for P&P had some shifts for some good carrying products between letter and parcel. There are details in the backup on that. So if you look on an organic basis, parcels were up around 2%. We had normal ups and downs in the volume of mail as well. The advertising mail had been quite weak in the third quarter of 2024. So year-on-year, it looks quite positive. But overall, when it comes to letter volume in Germany, there is no change to any trends. We still see that on the path that we talked about earlier. Now coming to the concrete measures that helped us also improve profitability to the level that we're now seeing, which is in line with the guidance that we've provided. AB steering, this is something that we can now do to a greater extent because of the lead time extension we got for the standard letter so that those standard letters are only brought to every address every second day, staying within the allowed lead time, but allowing for some efficiencies in that last mile and skipping households where we would elsewise only had a single letter on Monday and Tuesday, for instance, and now we bundle that to 2 letters on Tuesdays. That's what's meant with that AB steering. Joint delivery is something that we have been on for a long time. It's a really big program because it requires us to rebuild infrastructure to a great extent, but that is really very important in the long run to strengthen the efficiency of the system to ultimately become a parcel carrier that also carries some mail. We are now at 69% of parcels being jointly delivered with mail. So that's steadily progressing and supporting the efficiency, much needed efficiency within P&P. Out-of-home continues to be a focus. We continue to invest in that. We are as close to consumers as we ever were in Germany, and that is strengthening our position in that market and also on the support functions, we are nimble and efficiency focused, which you also see in the numbers. Technology plays an important role. On Page 7, there are some examples how we also deploy Agentic AI. Outside Europe, we have support for frontline recruiting, for instance, the prequalification, the initial interview of somebody who wants to work for DHL, an applicant that's done with the support of AI, customer service, probably across industries, the most common use case that is also visible in our company. More specifically on customs, it's very helpful not only from an efficiency point of view, but Agentic AI also does an excellent job in documenting the sources that were used for classification, so on the regulatory side, but also on the goods description side that does not only increase efficiency, but also service quality and compliance, very important in this area, especially when we talk about U.S. clearances is an important component of our success there. I think we have been leading in providing continued great service into the U.S. in recent months. So that's something where this also contributed. And then on service logistics, dispatch calls, for instance, following up on the dispatch of trucks is one of those areas where AI also comes in handy. When we look at growth accelerators on the following Page 8, we continue to invest organically, roughly at the same level than we had in previous years. This goes into infrastructure that improves our quality like in Barcelona and Helsinki for Express, but also investments that unlock new revenue streams, particularly in geographies like Middle East and Africa, where we're really getting into new verticals as well for supply chain, especially and then the ongoing expansion we have in our last mile activity. We continue to do targeted M&A, and we also had such in the third quarter as it relates to the merger of our e-commerce operations in U.K. with Evri. That is a consolidating move. We believe we need to be amongst the top 3 players in every e-commerce last mile market that we're in. If we're not able to reach this organically, we'll do so inorganically. We have announced a similar move for Iberia earlier in the year. We have now closed the transaction in the U.K., getting into such a market-leading position with that participation in the merged entity. We did a smaller acquisition in the U.S. that gives us access to specific capability on health care-orientated last mile, hospital logistics. And with our investment in AGEX, we get access to last mile activities in the Gulf Corporation Council countries. So again, an expansion of our footprint, which is part of the strategy that we have communicated. Similarly, we support the strategy with a strengthened management focus. We have a dedicated team for supply chain Middle East and Africa that has been executed in the third quarter. We just announced that we'll also have a similar move with DHL Global Forwarding as it relates to Latin America. So we want to have senior leadership in the region to drive the growth of those businesses. That's part of our strategy execution as well. That already brings me to my summary on Page 9. So we cover the short-term volatility that the business is exposed to. We're successful in protecting earnings and cash flow generation in that environment by doing the cyclical capacity flex, which I believe was highly effective also in this quarter, but also work on the structural measures that make us more competitive in the mid- to long term through the Fit for Growth initiatives, including increased deployment of technology such as AI-based tools. But also the long term, we saw progress in the quarter with those organic investments, the targeted M&A. We see ourselves making good progress on those structural elements of our growth journey towards Strategy 2030, and that is important to accelerate our growth trajectory in '26 and '27. We are aware that additional momentum is needed. With that, I would hand it over to Melanie to give you some more details on the financial performance of the divisions in the third quarter. Melanie Kreis: Yes. Thank you very much, Tobias, and good morning, and welcome also from my side. Thank you for joining our Q3 earnings call. I will start on Page 10 with the main takeaways by division. For DHL Express, Tobias already explained the effectiveness of our cost and yield measures. Reported Express EBIT contains a net negative EUR 54 million from nonrecurring effects, mainly related to a legal provision as well as some smaller cost of change and M&A effects. So it's worth pointing out that excluding these nonrecurring items, Express EBIT was actually up 9% year-over-year. In forwarding freight, we have seen similar market dynamics as our peers. In comparison, we have been performing relatively well in the quarter with underlying ocean freight volume growth of 5% and increases in GP and GP per tonne in air freight, both year-over-year and quarter-over-quarter, all leading to forwarding EBIT being up versus Q2. That being said, we are clearly not where we want to be with DGFF and Oscar de Bok is implementing structural improvements. Supply Chain continues to perform very well. Yes, we see somewhat slower growth in current circumstances with both currency headwinds as well as impacts from the general environment. But the structural growth tailwinds are intact for that division as reflected in very good new business signings with EUR 1.4 billion new contract value in Q3. One of the key drivers of these customer wins as well as a strong 6% plus margin is our leading digitalization, automation and standardization setup. In DHL e-commerce, EBIT includes a mix of nonrecurring effects, which I will address on the next page. Fundamentally, Q3 confirmed the intact structural e-commerce growth opportunity, which is not yet translating into accelerated profits as we keep investing into our network in this division. Last but not least, P&P is delivering very well on its strategic plan. Tobias has shown earlier the structural network changes which we are successfully implementing under Fit for Growth. And the Q3 numbers show that our measures are working with a year-over-year EBIT increase, both on a reported and as an underlying basis, which brings me to our Q3 EBIT bridge on Page 11. So in Q3 '24, we had a EUR 70 million positive one-off effect in P&P. If you adjust for this as well as this year's nonrecurring effects, our reported 7.6% year-over-year EBIT increase was actually a 10% growth, excluding nonrecurring items. On the main effects in this quarter, we are showing them very transparently on this page. There are, in total, EUR 37 million cost of change across Express, Global Forwarding Freight and DHL e-commerce. I already talked about the net minus EUR 54 million in Express being primarily driven by a legal provision. Now to the big number in DHL e-commerce. We handed over control for our U.K. e-commerce business to EY at the end of the quarter, which led to a positive deconsolidation gain. This positive effect is partially balanced by cost of change as well as a total of EUR 42 million in noncash write-downs for a full net positive effect of EUR 123 million in the quarter. We are explaining the accounting effects of the U.K. transaction on the dedicated e-com page in the backup, so I won't go through the accounting details now, but be aware that going forward, we will no longer fully consolidate our U.K. e-commerce business, but recognize the pro rata net income of our 30% stake in the combined entity in EBIT in line with the equity accounting rules. So that was a bit on accounting now. Sticking to the P&L, turning to Page 12, some more comments on the overall P&L. I think it's worth pointing out here that the 2.3% revenue decline is about equivalent to the minus 2.4% FX effect in the quarter. So while lower freight rates and U.S. tariffs were a headwind to growth, that also implies this revenue development overall also implies that on other trade lanes in regions and verticals, we saw continued growth, as Tobias already pointed out before. On the cost side, you see the benefits of our capacity flex and structural cost measures taking effect in terms of significantly lower cost for external capacity as well as in the reduction in staff costs. And at the bottom of the P&L page, you see that our continuous and consistent share buyback activity is driving a significant step-up in earnings per share growth in Q3 to 16% year-over-year. Coming now to the key points in our cash flow statement on Page 13. So EBIT growth is translating into higher growth of operating cash flow before changes in working capital. There are numerous movements across different lines in the cash flow statement. But ultimately, this growth in OCF before changes in working capital shows that -- while there are some moving parts in our EBIT bridge, the earnings quality of our EBIT growth is very healthy, and that is very important. Working capital changes contributed positively to cash flow in the quarter with the main contribution coming from DGFF. And this is, for me, another useful reminder that while we have work to do on DGFF, the business model of an asset-light forwarder is attractive through the cycle with working capital being one of the factors protecting the cash flow generation of the model. Strong growth in operating cash flow, coupled with ongoing investment control led to a very good free cash flow in Q3. And I'm pleased that in '25, we have shown a smoother cash generation across the quarters and are well on track to our unchanged EUR 3 billion full year target for free cash flow, excluding M&A. And that takes us to the use of cash and the next page. We have been consistently delivering on our dividend continuity promise and to our clear commitment on our EUR 6 billion share buyback program. With EUR 4.4 billion done by end of September, this leaves up to EUR 1.6 billion to go by end of '26. So no change here in our commitment to attractive shareholder returns. To round it up, let's turn to our unchanged guidance on Page 15. When we talked about our Q2 numbers in early August, the short notice cancellation of Rest of World de minimis to the U.S. had just been announced, and we prudently flagged a worst-case risk from this new development. By now, the abolishment of Rest of World de minimis has been implemented, and we have better visibility on the impact. So this impact is now fully reflected in the assumptions for our otherwise unchanged guidance as we reconfirm explicitly in the first bullet below the full year '25 targets. And this brings me right away to my wrap-up and the 3 main messages we want you to take away from today. The first is that in the short term, our cost and yield measures have driven a strong Q3 performance. And on this basis, we fully confirmed guidance today. Secondly, beyond short-term volatility and capacity flex, our structural cost savings drive a sustainably lower cost base, not only for the current environment, but also for the growth path thereafter. So they literally make us fit for growth. And thirdly, beyond P&L earnings, we also delivered a strong cash flow, which allows us to invest in a very targeted manner into the GDP plus verticals and regions we identified, while at the same time, offering attractive returns for our shareholders. And before we now turn to your questions, something special, a quick double advertisement in the name of our Investor Relations team. So first, for your questions, we now have a new AI tool on our IR website, which matches your questions with the information we have provided in our official publications. Martin told me that this is pretty unique in the IR arena. I would ask all of you to check it out, give me feedback. I hope that this will be a good example on how we strive to apply AI wherever helpful across the organization. And secondly, we have John Pearson and Mike Parra, our divisional CEO and our CEO, Europe of DHL Express, hosting an investor visit at our U.K. hub upcoming Monday. Contact IR here for more details if interested. I think it's definitely worth seeing. And with that, operator, please launch the Q&A. Operator: [Operator Instructions] Our first question comes from Alex Dogani at JPMorgan. Alexia Dogani: Just I'm going to limit it to 2. Just firstly, in freight forwarding, obviously, Oscar has now been in the seat for, I think, the past 90 days. Can you give us a little bit of an indication of what his plan is to improve the earnings kind of progression in that division? Because clearly, things have been approaching the 2019 levels faster than we would have thought a couple of years ago. So that's my first question. And then secondly, can you give us an update on the progress on the legal structure tiding up and when we should expect to see the overheads within the divisional reporting that you signaled at the CMD? That's it. Tobias Meyer: Thank you, Alex, for these 2 questions. So as it relates to Global Forwarding, I mean, Oscar is making progress. You saw the move on Latin America, for instance, which is, again, a closer to market move that enables us to execute our strategy in that as well. Overall, I think we know that in Global Forwarding, we have a great dependency on industry trends as well. You see that in the third quarter. That is hard for us to predict. We have seen clearly a normalization trend since COVID, but also within the year. I think there are some signs of that bottoming out, but there is a lot of uncertainty due to the changes in trade policy that we have talked about that obviously has implications on demand, quite notably so. On the other hand, we have compensating factors. I think we're all positively surprised by the trade figures that China published for September. That being one example of a counterbalancing effect. Overall, we see ourselves in the quarter with a positive development, especially in ocean freight. I think relative to our competitors, we have been doing quite well. Air freight, there's still more work to be done. And we also have that topic in terms of the freight market in Europe, especially our LTL network in Germany. So these are topics that Oscar is working on. But again, within the quarter relative to our peers, we are quite pleased. Melanie Kreis: Alexia, I'll take your second question on legal structure and the allocation of the corporate center costs. So we are well on track on the legal cleanup. As you may recall, target is to take the topic to the AGM next spring, and we are on track to do that. We will then, once we have implemented the new legal structure in the course of '26, start with the new reporting with the full allocation of the corporate center costs in '27. We will do some parallel shadow calculations for '26 so that when we start reporting in the new structure in '27, we can also restate the '26 numbers to that format. That's the time line here. Alexia Dogani: And can I just ask a follow-up on Tobias answer. Obviously, you talked about the external factors. productivity usually is an element that kind of helps improve the earnings kind of projections. We've seen other peers announce kind of relatively sizable cost savings programs. The Fit for Growth doesn't really apply to freight forwarding. Is there something that you are specifically looking at there, perhaps using natural attrition as a tailwind, just to kind of understand how costs should evolve there as well. Melanie Kreis: I think when you look, for example, at the numbers we show in our stat book, you can see that in terms of employees, we are 3.9% down in Global Forwarding Freight. So Fit for Growth and cost measures are also happening in that division. Tobias Meyer: Yes. So that I think I would absolutely echo we see ourselves good underway. You also have to see that productivity in the cycle has a cyclical element to it as well. In the downturn, we often see the files getting lighter and having less TEUs per file on the ocean freight side. Overall, also, if we look forward, Alexia, I mean, this is an area where we want to grow and rebuild also market share. So our obsession with cost is limited by that ambition to grow. We will look at productivity, continue to do so. But 2026 needs to be a year for growth for Global Forwarding. The environment is ripe for that. Some of the moves in the broader industry landscape might be helpful for us in that regard. So that's a strong focus that we have. We want to absolutely stay customer-focused in Global Forwarding and grow in those industry verticals that we have laid out. That's a clear focus for Oscar as well. Martin Ziegenbalg: Thank you, Alexia. We come to the next caller, which is from Wolfe Research. Operator: Yes, our next caller is Jacob Lacks with Wolfe Research. Jacob Lacks: So cost control was strong again with the ongoing volume pressure in Express. Can you help us think about how much of the cost outs are variable and how much are structural? And is in the EUR 1 billion Fit for Growth plan, is that on track? Or are you ahead of schedule here just given the global trade volatility? Melanie Kreis: Yes. Thank you for that question. So we are purpose really not breaking out how much of the cost is coming from the volume capacity flex and how much is structural because that is a little bit of an artificial calculation. So for example, -- we have done some rejigging to our aviation network by changing the partners we fly with. That has structurally improved our cost base under the Fit for Growth. But of course, that is now also impacted by how much volume we actually have in the network. So we don't see the benefit of kind of like pseudomathematically breaking it into the one bucket or the other. I think the important element is what you see in the bottom line and that is this very good cost development. And with that, we are overall a bit ahead of what we had envisioned under Fit for Growth for the third quarter situation. Jacob Lacks: Great. And then just one more for me. When you look at the U.S. volume declines, do you have a sense for how much of these declines are driven by de minimis and how much are higher tariffs? And to the extent we see tariffs taken off by the courts next year, could this drive a B2C volume recovery? Tobias Meyer: So I think we would not expect that. The -- even if IEEPA tariffs go, we all know that there are other legal grounds that the President could use to impose tariffs. So we think that the step down that has happened is permanent. If that would change, that would obviously provide opportunity. We would love that, would allow us also to definitely bring some business back, but we currently don't plan for that. The exact split between de minimis effect and tariffs is hard to do because it's also overlapping. So e-commerce has clearly taken a much more severe drop than B2B volumes. That's something that we very clearly see, and I think everybody would expect as well. Those B2B volumes are goods that are essential in many ways to the U.S. economy to U.S.-based customers. So the decline is significantly lower than the decline you see on the B2C on the e-commerce side. Melanie Kreis: And you also see in our overall numbers. So for B2C, we had minus 23% on the shipment side and for B2B, minus 2%, so holding quite stable. Martin Ziegenbalg: And on to the next caller from BNP. Operator: Our next question comes from James Hollins with BNP Paribas. James Hollins: James Hollins from BNP Paribas. Two from me. Melanie, please, could you try and quantify the de minimis impact? Obviously, you talked about up to EUR 200 million this year. Maybe you could give us any detail you think it's going to be and better still what you think it might be in full year '26. I know you told us not to annualize it. And then what I'd describe as a stream of questions on Express, but I'll keep it to pretend to one. If we look at Express TDI volumes obviously down 10%, 11% Q2 and Q3. B2C volumes down 23%. I was just wondering where that was versus the market, what you're seeing happening on market share and perhaps whether you could give us an early estimate where you think volumes might go in 2026. And then let's turn to the second part, TVI B2B volumes. I think previously, obviously, volume is pretty solid there. You talked about average weight per shipment. I was wondering if you could give us a bit of an update on that, if possible. Melanie Kreis: Yes. Thank you. So starting with the de minimis question. So I mean, again, when we talked about the EUR 200 million on August 5, that was days under days after the announcement that de minimis would go out end of August rest of world. So what we had done to come up with EUR 200 million was basically extrapolate the development we had seen for China, Hong Kong to the U.S. And I had already flagged then that this was really a worst-case scenario. We have now seen that there is an impact, but that we are able to manage that quite well as visible the Q3 numbers for Express. With regard to the TDI volumes, I mean, first of all, we had already taken a yield and profitability focused approach to B2C volumes long before the whole de minimis thing started. We had talked about that now for, yes, 6 quarters that we had really taken pricing action and that this had impacted our volumes, particularly on the Transpacific. And in that respect, we had seen stronger volume declines than competition. But when you look at our profitability development, I think that shows very clearly that the development is -- our approach is the right one. And to the weight question, yes, I think that's a very important point. When you look at volume and weight development, we see a less pronounced development on the weight side. So the focus also on heavier shipments for the Express network is actually paying off. Tobias Meyer: And I think if I may add to the market share, we are following that. You might have seen that some of our competitors have also published or said something to the in-quarter development. So that is something -- if you look at the entire quarter, it gives an impression that we might have lost. If you then look at how that development was within the quarter. We're not so sure about that anymore. So it's something that we watch. We obviously here are focused on TDI. We do not play in the intercontinental deferred market where there is clearly some growth that competitors have shown. Melanie commented on the profitability. The focus for 2026 is more on the weight side, given the focus on growing in industrials and the focus verticals that we have laid out. So that's our focus there, clearly B2B and tilted towards somewhat heavier weight of high-value critical goods. That's very much the focus of Express as we go into 2026. Operator: Next question comes from Marco Limite with Barclays. Marco Limite: Congrats for the Q2 results. So a question indeed on cost savings because I think the Q3 was a bit was mostly driven by cost savings. When we think about the 2026 outlook, I mean, I'm aware that probably is a bit too early to discuss about '26. But I mean, if -- specifically in the Express division, I mean, if we think about an environment where macro does not improve, you've got pricing that offset inflation. So let's say, the year-over-year improvement will be driven by cost savings. And then in your Fit for Growth program, I think you have said you have only EUR 250 million cost savings in '25 and a lot more next year. So is my, let's say, statement of Express growth next year of EUR 300 million, EUR 400 million year-over-year, right, if we assume macro stable and all coming from cost savings or that you think is a bit too bullish and I'm missing something else? Yes, maybe this is the first question. And my second question is on your full year '25 outlook. You have reported 3 quarters year-to-date up year-over-year and your current guidance at the low end implies Q4 down year-over-year. Yes, is that just, let's say, the low end is a bit more cautious? Or how do you explain that? I mean, do you just expect the e-commerce season being particularly bad? Or any color on that would be helpful. Tobias Meyer: So maybe I take the first question and then Melanie can comment on the 2025 outlook. Look, I think in the current environment to say what a stable macro means, we find this relatively difficult. If you look on the macro assumptions that we based Strategy 2030 on, and we rely on external sources that has been very disappointing, not only as it relates to trade and what has happened with tariffs in the U.S., but also the continued weakness in Europe, especially Germany, Germany having the third year without growth. So we will provide guidance in due course. We are in that process. We'll obviously continue the focus on cost savings, the cyclical part, but more important, also the structural part. We see ourselves good underway, but I think we need to wait a bit more to see with what run rate we really now exit 2025. We have picked up momentum in some areas as it relates to contract closings, for instance, in supply chain, which is also needed to get back on a solid growth term. We need to see now what happens on the U.S. side with APA and how that turns out. So these are all factors that will play out in2026. Marco Limite: Okay. Sorry, just a follow-up on that. asking the same question in a different way. Like can you confirm that you still got additional EUR 750 million cost savings next year and only EUR 250 million cost savings in '25 from the EUR 1 billion Fit for Growth program? Melanie Kreis: So as I said, we are actually ahead on the Fit for Growth measures. So in that respect, we will already see more benefits in the current year. As Tobias said, we will give guidance for '26 in March. There will be a positive contribution year-over-year from Fit for Growth going into the next year. We also have some negatives, for example, in P&P, it will be the second year of the price regulation. And then we have the macro question mark. We will put all that together for our guidance in March. With regard to Q4, yes, I follow the mathematics and the year-over-year comparison. I think one important element also linked to the first part of your question, we do plan further cost of change bookings for the fourth quarter. So in total, we will probably have cost of change up to million, half has already happened, but that means that we will also do some more cost change in Q4. And as we guide on reported EBIT, that is, of course, all included in our EBIT guidance. Operator: Next question comes from Cedar Ekblom with Morgan Stanley. Cedar Ekblom: I've got 2 questions. So firstly, on the AI rollout that you guys talk about. Have you thought what you could quantify those cost savings at considering we've got headcount down a couple of percent versus the end of 2024. I don't know if you could put some numbers around sort of lowering cost to serve. Maybe it's too early in the process, but that would be interesting to understand. And then the second question is just related to sort of the macro outlook that you talked about, Tobias, at the beginning on your global connectedness tracker. That obviously points to a world where global trade as a multiplier of GDP should continue to be pretty solid. I'm not so sure that, that is consistent with the message you gave at the Capital Markets Day where we had that sort of long-term trend that saw that decelerating. But the broader question here is, you are not growing your volumes in the businesses that are sort of most geared into global trade, sort of freight forwarding and Express. And I wonder, is it a case where the global market might continue to grow overall, but the verticals that are actually profitable for your business become far more niche. So I suppose the overall market can grow, but can your business grow overall? Or is it a case that there's only certain segments that remain profitable? It's a bit of a macro question. Tobias Meyer: Yes. Thank you, Cedar. For both of those questions, I think for AI, we would not quantify this. I think this is also very difficult to do. This technology is ultimately becoming a part of many, many applications that we use. We have dedicated programs as for customs, where we also drive that with own capacity, and that's easier to measure. But even that will quickly infiltrate into normal productivity increasements and the like. So singling out the AI effect as important as that emerging technology and very helpful technology is something that we see as difficult. Well, we'll continue to report and give updates on how we use it. and at least on a qualitative level, how it connects to our figures. As it relates to the macro outlook, I think we would stay with the view that we have shared that there is a deceleration also in the multiplier. The multiplier was significantly above 1 since at least 1990, and that will -- is not what we expect going forward. But the narrative that is out there of the regionalization is a Western perspective, and it's not a global perspective. China continues to globalize. Now in terms of us benefiting from that, it's not falling into our lap. That's, I think, a fair observation. There are some also industry sectors that we have strong exposure to that are not going to deliver the growth in Express, -- it is a story of an industry that has taken share from the general airfreight market over the last 40 years by expanding its capability. And that's what we need to do to be able to continue to grow that we have express cold chain capability, for instance, to have access to the sector that we're absolutely convinced will continue to globalize. The U.S. has a very unique point being the world's largest market and thereby being able to force companies to produce there. The rest of the world doesn't have that choice. Maybe China is the only second one to that. You will not produce modern pharmaceutical biogenetic pharmaceuticals in 20 places on this planet. This is just not what our customers tell us. These modern technologies are going to be highly concentrated, which means that for the rest of the world to participate, in that technological progress, there will be trade. That's what we see happening with a different focus, and that's what we expect going forward. Again, something that we need to actively address geographically, but also as it relates to our capability portfolio, and that's what we are working on and need to deliver on to be able to show stronger growth. I think we have a good track record in supply chain with that gradual expansion of our capability portfolio, but it's clearly a strong focus point for Express and Global Forwarding as we go into the year 2026. Operator: Our next question comes from Alex Irving with Bernstein. Alexander Irving: Two for me, please. First of all, on Express into the air peak season, both on volume and on the success of the surcharge, how are you seeing that develop, please? Second, also on Express, you've taken out quite a lot of costs year-over-year, but how much of that we need to add back as and when volumes rebound? Maybe related to that, where is the weight load factor currently, both year-over-year and also relative to your view of a normalized baseline? Melanie Kreis: I think with regard to the Express peak season, maybe not just in Express, but also in the other businesses where we see a peak season, we do expect that there will be a B2C peak season. How dynamic that will be remains to be seen. But we clearly expect the seasonal increase in the B2C volumes, and we are prepared for that in Express, but of course, also in Post & Parcel Germany and the e-com divisions. And with regard to the yes, demand surcharge driven by this seasonal additional stress on the system. We are on track with the implementation. So we do expect the positive cost offset from that seasonal surcharge also in the fourth quarter of '25. With regard to how much of the cost improvement is there to stay, as I said before, it is a mix, what we see at the moment between volume-induced capacity adjustments and structural growth levers. So of course, when volumes come back, we will eventually also flex back with capacity. But we also think that those structural fit for growth measures will give a lasting benefit, but we can't quantify that to a very precise number. With regard to weight load factor, well, given the current volume and weight situation, we are still not at an optimal point. So the cost measures are helping. But of course, ultimately, that is still a fixed cost network where it is more enjoyable when there is more volume and weight. I mean, also with regard to margin, we have seen a good development, but this is not our ultimate margin goal. So I think very well managed given the circumstances, but we look forward to the moment when volumes come back. Operator: Our next question comes from Michael Aspinall with Jefferies. Michael Aspinall: Michael here from Jefferies. A couple on Express. On the Express Rest of World kind of impact, it was mostly lower volumes. Maybe you can just talk to us as to why that is? And just thinking about the characteristics of those products. Are they kind of highly desirable B2C products or B2B that still need to move? Just thinking kind of what's happening underneath the numbers. Melanie Kreis: I think what we already assumed in August or what was kind of like our hope to keep us away from the worst-case scenario was that particularly the higher valued shipments, which had entered into the U.S. under the de minimis rule that they would be more resilient. So I mean, you had lots of machinery spare parts valued below $800 going into the U.S. under the de minimis. And our base case hypothesis was that these volumes would keep moving, but of course, then with clearance, and that is what we have now seen happening. So particularly the very low-value B2C stuff has seen the impact. partially also because customers are then changing to different forms of transporting B2C into the U.S. but we have seen more resilience on the B2B side, and that explains the difference between the minus 23% B2C volume decline and the minus 2.2% B2B. Michael Aspinall: Great. And 2 other just small ones. In Express on TDI volumes, Europe improved sequentially a little bit from minus 3% to minus 1% in 3Q. Is there anything underneath that to read into in terms of Europe getting better or not really yet? Melanie Kreis: I think it's a glass half full, glass half empty question. So yes, from minus 3% to minus 1% is moving in the right direction. Can we be satisfied with minus 1% -- clearly not. So yes, I think at the moment, we still see a more stagnant European development than we all would have hoped for. Michael Aspinall: Okay. Great. And last one, sorry to slip in 3. I think you don't really get into fuel hedging in Express. Maybe you can just remind us on that. And similarly, if there's no hedging, but you expect lower fuel surcharges, would that normally help on the volume front? Melanie Kreis: So on the fuel side, and there's a well-established mechanism in DHL Express, but also in the industry where you have a fuel surcharge. So there is a bit of a time lag about 6 weeks. But fundamentally, you then adjust and pass fluctuations in underlying fuel price on to the customer. Tobias Meyer: And the volume elasticity is relatively low to that. Operator: Our next question comes from Cristian Nedelcu with UBS. Cristian Nedelcu: Can I ask the first one in Express, your competitors are talking about adding air capacity on intra-Asia and Asia Europe. And I believe -- and correct me if I'm wrong, but I believe those are usually trade lanes where your Express margins are higher than the divisional average. So how do you see the risk of potential market share losses or margin compression there in 2026? The second one, maybe a small one on the Q3 Express. For what concerns the U.S., we've heard about the postal operators temporarily stopping deliveries to the U.S. in September. There's been maybe also some de minimis front-loading in August. did those bring any benefits to the profitability in Express in Q3 that may not repeat going forward? And the last one on Express, very useful the chart you offer with the weights into different regions. And looking at Q2 and Q3 and just focusing on Europe, weight down 3%, weight down 1%. If I compare it with the CTS ocean volumes into Europe, those have been growing around 10% year-over-year. Air freight capacity into Europe overall is also up high to low -- high single digit, low double digit. So I guess my question is a bit what do you think is driving the underperformance of Express versus ocean and air cargo only when we focus on Europe? Do you think it could be market share loss? Do you think it could be down trading or other factors that could explain that? Melanie Kreis: Okay. So maybe starting with the third one. So the missing element in the comparison is the intra-European business, where obviously air and ocean freight statistics don't show what is happening intra-Europe, but that's a big part of our Express business, and that has clearly not been the most dynamic. So that explains the difference there. Staying with the trade lane questions. So yes, I mean, the fact that intra-Asia and Asia to Europe is developing more favorably, which is why others are apparently thinking about moving capacity there is ultimately a good thing because those trade lanes are strong trade lanes for us market position in terms of profitability. So I see it more positive if intra-Asia and Asia to Europe is developing favorably. And yes, I think overall, we haven't seen any crazy capacity movements leading to difficult pricing situations beyond the normal competitive dynamics. Tobias Meyer: I would echo that. So this is good. We see ourselves in a very competitive situation, both intra-Asia. We sometimes say that Asia is DHL's second home and also Asia to Europe. So the trends that you're seeing that competitors are more interested in is something that we recognize and overall see as a positive message of this being a trade lanes where we can also can expect some growth in 2026. To your second question on the postal operators and the de minimis front loading, I think there might be small effects of that, but really not much. The de minimis front-loading, we -- others might have seen to a greater extent than we have. The postal operators, there might have been some shift for some time, but I think most of that volume just didn't show up. And we, as you are aware, have already now for several weeks, re established the postal channel to the United States Postal Service, which is particularly strong on the C2C side. So not much effect on Express in the third quarter as it relates to that. Operator: Our next question comes from Muneeba Kayani with Bank of America. Muneeba Kayani: I just wanted to understand your guidance that you've maintained and unpack some of the moving parts there because it's, of course, on the reported number and with all the one-offs. So you've got the EUR 178 million benefit on the accounting on e-commerce. That's certainly new for us. Was that something that you were expecting kind of already when you were giving your guidance maybe earlier in August? Similarly, on the cost of change, this was something you'd kind of highlighted and kind of we've taken into account into our numbers, but has that kind of impact of cost of change been different because of the phasing than what you had initially expected? And then lastly, on the de minimis kind of -- what have you accounted for into the year-end on that impact compared to that worst case of EUR 200 million. So if you could unpack those moving parts, that would be super helpful. Tobias Meyer: I think in the de minimis for us, this is now part of the run rate. So the effect is there. We don't expect much further to move than what we now have. As Melanie laid out, the impact was smaller than the worst case, significantly smaller than the worst case, and it's now part of everyday life. As it relates to the guidance, overall, this will net out for the year. So we roughly stay to where we originally seen that. Obviously, there's now the impact quarter-by-quarter, and Melanie can further elaborate on that. Melanie Kreis: Yes. I think if you put all the one-offs together, what we disclosed in Q2, what we disclosed in Q3, we currently have a net positive effect of a bit over EUR 40 million. We expect that to turn to a negative number because, as I said, we will have more cost of change now in the fourth quarter, and we don't anticipate a positive one-off in the fourth quarter. So if you say we have close to EUR 100 million in cost of change year-to-date. If you want to take that up to EUR 200 million, that gives you a feeling for the order of magnitude in the fourth quarter. So we should end the year with a negative contribution from one-offs for the full year. Muneeba Kayani: And just kind of on your 3Q Express volumes and the B2C minus 23%. Can you give us a sense of how that was in the month and like what happened in September post the de minimis? Tobias Meyer: So the swing that others might have seen was not as big for us. So I think you see over the quarters a pretty consistent trend, and we would not see much deviation from that trend. Operator: Our final question comes from Marc Zeck with Kepler Cheuvreux. Marc Zeck: One question left for me, maybe a bit on the P&P performance, I guess, that was good, certainly much higher than expected by the market. Is like EUR 200-plus million EBIT in the -- every quarter that is not Q4 kind of the run rate that you would expect now for the next year as well? I guess, we've seen the wage increases already for this quarter. So it seems like a pretty decent run rate. And with Q4 coming in, would it be fair that maybe you will end up in EBIT maybe more at the EUR 1.1 billion rather than the EUR 1.0 billion in P&P? Tobias Meyer: So I think -- the recovery that we see this year is also because the last year was relatively weak. I think that's important to keep in mind. Overall, we see ourselves very well underway to deliver the guidance. For next year, Melanie already highlighted, this will be a year without regulatory price increases in Mail. So that provides some pricing headwind for 2026. We obviously have some freedom in parcel that will also adequately utilize. So similar to other elements that we talked about, we don't see a change of trends for P&P. We have some seasonality in that business as it relates to volume and also earnings, and we expect that to be a normal peak season. That's where everything is currently pointing at. We also have higher cost to deal with that. So a normal seasonal development is what we expect to close out Q4. And then again, obviously, some of the structural cost measures will carry forward, but the headwind on input factor cost and pricing will be a factor in 2026. Operator: This concludes the Q&A session. I now hand it back to management for closing remarks. Martin Ziegenbalg: All right. We're not too far away from the 60 minutes that we were looking for. Good news for the guys in Copenhagen, who are next. Tobias, your closing remarks, please. Tobias Meyer: Well, it was an interesting quarter, and it, from our perspective, turned out quite well. We do not expect that volatility will go down. We will stay close to our customers. So first and foremost, impacted. It's easier to shift airplanes around than factories. We do see our narrative confirmed in terms of globalization not being derailed. There's clearly a deceleration relative to decades earlier, but especially in those areas that we focus on technology and the concentration of manufacturing due to economies of scale and economies of scale that continues to drive globalization and the growth of trade. And we are very focused on, a, staying close to our customers, adjusting capacity and remain fit in the institutional capability to do so. But secondly, to have enough time and management capacity to do what we clearly need to do to accelerate growth to execute on Strategy 2030, where we have more headwinds than we had originally anticipated from a macro environment. We talked intensively about that in this call as well. So there's clearly work to be done, but we remain optimistic about that and to a great extent, also excited about the opportunity that the world still offers to our company. With that, I thank you for your interest and the great questions that you post. Have a great day. Operator: This concludes today's call. Thank you for joining. You may now disconnect.
Operator: Hello, everybody, and welcome to the Skillz Q3 2025 Earnings Conference Call. My name is [ Elliot ], and I'll be coordinating your call today. [Operator Instructions] I'll now hand over to Joe Jaffoni. Please go ahead. Joseph Jaffoni: This morning, Skillz issued its 2025 third quarter earnings release, which is available on the company's Investor Relations website. The company is in the process of completing its unaudited interim financial statements and other disclosures for the third quarter ended September 30, 2025. Accordingly, we are announcing preliminary results for the third quarter, which are based on currently available information and are subject to revision. Actual results may differ from these preliminary financial results and other financial information as final adjustments and developments may arise between now and the time the results are finalized. In the event the company determines it will not file its quarterly report on Form 10-Q by the prescribed deadline, it will file an extension on Form 12b-25 with the Securities and Exchange Commission, which may include further disclosure. The company is also completing the financial statements and other disclosures for the annual report on Form 10-K for the year ended December 31, 2024, and its quarterly reports on Form 10-Q for the 3 months ended March 31, 2025, and the 3 months ended June 30, 2025. We were unable to file our annual report on Form 10-K for the year ended December 31, 2024, and we have previously announced we received a notice from the NYSE that the company was not in compliance with its listing standards. The company is working diligently to complete the necessary work to file the Form 10-K as well as the quarterly reports on Form 10-Qs for the 3 months ended March 31, 2025, and the 3 and 6 months ended June 30, 2025, as soon as practical. The company expects to file the Form 10-K and Form 10-Qs by December 17, 2025, which is within the extension period provided to us by the New York Stock Exchange following our request for an additional extension period beyond the initial 6-month period granted by the notice. Additionally, the company intends to take the necessary steps to achieve compliance with the applicable New York Stock Exchange listing standards as soon as possible. Before I turn the call over to Founder and Chief Executive Officer of Skillz, Andrew Paradise, please note that management's comments today may include forward-looking statements within the meaning of federal securities laws. Forward-looking statements, which are usually identified by the use of words such as will, expect, should or other similar phrases are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Therefore, you should exercise caution in interpreting and relying on them. We refer you to the company's Securities and Exchange Commission filings for a more detailed discussion of the risks that could impact future operating results and financial condition. During the call, management will discuss non-GAAP financial measures, which it believes can be useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with generally accepted accounting principles. The reconciliation of these measures to the most directly comparable GAAP measures is available in the company's third quarter 2025 earnings release. With that, I'll turn the call over to Andrew for some opening remarks, followed by a review of the financial performance from the Chief Financial Officer of Skillz, Gaetano Franceschi, before we open the call for questions. Andrew? Andrew Paradise: Thank you, Joe, and good morning, everyone. I'll begin today's call with a review of the key Q3 quarterly results, which reflect the meaningful progress underway across Skillz and Aarki. Q3 GAAP revenue of $27 million grew 9% quarter-over-quarter, 11% year-over-year, supported by continued Aarki momentum and stability of the competition platform. Adjusted EBITDA loss of $12 million decreased 3% quarter-over-quarter and grew 15% year-over-year. Paying MAU of 155,000 grew 6% quarter-over-quarter and 28% year-over-year, driven by higher [ payor ] conversion rates and deeper monetization. We delivered quarterly sequential growth in what's typically a softer seasonal period, marked by higher additional traffic costs and competition for consumer attention during the fall sports season. Taking a look at our 4 business pillars, beginning with the first pillar, enhancing the platform for player and developer engagement. In the quarter, we launched an owned and operated title, Solitaire Skillz, which is showing early promise. The game serves as a testing ground for new features that we rolled out platform-wide. Importantly, Solitaire Skillz was developed in conjunction with third-party developers and represents the first title to come to market through our $75 million Developer Accelerator Program. This program continues to attract strong developer interest with additional titles in development that are expected to be showcased at the Game Developer Conference in March 2026. Some of these upcoming games will incorporate new technology that we believe will further energize our developer community. Switching to Aarki. The momentum from our ad tech business continued this quarter with accelerating revenue growth supported by new AI-driven product launches across the iOS and Android operating systems. Building on data models introduced last quarter, Aarki launched an iOS enabling privacy forward performance marketing. These new offerings are already driving measurable scale and efficiency, and we will continue to invest in Aarki's machine and deep learning capabilities to expand its addressable market and improve returns on spend for advertisers. Regarding our second pillar, up-leveling our organization. Our gains in operational efficiency across both the competition platform and Aarki businesses continue to improve, allowing us to more effectively leverage our people and resources. We continue to strengthen our global team, particularly with the expansion of our new India office, where we're hosting today's call. As it relates to our third pillar, go-to-market strategy and monetization, our focus remains on acquiring and retaining quality paying players while driving efficient monetization. Paying MAU improved again this quarter, reflecting stronger conversion amongst our existing player base, while total MAU declined modestly. This reflects our emphasis on engagement quality over volume. We continue to optimize customer acquisition costs and improve marketing efficiency supported by product level enhancements that strengthen monetization and retention. Together, these initiatives reinforce our go-to-market discipline, positioning the business for profitable scaling once we expand traffic more broadly. For our fourth pillar, path to profitability, Aarki's business continues to expand its advertiser base and improve yield with net revenue up more than 100% year-over-year and improving margins. With improvements in the competition platform, together with the ad tech business momentum, we continue to make progress on our path to profitability. Turning to an update on our fair play initiative. As discussed on previous calls, protecting players and preserving fair competition is core to our values. We continue to pursue litigation against Papaya and Voodoo games for their alleged use of bots, a practice we believe undermines consumer trust and harms the entire industry. We remain firm in our position as both the Papaya and Voodoo matters move through the litigation process. On October 28, 2025, Judge Cote in the Southern District of New York denied Papaya's motion for summary judgment as to Skillz claims against Papaya. The court also denied Papaya's motion to exclude Skillz survey and damages experts. I encourage you to read Judge Cote's now public decision in detail. While other motions are still pending before the court, the court's confirmation that Skillz claims against Papaya will proceed to a trial is a major step forward in our fair play initiative. Separately, I'd also like to address our dispute with Tether. As we disclosed in our 8-K filing, 2 of Tether's games, Solitaire Cube and 21 Blitz will remain on our platform for a period of up to 18 months following termination. During the post termination period, Skillz has the option but not the obligation to host paid competitions for these games on the company's platform. In our view, the alleged bought fraud from our competitors not only affects our players, but also how our developer partners are able to monetize and generate revenue in our ecosystem. We appreciate the developers who stood by us and weathered the issues caused by companies in our view engaged with bot fraud. With that being said, we remain committed to protecting the industry that we pioneered, and we anticipate our efforts to clean up the industry to be ultimately reflected in our financial performance. In closing, a key takeaway from today is that we're encouraged by the progress across both of our businesses. By combining our strengths in gaming and AI-driven ad tech, we're building a powerful foundation that can extend beyond gaming into adjacent verticals such as e-commerce, interactive entertainment and retail media, where performance marketing and content converge. The combination of a scaled competitive gaming platform and an AI-powered advertising technology solution uniquely positions Skillz and Aarki to capture long-term growth opportunities, and in doing so, enhance value for our shareholders. With that, I'll hand it over to our Chief Financial Officer, Gaetano Franceschi, for the financial review. Gaetano Franceschi: Thank you, Andrew. Our third quarter results demonstrate the benefits of disciplined execution and structural improvements across both Skillz and Aarki, producing stronger fundamentals and a clear trajectory toward profitability. Q3 GAAP revenue was $27 million, up from $25 million in Q2 2025 and $24 million in Q3 2024, representing 9% growth quarter-over-quarter and 11% year-over-year. Q3 paying MAU was 155,000, up from 146,000 in Q2 2025 and 121,000 in Q3 2024, representing 6% growth quarter-over-quarter and 28% year-over-year. On costs, R&D expenses of $5 million increased 15% year-over-year, reflecting ongoing investment in our competition platform and Aarki. Sales and marketing expenses of $17 million decreased 10% year-over-year, reflecting ongoing optimization of our user acquisition and engagement spend. G&A expenses of $17 million decreased 4% year-over-year, reflecting continued focus on expenses. Q3 net loss of $17 million improved 17% year-over-year. Q3 adjusted EBITDA loss was $12 million, down from a loss of $11 million in Q2 2025 and up from a loss of $14 million in Q3 2024, representing a 3% decrease quarter-over-quarter and 15% increase year-over-year. Our balance sheet remains healthy, and we continue to manage capital prudently as we progress toward sustained profitability. We ended Q3 with $213 million in cash, including $1 million of restricted cash and $129.7 million of total debt principal outstanding. With continued execution and operational focus, we expect Skillz to deliver meaningful long-term value for our shareholders as we execute with focus and discipline. Operator, we're now ready to open the line for questions. Operator: [Operator Instructions] Ladies and gentlemen, this concludes our Q&A and today's conference call. We'd like to thank you for your participation. You may now disconnect your lines.
Operator: Hello, and thank you for standing by. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to STERIS plc 2Q Fiscal 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Julie Winter, Vice President of Investor Relations. You may begin. Julie Winter: Thank you, Bella, and good morning, everyone. Speaking on today's call this morning will be Karen Burton, Senior Vice President and CFO; and Dan Carestio, our President and CEO. And I do have a few words of caution before we open for comments. This webcast contains time-sensitive information that is accurate only as of today. Any redistribution, retransmission or rebroadcast of this call without the express written consent of STERIS is strictly prohibited. Some of the statements made during this review are or may be considered forward-looking statements. Many important factors could cause actual results to differ materially from those in the forward-looking statements, including, without limitation, those risk factors described in STERIS' securities filings. The company does not undertake to update or revise any forward-looking statements as a result of new information or future events or developments. STERIS' SEC filings are available through the company and on our website. In addition, on today's call, non-GAAP financial measures, including adjusted earnings per diluted share, adjusted operating income, constant currency organic revenue growth and free cash flow will be used. Additional information regarding these measures, including definitions, is available in our press release as well as reconciliations between GAAP and non-GAAP financial measures. Non-GAAP financial measures are presented during this call with the intent of providing greater transparency to supplemental financial information used by management and the Board of Directors in their financial analysis and operational decision-making. With those cautions, I will hand the call over to Karen. Karen Burton: Thank you, Julie, and good morning, everyone. It is my pleasure to be with you this morning to review the highlights of our second quarter performance from continuing operations. For the second quarter, total as-reported revenue grew 10%. Constant currency organic revenue grew 9% in the quarter, driven by volume as well as 210 basis points of price. Gross margin for the quarter increased 60 basis points compared with the prior year to 44.3%. Positive price and productivity, primarily driven by volume, more than offset increased inflation and tariff costs. EBIT margin increased 90 basis points to 23.1% of revenue compared with the second quarter last year, mainly driven by operating expense leverage. The adjusted effective tax rate in the quarter was 24.5%. The year-over-year increase was driven primarily by changes in discrete item adjustments and geographic mix. Net income from continuing operations in the quarter was $244.5 million. Adjusted earnings per diluted share from continuing operations were $2.47, a 15% increase over the prior year. Capital expenditures for the first half of fiscal 2026 totaled $180.1 million and depreciation and amortization totaled $241.1 million. We ended the quarter with $1.9 billion in total debt. Gross to EBITDA at quarter end was approximately 1.2x. Free cash flow for the first half of fiscal 2026 was $527.7 million, a very strong start to the year, driven by the increase in earnings and improvements in working capital. With that, I will now turn the call over to Dan for his remarks. Daniel Carestio: Thanks, Karen, and good morning, everyone. Thank you for joining us to hear more about our second quarter and our increased outlook. Karen covered the quarter at a high level, so I will add some commentary on the segments. Starting with Healthcare. Constant currency organic revenue grew 9% in the second quarter, with growth across all categories. Service continued its streak of outperformance, growing 13% in the second quarter. Consumables also performed well with growth of 10%. Healthcare capital equipment revenue increased 4% in the quarter with backlog of over $400 million. Orders were up 3% year-to-date and down slightly in the second quarter. EBIT margins for Healthcare in the quarter increased 100 basis points to 25.1%, with volume, pricing, positive productivity and restructuring program benefits offsetting tariffs and inflation. Turning to AST. Constant currency organic revenue grew 7% for the quarter with 13% growth in services, offset by anticipated declines in capital equipment revenue. Services benefited from stable medical device volumes, bioprocessing demand and currency. EBIT margins for AST were 45.3%, up 250 basis points from second quarter last year as additional volume, pricing and less capital equipment in the mix were able to more than offset increases in labor and energy. Constant currency organic revenue increased 12% for Life Sciences in the quarter, driven by a return of capital equipment shipments with growth of 39%. Service revenues grew 9% and consumables increased 7%. Capital equipment backlog was up over 50% to $114 million. Margins declined 70 basis points as volume and price were more than offset by tariffs and inflation. From an earnings perspective, we grew the bottom line 15% in the quarter to $2.47 per diluted share. Included in that number is approximately $12 million of pretax tariff impact, which primarily impacted our Healthcare segment. Turning to our outlook for fiscal 2026. As noted in the press release, based on our first half outperformance and expectations for the balance of the year, we are increasing most elements of our outlook. We now anticipate approximately 8% to 9% as reported revenue growth, which reflects about 100 basis points of favorable currency, a significantly lower impact than we anticipated last quarter. Making up for the shift in currency impact, constant currency organic revenue growth is now expected to be 7% to 8%, an increase of 100 basis points from our prior outlook. This improvement was driven by our first half outperformance. We now expect all 3 segments to grow 7% to 8% on a constant currency organic basis for the year. For AST, we now expect services to grow 9% to 10%, which will be offset by anticipated declines in capital equipment, particularly versus the tough comparisons in the fourth quarter. We are also increasing our earnings outlook with a new range of $10.15 to $10.30. For your modeling purposes, we now expect EBIT margins to improve 10 to 20 basis points in fiscal 2026. This will be partially offset by a 50 basis point increase in our anticipated effective tax rate of approximately 24%. We are also increasing our outlook for free cash flow by $30 million to $850 million for fiscal 2026. CapEx remains unchanged at about $375 million. We are pleased with our strong start to the year, and we are confident in our ability to meet these revised expectations. That concludes our prepared remarks for the call. Julie, would you please give the instructions so that we can begin the Q&A. Julie Winter: Thank you, Karen and Dan, for your comments. Bella, can you please give the instructions for Q&A, and we can get started. Operator: [Operator Instructions] Your first question comes from the line of Brett Fishbin with KeyBanc Capital Markets. Brett Fishbin: Just wanted to start on AST. I was curious if you guys could comment a little bit on what drove the second consecutive quarter of double-digit growth in services. And then just how you're thinking about sustainability of trends in that area going forward? Daniel Carestio: Yes. Thanks, Brett. This is Dan. I think it's more or the same. We continue to see pretty stable volume from our medtech customers. We continue to see recovery in bioprocessing, which was a negative drain on us for some quarters a year or so ago. And in addition to that, we've had a number of expansions going into place over the last 4 years. And that investment is facilitating our growth. So we're very confident in the 9% to 10% outlook that we have going forward. There's still a little noise out there. We have seen some juxtaposition of customer volume in terms of manufacturing location, but not in a real meaningful way. So we feel pretty good about our global footprint and how that facilitates those needs. Brett Fishbin: All right. Perfect. And then just one more for me. I think in the press release, you mentioned that operating margins took a step up despite several headwinds. I think you mentioned tariffs and inflation on the call today. Maybe if you could just touch on any other items that you might have been referring to? And then how much of an offset you're kind of viewing those collective headwinds against the underlying margin expansion? Karen Burton: So as you noted, we are referring to tariffs and inflation, both labor and material. Brett Fishbin: Okay. Sorry, is there like any way to maybe approximate like how much those headwinds represented as an offset in the quarter to margins? Karen Burton: The -- yes, tariffs in the quarter were 90 basis points and material inflation was -- material and labor inflation was about 130 basis points across the company. Operator: Your next question comes from the line of Patrick Wood with Morgan Stanley. Patrick Wood: Beautiful. Two quick ones. I guess, the first one, Healthcare on the service side also was very strong. What are you seeing there? Could you unpack that a little bit for us? Daniel Carestio: Yes. I mean a couple of things. Our service business in Healthcare is obviously our traditional rents turning service on our equipment and install work that we do that goes along with our capital. But there's a much larger component of that, that goes into our IMS repair business and then processing of instruments where we operate as a service. So volumes are strong. We've been doing very well for the last, I don't know, 5, 6 quarters, I would say, with double-digit growth. Some of that, we have said all along that, that's an area of the business that we're able to get price, and we have been able to get price because of the justification of significant labor increases that were going on for a number of years. And -- but as that has normalized, those things, you're going to see -- I believe what we're going to see is a bit of a slowdown from 12%, 13% to something less than that, but we are also going to see a coinciding slowdown in labor cost. So it's -- it should not affect the overall margin, but will slow down the top line a bit. Patrick Wood: I got you. That makes sense. I guess one more, which is basically like on the modality side like X-ray, could you give us a sense of how that's contributed to growth? It's obviously an exciting modality. Daniel Carestio: Yes, we're very excited about it. We don't break out the technologies. Just -- it will become just a math exercise that we'd have to keep up with, that's not worth pursuing. We look at radiation as one technology and dose is dose. And we use gamma and we use e-beam and we use x-ray. And although we're incredibly excited about X-ray, and that's a lot of the expansion capacity that we've built out, it's just one tool in our bag. Operator: Your next question comes from the line of Jason Bednar with Piper Sandler. Jason Bednar: Congrats on another strong quarter here. I heard you on the updated outlook for the segment, and I appreciate the breakout of the service growth in AST. Wondering if you're willing to give maybe a similar perspective on the outlook for some of those Healthcare subsegments. Dan, I just heard you on service there, maybe detailing a little bit as maybe price comes off. But what about like consumables versus equipment? Any way to give a little bit of color there, rack and stack, help service top, consumables next, equipment bottom on kind of the growth. Anything there would be great. Daniel Carestio: Yes. I mean we would -- I mean you can do the basic analysis, and we consider our consumable business to grow on sort of the share we've gained in the history and procedure rate, right? And so I would expect that trend of good performance to continue. On capital, we're sitting on a huge backlog number right now, over $400 million in Healthcare capital. And our order rate remains strong. That comes down to really timing of shipments. We feel pretty good about the next 2 quarters, although we've got some tough comps in Healthcare capital. So it's hard to say specifically. What we're confident is that we're in a good position. But if you have to put a gun to my head, I would say service is probably going to be near the top, consumable second. And capital is going to grow, it's going to do fine, and it's kind of a bit of a wildcard in terms of timing. Jason Bednar: Okay. That's very helpful. And then, Karen, you're already at $530 million in free cash flow this year. Really impressive so far, but you typically generate far more free cash in the second half of your fiscal years. So is this just an abnormal year? When I look at the -- your updated guidance, I like the raise, but is this just an abnormal year where you get more cash generation in the front end of the year and you've maybe had some things shift out of second half or pulled forward from second half into first half? Or is the guidance just really conservative here for the full year? Karen Burton: So I would say that we have seen stronger first half cash flow than is typical. The -- pulling the earnings a little bit forward into the first half is a contributor. We've also had some meaningful improvements in working capital, faster collections on those late fiscal '25 shipments. So I think the answer is all of the above. As you mentioned, it's stronger earnings earlier in the year, improvements in working capital earlier in the year and a little bit of cautiousness. Operator: Your next question comes from the line of Mike Matson with Needham. Michael Matson: So just in terms of the Healthcare business, I mean, I know you kind of broke it out into the capital service and consumables. But I'm just wondering if you could give us any more detail around geographies, types of customers, hospitals versus ASCs, product lines, et cetera, that are driving the growth there. Is it pretty strong across the board? Are there any areas of those things where you would call out you're seeing particular strength? Daniel Carestio: Not really. I mean, we're seeing pretty good strength across the globe in terms of geographic and there still seems to be a lot of procedures going on and particularly strong in the U.S. more so than other places, but we're starting to see recovery in other places as well. So no, there's nothing I would call out specifically. Michael Matson: Okay. And then for AST, can you just give us an update on your capacity there? And are you currently capacity constrained? And if so, how fast can you address this? I think you've said earlier in this call that you are expanding capacity there. Daniel Carestio: Yes. It's a long process to expand capacity. In AST, from the time we decided to build a plant at the time its operational, it can be 2 to 3 years. So we have a number of expansions that have been completed. We have a number that are in process, and we have a number that are planned out into the future. And we've been pretty steadily bringing new capacity into the market now for the last 8 years. So we're in a good position in most geographies, if not all geographies of the world right now in terms of where we've added capacity to facilitate plants that are nearing their limit of capacity. Operator: Your last question comes from the line of Michael Polark with Wolfe Research. Michael Polark: I will say I forget what the record is for prepared remarks, but 9 minutes was pretty good again. So kudos. I got two big picture ones. Life Sciences, some growth mojo back, 12% in the quarter. Obviously, the comps are easy and capital equipment is up big off of a low base, but nevertheless, 12%. My question is thematic, this notion of reshoring, hearing about a little bit pharmas biotechs bringing, their manufacturing partners bringing manufacturing back towards the U.S. What do you think on this? Do you see any evidence that it's helpful so far here, anecdote that it could be helpful for you? What is the state of this theme for your exposure in this space? Daniel Carestio: Thanks, Michael. Yes, any -- in general, any time we see our large pharma customers moving or expanding capacity in manufacturing locations, whether that's new greenfields or whether that's existing sites, that generally bodes well for our capital equipment business. And there's probably more noise than there's substance to the amount of redistribution or construction of pharma at this point. But there is some. It is real. And I do believe we are getting maybe some benefit from that on the GMP side or the pharma side of our capital equipment. It's also, like you said, it's -- we're comparing against some pretty significant troughs when there was nothing going on in pharma for almost 18 months in terms of that type of work. Michael Polark: The other one is in Healthcare, and I've been asked this once or twice a year for a good number of years running, but it's the topic of single-use scopes. And obviously, this is a function of your Cantel exposure. Like what is the state of that trend today? Has it really not lived up to what was once believed to be high expectations or those products are getting some traction? It's just small and therefore, not all that significant. I know once upon a time, not long ago, you talked about launching your own single-use scope. Maybe that's been a helpful offset. But what are you seeing there over the last year or 2? And what's on the horizon over the next year or 2? Daniel Carestio: Yes. I think what I would say and what we've been consistent in our messaging is that there is a place for single-use scopes, especially as it relates to small diameter scopes. So think of hysteroscopy, ureteroscopes, different nasogastric scopes, things like that, bronchoscopes. But the bulk of the business we have at STERIS in terms of everything that we do has to do with the large diameter scopes that you would use for colonoscopies. And the reason why it makes sense for the small diameter scopes is the cost -- the break frequency and the relative cost to fix them is pretty high versus when you look at large diameter scopes, they tend to be much more robust. They last a long time. They also cost a lot more upfront. So we've said all along, there's a place for certain aspects of disposable. And I think if you look a lot of the disposable scope manufacturers are highly focused on the small diameter scopes. And some of you even announced that they're not focusing at all on large diameter scopes for colonoscopy. Operator: That concludes our Q&A session. I will now turn the call back over to Julie Winter for closing remarks. Julie Winter: Thank you, everyone, for taking the time to join us this morning to learn more about our performance in the quarter and our outlook for the year. We look forward to seeing many of you on the road later this. Operator: Ladies and gentlemen, thank you all for joining, and you may now disconnect. Everyone, have a great day.
Operator: Good morning. Thank you for attending the Aspen Aerogels Inc. Q3 2025 Financial Results Call. [Operator Instructions] I would now like to turn the conference over to your host, Neal Baranosky, Aspen's Senior Director, Head of Investor Relations and Corporate Strategy. Thank you. You may proceed, Mr. Baranosky. Neal Baranosky: Thank you, Micai. Good morning, and thank you for joining us for the Aspen Aerogels Third Quarter 2025 Financial Results Conference Call. With us today are Don Young, President and CEO; and Grant Thoele, Chief Financial Officer and Treasurer. The press release announcing Aspen's financial results and business developments and the slide deck that will accompany our conversation today are available on the Investors section of Aspen's website, www.aerogel.com. During this call, we will refer to non-GAAP financial measures, including adjusted EBITDA and adjusted net income. The reconciliations between GAAP and non-GAAP measures are included in the back of the slide presentation and earnings release. On today's call, management will make forward-looking statements about our expectations. These statements are subject to risks and uncertainties that could cause our actual results to differ materially. These risks and uncertainties include the factors identified in our filings with the SEC. Please review the disclaimer statements on Page 1 of the slide deck as the content of our call will be governed by this language. I'd also like to note that from time to time in connection with the vesting of restricted stock units and/or stock options issued under our long-term equity incentive program, we expect that our Section 16 officer will file Form 4 to report the sale and/or withholding of shares in order to cover the payment of taxes and/or the exercise price of options. Our CEO, Don Young, has established a prearranged Rule 10b5-1 plan to sell a limited number of shares for tax purposes in connection with a onetime personal real estate transaction. I'll now turn the call over to Don. Don? Donald Young: Thanks, Neal. Good morning, everyone. Thank you for joining us for our Q3 2025 earnings call. My comments will cover the introduction of 2 new members of the leadership team, the unsettled commercial environment for electric vehicles, an update on our energy industrial segment, a discussion of the versatility of our flexible Aerogel blanket, as we target adjacent markets, the announcement of the design award from a major European automotive OEM and the beginning of the ramp for ACC, a lot to cover. Grant Thoele, our new CFO, will amplify these points with his comments. We look forward to your questions. At the time of our last earnings call, we announced that Grant would assume the role of CFO effective October 1. Grant joined Aspen in 2021 and has been a key architect of our corporate finance and strategy functions. He brings to the CFO position an important blend of operational depth and transactional experience. After 3 years at KPMG, Grant gained experience in operations and business integration at Learfield Sports and in optimizing financial performance and capital structures during his time at Providence Equity Partners. His experience and disciplined approach will serve Aspen well as we execute the next phase of growth and value creation. I'm also pleased to welcome Glenn Deegan, our new Chief Administrative Officer. This new position for Aspen combined into a single role, the Chief Legal Officer and Chief Human Resource Officer responsibilities. Glenn brings more than 25 years of legal, HR and transactional leadership with deep experience guiding organizations through complex M&A, governance and integration initiatives. He joins Aspen from Altra Industrial Motion Corporation, a $2 billion global leader in motion control and automation products, where he served as Chief Legal and Human Resources Officer. Glenn play a pivotal role in major strategic transactions, including Altra's $4.95 billion acquisition by Regal Rexnord Corporation in 2023. His experience in successfully integrating companies and aligning people, culture and governance through transformational change will be invaluable. We welcome Grant and Glenn to their new positions. Our core objective is to build a strong, profitable, capital-efficient business. The focus during the first 3 quarters of 2025 was to streamline and simplify the organization to optimize our cost structure, build resilience and drive profitability, and of course, to prepare for the rapidly changing North American EV environment. North American EV sales in Q3 were at record levels, powered by the pull forward of demand in response to pending changes to rebate incentives and regulatory standards. GM grew U.S. market share during the quarter to 16.5%, second only to Tesla. During October, however, GM shifted gears and significantly ramped down its EV production rates. We expect GM and other EV OEMs to align production rates according to consumer demand based on the new market conditions. GM has suggested that it will determine the natural demand for EVs early in 2026. We believe EV growth for GM and other OEMs will start again from that reset number. Despite these market headwinds, we do see brighter spots for our PyroThin thermal barrier segment. In October, we won a battery design award from a major European OEM, an account with great promise and the potential to ramp in 2027. We anticipate naming the company at the time of our next business update. In addition, we are seeing signs that another European customer, ACC, is preparing to wrap its battery cell production in 2026. As a reminder, ACC was created to serve the European EV market with high-volume, high-quality lithium-ion battery cells and is strategic to Aspen because it is owned in part by Stellantis and Mercedes-Benz, both companies important to Aspen as we seek to ramp our business in Europe in 2026 and 2027. And one other brighter spot, on-shoring and near-shoring in response to shifting trade policy and geopolitics are creating advantages to companies such as Aspen who can provide high-performance, domestically produced solutions. Proximity enhances our ability to support new opportunities with our existing BEV and EI customers and is opening the door to adjacent market opportunities. An example of the latter is battery energy storage systems or BES, where 2 powerful shifts, 1 technical and 1 policy driven are converging to open a new opportunity for Aspen. To improve economics and pack more energy into the same footprint, best developers are moving to higher-density LFP designs, essentially applying EV style engineering to grid-scale storage. And by doing so, creating the same thermal propagation challenges that we have already helped the EV industry to solve. Our PyroThin thermal barrier technology with its extremely low thermal connectivity, excellent fire resistance and minimal thickness is exactly what developers need as they compress thousands of cells into a single rack or modular. On the policy-driven side, domestic content rules are making local sourcing, both a supply chain preference and a financial incentive. We are working with 2 large advanced energy storage battery and system technology companies on near-term opportunities to supply PyroThin thermal barriers where the battery modules support the rising demand from data centers, grid infrastructure and other high reliability applications. We are also pursuing a range of high-impact electrification projects from carbon capture to pressure geothermal where asset owners are seeking low carbon solutions for site-specific power generation. Again, we are well positioned to serve their thermal management needs with high-performance domestically produced solutions. Our Energy Industrial segment cannot make up for the volatile EV revenue in the near term, but we do see this segment stabilized and beginning to grow again. Our Energy Industrial revenue this year has largely consisted of baseload maintenance work. Project-oriented revenue has been lacking in 2025 after record performance in 2023 and 2024. We see activity levels, strengthening across the board and anticipate a healthy growth year for Energy Industrial in 2026. We see subsea opportunities in the backlogs of key customers that we expect will generate subsea project revenue for us in 2026. We are quoting subsea project work with potential revenue exceeding $80 million over the next 3 years, including $15 million to $20 million in 2026. And on the LNG side, we will supply Cryogel to the Venture Global CP2 LNG project in Cameron Parish, Louisiana during the first half of 2026. Again, we anticipate a strong growth year in 2026 for the Energy Industrial segment and a return to a trajectory towards a robust $200 million Energy Industrial business in the years to come. As part of our long-term growth strategy, we are executing a disciplined initiative to diversify into markets adjacent to our core battery and Energy Industrial businesses. In addition to the battery energy storage systems and electrification opportunities described above, our team is focused on other potential adjacencies based on commercial potential, speed to market, product differentiation and the ability to leverage our existing manufacturing platform. We believe the diversify and broaden Aspen's addressable market and contribute revenue levels beginning in 2026. The initiative reinforces our commitment to innovation-driven growth and enduring shareholder value. Grant, over to you. Grant Thoele: Thanks, Don, and good morning to everyone joining us today. I plan to cover Q3 financial highlights, our Q4 and fiscal year 2025 outlook, along with the financial framework and long-term strategic positioning. Looking at Slide 3. Q3 revenue landed at $73 million, a decline of $5 million or 6% quarter-over-quarter, driven by Thermal Barrier revenues softening 12% from Q2 to $48.7 million. This was partially offset by a 7% increase in Energy Industrial revenues to $24.3 million, representing a stabilization of our EI segment from the recent low in Q2. Gross profit of $20.8 million decreased by 18% quarter-over-quarter, predominantly driven by less volume to absorb fixed costs at our manufacturing facilities. Gross margin of 28.5% declined from 32.4% last quarter. We adjusted our production schedules in Q3. However, we won't see the benefit of more efficient manufacturing operation until Q4. Ultimately, lower EV volumes drove the majority of the decline in combination with increased scrap rates in preparation for ACC's volume ramp over the next few quarters. We saw this dynamic with our successful ramp of GM at the beginning of serial production. Thermal Barrier segment gross margin was burdened by fixed costs and onetime scrap charges, resulting in 24% gross margin for the quarter down from 31% in Q2. Segment gross margin for Energy Industrial landed at 36%, in line with Q2 and above our company target of 35%. We lowered our OpEx rate, excluding onetime items from impairments and restructuring charges from $24.6 million in Q2 to $22.6 million in Q3. We will continue to look for opportunities to streamline and simplify our operations to further reduce this run rate in the coming quarters. Adjusted EBITDA declined by $3.5 million quarter-over-quarter to $6.3 million in Q3. In terms of Q3 cash flow, we had a favorable working capital of $12 million due to supply chain and inventory optimization efforts, lowered CapEx spend below $10 million, opportunistically paid down $14.8 million on our revolver to lower interest expense and paid down quarterly amortization on our term loan for $6.5 million. We ended Q3 with $152.4 million in cash and equivalents. Next, let's turn to Slide 4 to review our Q4 outlook. Over the past few months, the administration has removed CARB waivers and penalties for CAFE standards, and we expect similar actions regarding EPA rules. These regulatory shifts have occurred faster than originally anticipated. As a result, supply side incentives are no longer driving portions of EV production, leading consumer adoption and demand as the primary forces influencing how many vehicles reach dealer lots. GM and other OEMs are clearly taking decisive actions to align production with current consumer demand. Workforce reductions, capacity adjustments and temporary plant closures underscore that the near-term environment remains uncertain and difficult to forecast. GM has indicated that it expects to determine the natural level of EV demand early in 2026 and is recalibrating production accordingly. While this represents a meaningful step down from prior growth expectations, we believe EV volumes will begin to grow again from this lower base. For the fourth quarter, we currently expect total revenue between $40 million to $50 million. We anticipate the mix between our segments to be grounded in approximately $25 million for the Energy Industrial business with more variability in the Thermal Barrier segment. It's worth noting over the past few weeks, we've seen GM demand erode, leading to a higher degree of uncertainty. Additionally, the mix between segments is important to overall profitability given different unit economics of each business. With $40 million to $50 million of revenues for Q4, we'd expect between negative $14 million to negative $6 million of adjusted EBITDA, respectively. Given our new Q4 outlook and the resulting impacts on liquidity, we are engaging with our lenders at MidCap for near-term covenant relief. It's worth noting we have over $150 million of cash as of September 30, representing a strong net cash position. When taking our year-to-date actuals and Q4 guide, revenue could range from $270 million to $280 million, with adjusted EBITDA of $7 million to $15 million for the year. In October, Q4 volumes declined below our previous guidance assumptions in August. It's clear that OEM reactions to a deregulated environment have accelerated beyond prior expectations. When bridging to our prior outlook, by far and above the driving factor and lower expected full year results is driven by EV market headwinds, combined with a less favorable product mix, which results in higher material costs on average for 2025. We now believe that the fourth quarter adjusted EBITDA levels are representative of our go-forward cost structure. Several onetime items in this quarter have temporarily impacted profitability and actions have already been taken to improve our breakeven threshold. Material cost as a percentage of revenue in the second half of 2025 were slightly higher than our go-forward run rate due to shifting production between East Providence and our external manufacturing facility. Projects tied to cost reductions at our manufacturing sites, primarily production optimization and yield improvements will begin to materialize in 2026 and 2027. We also expect our operating expense run rate to level out between $20 million and $22 million with additional savings opportunities tied to the implementation of our company-wide ERP system and synergies from integrating our Mexico facility. As a result, we believe we can achieve adjusted EBITDA breakeven approximately at $200 million of annual revenue with line of sight to further improvements as we move throughout 2026. We expect to end the year with $25 million of CapEx, excluding Plant 2 or approximately $5 million of spend in Q4. In regards to Plant 2, we continue to pursue buyers for the property and equipment. We expect equipment sales to begin trickling in within Q4 and over the next few quarters, while the building sale has a longer tail over the course of 2026. Turning to Slide 5. As we look ahead to 2026, I'd like to outline how our financials could perform at various volume levels within our core business. It won't come as a surprise that there remains a wide range of potential outcomes on the EV thermal barrier segment. While we have stronger confidence that the Energy Industrial segment will return to growth next year. We continue to pull every operational and financial lever available to ensure the business remains stable and efficient. The EV landscape continues to evolve. And while we use IHS forecast and customer provided volumes as key inputs, we apply our own insights, scenario analysis and appropriate discounts to those forecasts to model and plan for various production scenarios. When we think about GM, their recent public statements suggest that the volumes we're seeing in Q4 likely represent a floor for production levels based on their current EV portfolio. GM has been clear that the EV demand will be soft through early 2026 as the market resets to a more natural level of consumer demand following the end of incentives. Importantly, GM is better positioned than many OEMs. They've gained U.S. market share, maintained pricing discipline with fewer incentives and remained highly committed to EVs as a strategic priority. From this lower base, we expect GM's production to rebuild as demand normalizes and the company continues to expand its EV portfolio. The IHS current forecast for 2026 has GM delivering approximately 175,000 Ultium vehicles. Assuming $10 million to $15 million of other OEM revenues, we could potentially generate approximately $135 million of revenue at full IHS volumes for the Thermal Barrier segment. However, given the degree of uncertainty that we see in the market today, it would be prudent to take a significant discount to IHS volumes. As a reminder, with our expected cost structure in 2026 and after crossing the breakeven adjusted EBITDA threshold at $200 million revenue, we expect to drop approximately $0.50 to $0.60 to the bottom line on every dollar of additional revenue. With operating cash flow tied to revenue and growth levels, we project a total of $45 million in cash outflows from investing and financing activities or approximately $10 million of CapEx and $35 million of debt payments in 2026. From where we sit today, we believe we can maintain over $100 million of cash on our balance sheet at the end of 2026 when assuming breakeven adjusted EBITDA. Looking even further out at our core markets, 2027 introduces European EV customers ramping up, along with continued healthy growth for the Energy Industrial business. We believe we can return to growth in 2027, supported by awarded European EV customer forecast that have the potential to generate over $150 million of revenue in 2027 at full volumes. Along with GM growing off its 2026 EV reset, continued growth in Energy Industrial and untapped adjacency revenue. Lastly, I'll build on Don's comments around our strategy going forward. As we look to Aspen today, our focus is on unlocking the full potential of our aerogel technology, the foundation of our differentiation. It's a platform that has high barriers to entry, a deep IP moat and strong sustainability tailwinds. Over the past few years, we've aggressively pursued capturing the EV opportunity, and in doing so, have greatly improved our technology, manufacturing capabilities and footprint. In addition to strengthening our core markets and optimizing our capital structure, we are laser-focused on expanding Aspen's strategic optionality to accelerate growth, unlocking new verticals and long-term value creation. Our Aerogel products currently serve 2 core markets with a highly specialized value proposition, but we see a much larger opportunity ahead that helps drive our strategy, including expanding our aerogel technology platform into adjacent markets and enhancing Aerogel performance with complementary specialty materials. In order to execute this strategy, we'll explore strategic partnerships, pursue organic and inorganic opportunities by canvassing the landscape of specialty materials companies and taken all of the above approach to broaden our portfolio offering with high-value products at accretive margins. We believe our Aerogel technology platform provides a springboard into new addressable markets within Specialty Materials that share our focus on lightweight, thermal management and sustainability. By broadening our capabilities with a specialty materials platform anchored on Aerogel, we opened the door to solving mission-critical problems for our customers. Think energy storage materials, advanced composites and thermal interface and fire protection systems, all solutions that expand our relevance across diversified markets. As I step into the CFO role and look ahead, my focus is on ensuring that our strategy is matched by disciplined execution and thoughtful capital allocation. I'm challenging the organization to think boldly, act strategically and relentlessly pursue new opportunities that expand our impact and deliver long-term value for Aspen and its shareholders. Don, over to you. Donald Young: Thank you, Grant. Before we move to Q&A, I would like to reinforce a couple of key points. These are clearly trying times for EV OEMs and companies such as Aspen. We have been forced to change our expectations after 3 years of significant revenue growth and margin expansion. We continue to believe that electric vehicles have a significant role to play and that EV demand will reset at a lower market share and then resume a growth trajectory. Our Energy Industrial business is well positioned for a policy approach in the United States that promotes an intensified focus on energy and power generation. We anticipate that the segment will have a strong revenue growth trajectory in 2026 and beyond. The work on adjacent markets leverages our valuable technology and products as we diversify and expand our end markets. Overall, we have designed Aspen with a lean operating cost structure in order to generate substantial profits from incremental growth. Operator, let's turn to Q&A, please. Operator: [Operator Instructions] Our first question is from the line of Eric Stine with Craig Hull. Eric Stine: So first, I guess I just want to touch on the EBITDA breakeven the $200 million, the level that you are looking to get to. If I do the math there, it looks like you would be targeting kind of mid-20s gross margin, given where your OpEx -- you think your OpEx goes to and if you're expecting EV weakness likely, even though it will maybe improve, but weakness in the first half, I would think that the margins suffer a fair amount. And so I'm just trying to figure out how -- what are the puts and takes to get to that level where you can be breakeven at $50 million? I mean, are there additional steps to be had or maybe thoughts there would be great. Grant Thoele: Yes, sure. I'll take that one, Eric. I think overall, we've taken decisive action over the course of 2025 and have significantly reduced our overall fixed cost run rate. I think that some of those changes are also materializing over the next few quarters. There's certain -- in terms of production capacity, production yield improvements that are planned projects that have a targeted kind of return that will happen within the first half of next year. And overall, the mix is very important to that breakeven level. That is kind of a disclaimer on it. The more thermal barrier, the better in terms of achieving that breakeven EBITDA threshold sooner. But overall, we see your overall thought on the first half of the year, EV being soft is kind of directionally in line with where we're thinking it is. Eric Stine: So I mean it sounds like this is not -- I mean, you're not trying to communicate that this is a run rate you think you're at or a level you're at entering the year. It sounds like this is more of a second half level that you get to because some of the things that you had planned and that hopefully, we're going to have some impact here in late '25 or more now '26 events? Grant Thoele: Yes. And I think that they will materialize in the beginning of 2026. There's just some of the -- more of the production kind of yield improvements and projects that are tied to the plant that will be kind of that mid 2026 time frame. Donald Young: Sorry, Eric, I was just going to add. You know that we've taken actions through the year, including in the third quarter. And I think those will be more clearly reflected as we get into Q1 of next year as they filter their way through the income statement. Eric Stine: Okay. Got it. But no -- it's nothing -- you're not necessarily signaling additional steps. I suppose you could take those if needed, but not it's really kind of what's already in motion that gets you to that level. Donald Young: Correct, correct. Eric Stine: Maybe just Energy Industrial, I mean, clearly more optimistic on that. It's been, I think, a pretty weak first 3 quarters here. But when you're talking about a resumption of growth and back on the trajectory to $200 million, just curious based on what you see the LNG project for CP2, some of the other things? I mean, what -- any thoughts on magnitude of what that growth could be in '26 again to get back to those higher levels? Donald Young: Well, we've been producing here in the mid-20s basically off of our baseload maintenance work and very, very little project work through the period. We do believe that we have an opportunity in the subsea business to be in that $15 million range in 2026. Again, a big uptick from this year. But really, if you look out over the course of 5-plus years, that's a fairly normal level for us. Of course, we had big record years, $25 million, $35 million in 2023 and 2024. So that's definitely part of it. We also just -- we're seeing the LNG project that I referred to and other activities give us a nice little boost there. So I think you will see contribution from projects. I also think we have the ability to grow that baseload maintenance work. There have not been a lot of turnarounds in refineries this year to date. They're operating at pretty large spreads, and I think they've been reluctant to do some of the normal maintenance, but that is inevitable, and we think we'll see that as we enter into 2026. So a combination of our baseload maintenance growth and add some project activity on top of that, and we feel like as we call it a healthy growth year for 2026. Eric Stine: Okay. Maybe just last one for me. I mean so many questions to ask about the EV space. But maybe just clarity on, you mentioned as much as you can provide on the battery manufacturing coming out of Europe. Stellantis, Mercedes, what kind of contribution could that potentially make in '26? Grant Thoele: Overall, we're seeing the European OEMs would be between that kind of $10 million to $15 million range in 2026. We're obviously taking a discount to the volumes that they have provided. And so that could fluctuate. We're bullish on the European EV market kind of compared to the North American market as of right now. Operator: [Operator Instructions] The next question is from the line of Colin Rusch with Oppenheimer. Colin Rusch: Do you have a sense of where channel inventories are at this point with the pull-through in the September quarter and kind of initial sales in October with GM. Does it still feel like you need to do some channel correction here? Or do you feel like the channel is fully cleaned out? Donald Young: We've made progress, Colin, for sure, and moving products through distribution. Again, it's not perfectly transparent for us. But we know that it has improved markedly from earlier this year. Colin Rusch: Okay. That's helpful. And then on the stationery storage side, obviously, there's a very, very large pool of demand that's happening there and the duty cycles that those systems are going to engage in are intensifying and diversifying. I want to just get a sense of what you guys are seeing from a demand perspective and the design perspective on that because that looks like an opportunity that may emerge sooner than later to be honest. Donald Young: Colin, it's been an interesting push for us as we think about what we refer to as these adjacent kinds of markets a little off to the side of our core market, which we consider this to be exactly that. And what has been beneficial to us is not only the domestic supply incentive aspect of it. But at a technical level, we have seen the battery cells move to a higher-density LFP format. Again, as I said in my prepared comments, really using sort of EV engineering at grid level scale. And that feeds very neatly into our thermal barrier work. And we have made substantial progress in working with 2 large companies to date. And we believe that we will have this part of our business contribute to our 2026 revenue in a notable way. Operator: The next question is from the line of Ryan Pfingst with B. Riley. Ryan Pfingst: I'm bouncing around Colin's, so apologies if this was already covered. But is the new European OEM award, is that a platform award? And could you give some sense of the potential volumes that we could see there in '27 or maybe '28 when it's more fully ramped. Grant Thoele: Yes. I'll take that one, Ryan. I think that it's not necessarily a platform. I believe it's kind of a model approach. And it will be in 2027. And the magnitude is reflected and kind of that $150 million European OEM revenue that I citied kind of in my script here, that is at full volumes, and it's inclusive of this award. And so the discount to that, even taking $50 million to $75 million of that would be really, really beneficial to our P&L, considering we already have the fixed cost and the manufacturing in place to achieve that revenue level. Ryan Pfingst: Appreciate that. And then shifting gears. Battery storage sounds like an exciting adjacent market opportunity. Curious what some of the other applications are that you're looking at? Is there anything in the data center world that could be interesting for your technology just given the insulation aspect? Donald Young: Well, Ryan, these battery modules are supporting data centers that are coming out of it. These are site-specific energy storage systems. And so we are participating at it from that angle at this point. You asked about -- I believe you were asking a bit about other potential adjacencies. And look, we've got a team working on it. You're very familiar with the building and construction market that we had pursued earlier. And that's one of the businesses that we want to have just the right partner for. And we believe that we can have that contribute to our revenue and again, diversify our markets. We built that into a multimillion-dollar business back in the late teens, and we are planning to resume that as well, just as another example. Operator: The next question is from the line of David Anderson with Barclays. John Anderson: I was trying to get a little bit better handle on kind of where you see kind of overall GM to include bolt in there, kind of where the numbers look like they could bottom out in the first quarter just in terms of the overall volumes of vehicles. I'm looking at the IHS numbers, which just seen just completely wrong. I mean it doesn't make any sense to me of what they're showing. In fact, they actually raised their numbers on '26 this past quarter. So I'm trying to understand, I almost have to kind of push that aside. Where do you think we kind of bottom? I know they're kind of guiding like 40,000 cars in kind of 4Q. But realistically, where do you think we've bottomed in the first quarter? And how much could you see that growth throughout the year? Donald Young: Look, it's definitely an uncertain moment in time. I mean I'm a little reluctant to try to give an exact number. We do discount the IHS numbers in our own planning. We take other inputs as well, including from our customers themselves. And we try to triangulate really around those kind of numbers. So Dave, I'm just reluctant to project at this point what we think GM is going to do in Q1. Grant Thoele: And I think just to add to that, David, is it -- sorry go ahead. John Anderson: No, no, no. I was going to say if you still think that first quarter would be the bottom, is that the right way directionally to think about it, at least? . Donald Young: Well, we think somewhere here in Q4, Q1 will -- and GM has said this, that they expect to let me say, know where they are from a demand point of view in this new environment in early 2026. And so that leads me to believe that Q4, Q1 is clearly the bottom, especially after the demand pull forward that people experienced in August and September, leading into the October 1 day. John Anderson: That makes a lot of sense. I'm just curious, as you start building on the European side, the design of the batteries in terms of your thermal barrier how that fits in there in terms of, say, revenue per unit. How does that look in Europe versus the U.S.? Is it the same? Is it a little less, a little more? How should we think about that as you build out that side of the business? Grant Thoele: Yes. Most of the European OEMs are prismatic. And kind of the CPV on that has historically been between kind of that $250 to $350 million mark. So obviously, different than [indiscernible]. John Anderson: Okay. And then, Don, I want to go back to the battery storage. A few years ago, you guys were talking about getting the battery architecture side of using some of your technology and what you've used to build Aerogels, look at some of the -- I believe it was on the cathode side that you were looking to add into. Is any -- the discussion you're having today, is any of that part of it? Or are you just talking about the thermal barrier part. And I was wondering if you could also dig into that a little bit more on the battery surge. I've never heard of thermal runaway being an issue. In fact, I never heard about thermal runway twice sort of talking to you. But I haven't heard that doing an issue in like the larger battery storage side because I always thought it was part of the cycle, cycling up and down, and maybe that's what's happening here. If you could kind of dig into that a little bit about kind of where you fit in there? Because I was surprised to hear about that sort of a new side of the story. Donald Young: Yes. These are akin to our PyroThin thermal barriers, Dave. And what is changing, I think, from a technology point of view, is that they are moving to higher density cells, and that is creating concern around thermal propagation or thermal runaway, which we address in slowing the propagation and controlling that. There's also some policy aspect to this as well, which these projects have incentives to have domestic supply. And again, we contribute to that as well. So it's really a combination of our technology and that those policy changes or incentives, I guess, I would say, that are benefiting us in this space. So we're good at making these materials, we're really expert in helping them design around our materials, and there are -- they are trying to get as much density and as many cells into a limited amount of space as they can. And again, that suits us very well. Grant Thoele: I think the only thing I'd add to that is that we have -- we already have the infrastructure in place to deliver that for that entire opportunity, right? It's very -- it's like-for-like with our current thermal barriers. And so we already have the production, the capabilities and really it's kind of tooling to get that. So I think that's a key point that it's -- there's not a ton of capital investment required to kind of get to this opportunity. Operator: The next question is from the line of Leanne Hayden with Canaccord Genuity. Leanne Hayden: Just to start, I'm curious given lower EV -- just given lower EV demand levels, how do you think about leveraging capacity out of your Rhode Island facility versus outsourcing to your external manufacturing partner? Grant Thoele: That's a good question. I think that, really, this is on -- this comes down to a regional basis, right? We want to do what's best for allocating profits accordingly between the production facilities. As of right now, we have capacity we can use in both our East Providence plant and our external manufacturing partner. And it just comes down to whether it's domestic or international, we have the capabilities at both facilities to kind of deliver on the demand. . Leanne Hayden: Okay. And I noticed you're targeting decreasing CapEx into the fourth quarter and into next year. Curious how long you think you can maintain these lower levels? Grant Thoele: I think that the one kind of caveat to that is there are certain programs that we are quoting right now that could require a little bit more capital investment, akin to kind of getting our -- kind of our automated equipment down in Mexico. But it's not -- we're not building a new plant right now. And so when we think about CapEx, it is maintaining our assets and making sure that there is efficient and run as efficient as possible. And so we're going to be very selective. Obviously, cash is king. And so we're going to have -- any capital investment is going to be tied to a return that is reviewed by myself and my team with a business case and make sure that we're allocating capital accordingly. Operator: At this time, I would like to pass the call back over to Mr. Baranosky for any further remarks. Donald Young: Actually, I will take it. Thank you, operator. This is Don. We appreciate your interest in Aspen Aerogels and look forward to reporting our fourth quarter results to you on February 12. Be well. Have a good day. Thank you. Operator: Thank you all. This now concludes today's conference call. We appreciate your participation, and you may now disconnect your lines.
Operator: Good day, and welcome to this Tapestry conference call. Today's call is being recorded. [Operator Instructions] At this time, for opening remarks and introductions, I would like to turn the call over to the Global Head of Investor Relations, Christina Colone. Christina Colone: Good morning. Thank you for joining us. With me today to discuss our first quarter results as well as our strategies and outlook are Joanne Crevoiserat, Tapestry's Chief Executive Officer; and Scott Roe, Tapestry's Chief Financial Officer and Chief Operating Officer. Before we begin, we must point out that this conference call will involve certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. This includes projections for our business in the current or future quarters or fiscal years. Forward-looking statements are not guarantees, and our actual results may differ materially from those expressed or implied in the forward-looking statements. Please refer to our annual report on Form 10-K, the press release we issued this morning and our other filings with the Securities and Exchange Commission for a complete list of risks and other important factors that could impact our future results and performance. Non-GAAP financial measures are included in our comments today and in our presentation slides. For a full reconciliation to corresponding GAAP financial information, please visit our website, www.tapestry.com/investors, and then view the earnings release and the presentation posted today. Now let me outline the speakers and topics for this conference call. Joanne will begin with highlights for Tapestry and our brands. Scott will continue with our financial results, capital allocation priorities and our outlook going forward. Following that, we will hold a question-and-answer session where we will be joined by Todd Kahn, CEO and Brand President of Coach. After Q&A, Joanne will conclude with brief closing remarks. I'd now like to turn it over to Joanne Crevoiserat, Tapestry's CEO. Joanne Crevoiserat: Good morning. Thank you, Christina, and welcome, everyone. Our first quarter marked a powerful start to our next chapter of growth. We increased pro forma revenue by 16%, adjusted operating margin by 200 basis points and earnings per share by 35% versus last year, all surpassing expectations. We achieved these gains while making strategic investments in the long-term growth drivers of the business. This outperformance positioned us to increase our outlook for the year, reinforcing that our advantages are structural and sustainable. Now touching on the strategic highlights of the quarter. We meaningfully advanced our Amplify growth agenda as outlined at our Investor Day in September. We built emotional connections with consumers, acquiring over 2.2 million new customers globally in the quarter, driven by Gen Z. By connecting with consumers early in their journey, we're building lifetime value and reinforcing a competitive advantage, our ability to attract and retain new generations to our brands. Next, we delivered fashion innovation and product excellence led by Coach, where our brand is strong and growing. This is evident in the accelerated growth we achieved in our core leather goods offering. The combination of craftsmanship and value we offer to consumers continues to be a differentiator of our brands and business. We powered global growth through compelling experiences, driving double-digit gains in North America, China and Europe, far outpacing the industry. Our direct-to-consumer business model enables us to connect with consumers wherever they choose to engage with our brands while gathering real-time insights that underpin data-driven decisions. This is key to how we scale with focus and impact, and it was on display in the first quarter as we achieved strong growth in stores and online. As always, our talented teams are the driving force behind our results, delivering with creativity and discipline and building the capabilities that set us apart today and into the future. Overall, we are delivering standout performance against an uncertain external backdrop with a business that is healthy and positioned for long-term growth. Now moving to our results and strategies by brand. Coach delivered an exceptional first quarter, highlighted by a 21% increase in revenue at expanding margins. We drove double-digit top line growth across our key markets. with North America increasing 26%, China up 21% and Europe growing 39%. These broad-based gains and outperformance versus the industry demonstrate that our unique expressive luxury positioning is resonating around the world. This is evident in our strong customer acquisition results as we welcomed over 1.7 million new customers globally to Coach, a strong increase over prior year, led by Gen Z. Our new and younger customers are transacting at higher AUR and have a higher retention rate than the balance of our client base. They are also influencing all generations as we achieved growth in acquisition and retention among both Gen Z and non-Gen Z cohorts, a clear signal of our growing brand resonance and reach. Now to discuss our first quarter results in more detail. We drove strong double-digit gains in leather goods, where we have multiple platforms powering our growth. Our icons continued to lead, consistent with our strategy. In particular, the Tabby, New York and Terry families outperformed, driven by accelerated Gen Z customer recruitment. Further, the large Kisslock bag remained a highly coveted and viral success, a clear demonstration of our brand desire and the creativity of our teams. Bag charms and straps also continued their strong momentum, providing consumers with further opportunities for personalization, customization and self-expression. Overall, Coach's growth in handbags and accessories highlights the innovation and value we offer in the luxury market. With these advantages, we drove mid-teens handbag AUR growth for the quarter, led by North America. Further, handbag units also rose in the quarter globally and in North America despite lower promotional activity at the brand. Looking forward, we expect continued gains in both AUR and units, showcasing the diversified drivers in place to support healthy and sustained growth. To this point, we have a strong pipeline of innovation. This was clearly reflected in the brand's Spring '26 runway show presented at New York Fashion Week in September, which received outstanding reviews and social buzz. Next, turning to footwear. We delivered double-digit growth in the quarter, fueled by sneakers and the continued success of the High Line and Soho families across channels. Footwear is a long-term growth opportunity for Coach, given our brand strength and the category's relevance with our target consumer. Touching on marketing. We continue to drive cultural relevance through emotional storytelling that showcases our brand purpose and product offering. During the quarter, we launched our fall campaign, Revive Your Courage, inspired by insights gained from our engagement with Gen Z around the world. The campaign featured global ambassador Elle Fanning and 2 new ambassadors, Korean rapper songwriter and producer, Soyeon and Japanese songwriter, Lilas, 2 artists breaking boundaries and reshaping culture in their own ways. In addition, our Not Just for Walking footwear campaign highlighted our Soho sneaker and featured Audrey Nuna, the singing Voice of Mira in the Netflix hit film, K-Pop Demon Hunters. This campaign continued to support strong demand for our product offerings and cultural relevance for our brand. Our marketing execution exemplifies the brand's hallmark magic and logic in action. By using data-driven insights to scale creativity, we are enhancing the efficacy of our campaigns, expanding our reach and enabling our growth. And finally, we are fueling brand desire through distinctive, immersive retail experiences that resonate with today's consumer. This quarter, we launched 2 new Coach coffee shops in North America at Jersey Gardens and Woodbury Commons, tapping into the importance of experiential retail, especially among younger audiences. These activations go beyond marketing. They're driving longer dwell times, commercial momentum and deepening emotional connections with the brand. Looking ahead to holiday, we're leaning into proven drivers of the business. To this end, we will bring new animations to Tabby, expand the New York family, launch newness within our Coach Originals collection and deliver a compelling assortment of seasonal novelty brought to life through marketing campaigns that connect brand, purpose and product. In closing, Coach continues to deliver standout results guided by a bold brand vision to be the world's most inclusive, genuine and loved fashion brand. With the consumer at the heart of everything we do, our talented teams are operating with focus and purpose, turning insights into action and impact. By blending creativity with disciplined brand building, we've reimagined this iconic brand for the next generation of consumers, driving sustainable compounding growth. Now moving to Kate Spade. Our actions to reset the brand for durable and profitable growth are underway. In the first quarter, revenue trends improved sequentially to down 9%. At the same time, we continue to back our turnaround efforts with disciplined investments, taking the strategic steps necessary to strengthen the brand's foundation for long-term growth. Importantly, in the first quarter, where we placed our strategic focus and investments, we drove progress as tracked against the leading KPIs we've previously outlined. We saw a lift in consideration with our fall campaign and delivered an improvement in Gen Z acquisition trends driven by handbags. While still early in the turnaround, the improvement in these KPIs are signs that we are executing our strategies and they are beginning to take hold. To touch on our strategies and the results of the quarter in more detail, our first strategic priority is to fuel brand heat through our uplifting luxury positioning to become top of mind and relevant with our target consumer, the Gen Z connector. In the quarter, we launched our fall campaign, Spark Something Beautiful, featuring influential Gen Z celebrities, Ice Spice, Charlie D'Amelio, Levy and Reign Judge. The campaign had strong organic engagement as the most watched video on social channels for Kate Spade and drove higher brand consideration and purchase intent. This campaign will continue into holiday, building with festive editions as we remain focused on driving cut-through by increasing brand media through a spike and sustained strategy. Next, we advanced our strategy to build handbag blockbusters with a consumer-informed assortment that is more relevant and focused. During the quarter, we made important progress. Our handbag blockbusters outperformed the balance of the offering with higher AUR and strong Gen Z acquisition. This is another example of how our strategic focus is translating into early green shoots in the business. In Q1, we launched Duo, the hero of our fall campaign, which became the top-performing style in retail, winning with consumers on versatility and value. We also successfully introduced the 454 family in outlet, an on-trend silhouette reimagined from our archives. At the same time, we continued to animate Deco and Kayla, pillars of the assortment that are supporting new Gen Z acquisition. And as we continue to bring more innovation to the offering, we are streamlining, reducing handbag styles by 40% by holiday, allowing us to stand behind our big ideas with clarity and intention. Importantly, we are embedding deeper consumer insights and a rigorous test before we invest approach to all aspects of our work, ensuring that methodical consumer testing drives greater relevancy and impact across the entire assortment. Finally, touching on our third strategic pillar to maximize compelling omnichannel consumer experiences. A critical part of this work involves removing deselection barriers with cohesive messaging that builds the brand through desire. And we're moving in the right direction, evidenced by the higher full price selling we delivered in the quarter, a building block to scale in a healthy way. We know that staying disciplined on discounting will impact our top line results, especially in promotional and highly competitive time periods like holiday, and we are committed to this strategy as we position ourselves for sustainable growth over the long term. Overall, we are strengthening the brand's foundation for long-term profitable growth. While turnarounds take time, Kate Spade is a unique brand with significant runway. To unlock this potential, we have a focused strategy, targeted investments and clear KPIs to track our progress. We remain confident in our path forward and the brand's opportunity to deliver sequential improvement in the back half of the fiscal year and return to profitable growth in fiscal year '27. In closing, Tapestry achieved a record quarter, and we raised our outlook for the year, exemplifying the strength of our model. Our Amplify growth agenda is working, and our structural advantages are enduring. We operate in a large market where our runway is significant, and we have the strategy, capabilities and team in place to drive durable growth and value creation for years to come. Our vision to give more people the power to bring their own style and story into the world is fueled by our systemic approach to brand building. This is what guides us and drives our success. I'll now turn it over to Scott. Scott Roe: Thanks, Joanne, and good morning, everyone. Our first quarter performance reflects the compounding momentum behind our strategic growth initiatives and the discipline of our execution. In Q1, we outperformed expectations across revenue, operating income and earnings, delivering record sales and EPS. In the quarter, we achieved pro forma revenue growth of 16%, led by 21% growth at Coach. We drove adjusted operating margin expansion of 200 basis points, and we delivered adjusted earnings per share of $1.38, an increase of 35% versus last year. Turning to the details of the first quarter. I'll begin with a discussion of revenue trends on a pro forma constant currency basis. Sales increased 16% versus the prior year and outperformed our expectations. These results reflect strong global momentum. By region, North America sales accelerated, increasing 18% compared to the prior year, led by 26% growth at Coach. Importantly, both gross and operating margin in the region also rose versus last year. In Europe, revenue grew 32% above last year with increases across all channels, led by growth in our direct business. Strong new customer acquisition, particularly among Gen Z and increased local consumer spending continued to fuel our momentum. Given our market positioning and low penetration, we see significant opportunities for further growth in this large and attractive market. In Greater China, revenue outperformed our expectations, increasing 19% with notable strength in digital. Our strong performance in China underscores that our strategic initiatives and investments are working, and our business remains well positioned for long-term sustainable growth. In other Asia, revenue increased 3%, led by growth in Australia, New Zealand and South Korea. And in Japan, sales declined 10% as expected amid a challenging consumer backdrop. Now touching on revenue by channel for the quarter. We delivered gains across all channels, fueled by direct-to-consumer growth of 16% compared to the prior year, which included a mid-teens percentage increase in both digital and global brick-and-mortar sales at strong and increasing profitability. Moving down the P&L. We continue to drive healthy margin expansion versus the prior year, delivering a first quarter gross margin of 76.5%, 120 basis points above prior year. This expansion was driven by operational improvements of approximately 170 basis points as well as a benefit from the divestiture of Stuart Weitzman of 70 basis points. These tailwinds were partially offset by a negative tariff and duty impact of 70 basis points and a currency headwind of 60 basis points. Our strong gross margin remains a core element of our value creation model, supported by our agile supply chain, which delivers craftsmanship at scale, a core competitive advantage of Tapestry. Turning to SG&A. Expenses rose 11%, driven primarily by an increase in marketing investment, which represented 11% of sales. Even with this investment, we drove 80 basis points of expense leverage, reflecting our disciplined cost control while growing our top line. So taken together, operating margin expanded 200 basis points in the quarter, driving profit expansion of 24% over the prior year, which was ahead of expectations. And our first quarter EPS of $1.38 grew 35% over the prior year and exceeded our guidance. Now turning to shareholder returns. Starting with our dividend, our Board of Directors declared a quarterly cash dividend of $0.40 per common share, representing $83 million in dividend payments for the quarter. Additionally, during the first quarter, we spent $500 million to repurchase over 4.7 million shares. In fiscal '26, we now expect to return $1.3 billion or 100% of expected adjusted free cash flow to shareholders through dividends and share repurchases. This includes approximately $300 million in dividend payments for an annual rate of $1.60 per share as well as $1 billion in share repurchases, which is an increase from our original outlook of $800 million. Our significant return of capital to shareholders is a testament to our strong organic business and robust cash flow generation and underscores our confidence in the future. And now before turning to the details of our balance sheet and cash flows, I'd like to reiterate our capital allocation priorities, which are unchanged. We have 2 foundational commitments. first, to invest in our brands and business to support long-term sustainable growth and to return capital to shareholders via our dividend with the goal over time to increase the dividend at least in line with earnings growth. Beyond these 2 foundational commitments, our robust cash flow generation provides us with balance sheet flexibility for value creation. This includes the opportunity for share repurchase activity, which includes our previously announced $3 billion share repurchase authorization. And finally, using our rigorous lens framework, we consistently evaluate opportunities for strategic portfolio management. Importantly, and as previously communicated, before moving forward with any acquisitions, we will ensure Coach remains strong and Kate Spade has returned to sustainable top line growth. These clear capital allocation priorities are underpinned by our firm commitment to a solid investment-grade rating and maintaining our long-term gross leverage target of below 2.5x. Now turning to the details of our balance sheet and cash flows. We ended the quarter with $743 million in cash and investments and total borrowings of $2.64 billion, including $240 million outstanding borrowings under our newly established Commercial Paper program. Together, this represented net debt of $1.9 billion. At quarter end, our gross debt to adjusted EBITDA leverage ratio was 1.5x, a full turn below our target. Adjusted free cash flow for the quarter was an inflow of $103 million, and CapEx and cloud computing costs were $38 million. Inventory levels at quarter end were 1% below prior year on a reported basis and up high single digits, excluding the impact of Stuart Weitzman. As we enter the holiday season, our inventory continues to be current and well positioned globally and by brand. For fiscal '26, we continue to expect inventory levels to be modestly down year-over-year on a reported basis. Now moving to our guidance for fiscal '26, which is provided on a non-GAAP basis and excludes the impact of Stuart Weitzman from our fiscal ' 26 expectations. We are raising our fiscal 2026 outlook, which incorporates our first quarter outperformance and our momentum quarter-to-date. We view this guidance as prudent and achievable, balancing the realities of an uncertain external environment with the significant opportunities we see for our business. Now turning to the details. For the fiscal year, we expect revenue to be in the area of $7.3 billion, representing pro forma growth of 7% to 8% on a nominal basis or 6% to 7% in constant currency with FX planned to be a 70 basis point tailwind. Touching on sales details by region at constant currency on a pro forma basis. In North America, we now expect revenue to increase mid- to high single digits. In Europe, we expect growth in the area of 20%. In Greater China, we now expect to achieve low double-digit growth over the prior year. In Japan, we're forecasting a high single-digit decline. And in other Asia, we anticipate high single-digit gains. And by brand, this guidance now incorporates low double-digit growth at Coach. At Kate Spade, we continue to embed a high single-digit decline in revenue for the year with sequential improvement planned in the second half. In addition, our outlook assumes operating margin expansion of approximately 50 basis points. We anticipate gross margin to decline in the area of 50 basis points, an improvement from our prior outlook. This assumes operational gross margin expansion of 140 basis points due primarily to improvements in AUR, slightly offset by an FX headwind of 20 basis points. Further, we expect to realize a 60 basis point structural tailwind to gross margin from the disposition of Stuart Weitzman. Offsetting these planned margin drivers is a 230 basis point headwind from incremental tariffs and duties, which incorporates the timing of policy implementation, product sell-through and mitigating actions underway. For context, this is a headwind of $170 million in the fiscal year, which assumes we mitigate 30% of the annualized run rate of $250 million. I remain confident in our ability to offset these headwinds fully over time given the strength of our business and supply chain. On SG&A, we expect at least 100 basis points of leverage. This reflects our diligent expense control, partially offset by ongoing growth-focused investments in our strategic priorities. To this end, we expect marketing as a percentage of sales to increase around 90 basis points versus last year, reaching over 11% of revenue. We will also realize a 20 basis point benefit to expenses from the sale of Stuart Weitzman. All in, this means operational SG&A leverage is expected to be at least 170 basis points. For some texture on operating profit by brand, we anticipate Coach will maintain its operating margin even with tariff pressure and continued brand investments. At Kate Spade, we continue to expect a modest profit loss given the outsized tariff impacts and brand investments, as mentioned. Moving to below-the-line expectations for the year. Net interest expense is expected to be approximately $65 million. The tax rate is expected to be approximately 18%, and our weighted average diluted share count for the year is forecasted to be approximately 212 million shares, which includes the expectation for $1 billion in share repurchases. Taken together, we now expect EPS to be $5.45 to $5.60, representing 7% to 10% growth compared to last year. Moving on, we anticipate adjusted free cash flow of $1.3 billion. And finally, we expect CapEx and cloud computing costs to be in the area of $200 million. We anticipate about 60% of the spend to be related to store openings, renovations and relocations with the balance primarily relating to our ongoing IT and digital investments. Touching on the shaping for the year. To start, given the dynamic nature of the rapidly shifting market, it's important to note we could experience volatility by quarter, notably within profit as the tariff and duty impacts work their way through the P&L. Now to our current assumptions, we expect pro forma constant currency revenue growth throughout the year, led by the first half. For Q2 specifically, we're anticipating a pro forma total sales growth in the area of 7%, which includes an FX tailwind of nearly 50 basis points. This incorporates the expectation for low double-digit revenue growth at Coach or mid-20% growth on a 2-year stack basis, consistent with Q1 and a mid-teens revenue decline at Kate Spade. Turning to margin. We anticipate reported gross margin in Q2 to decline by approximately 50 basis points due entirely to tariff and duty headwinds. while SG&A is expected to leverage by over 100 basis points in the quarter. Together, we expect operating margin to increase roughly 80 basis points in the quarter. In the second half, operating margins are planned in line with prior year despite tariff and duty pressure. And finally, taking a prudent approach to our guidance, we expect Q2 EPS to grow high single digits to approximately $2.15. This includes a projected tax rate in the area of 20% for the quarter. In closing, we delivered another record-breaking quarter, highlighted by strong top and bottom line growth. This outperformance positioned us to raise our outlook for the year, clear evidence of the power of our Amplify growth agenda and our disciplined and consistent execution. Moving forward, our foundation is strong, and we have competitive and structural advantages to fuel durable growth and sustainable value creation in the year ahead and for years to come. I'd now like to open it up for your questions. Operator: [Operator Instructions] Our first question comes from Ike Boruchow of Wells Fargo. Irwin Boruchow: I guess high level, I'd like to start, maybe Joanne. Just can you elaborate more on the drivers of the accelerated growth that you're seeing and really more about the sustainability of the momentum? I know compares are going to start getting more difficult for you come holiday. And really at Coach specifically, what gives you the confidence that you can sustain double-digit revenue growth as you start to cycle those comparisons? Joanne Crevoiserat: This was a powerful start to our Amplify growth agenda. Our results are clearly differentiated in the market, and I'll start by sending a thank you to our teams who continue to focus on what matters, and that is delighting consumers all around the world. But to comment on the durability of our results overall, the beat and raise that we delivered this quarter reinforces that our advantages are structural and they're sustainable over the long term. At our Investor Day, we highlighted that we play in an attractive TAM with massive headroom, and we're focused on that new customer acquisition at point of market entry. And as we showed in the first quarter, we're winning with this next generation of consumers, and that's expanding the market. We're taking share, but it's also giving us the opportunity to drive higher lifetime value. And this is compounding. We're seeing increases in both acquisition and retention. And I think that's an important point to note, and we're managing the business for the long term. We're continuing to invest behind these capabilities at scale, which is expanding our competitive moat and it's ensuring that our performance continues well into the future. But let me turn it to Todd to talk about the durability of the Coach momentum more specifically. Todd? Todd Kahn: Thanks, Joanne. Good morning. Let me give you 5 proof points to support my conviction for long-term sustainable growth. They are the key 5 Ps of our business. These Ps are foundational to how we win in our space. First, it starts with product. The innovation pipeline of our products that our designers and merchants are developing is remarkable. You saw it on display at our most recent fashion show in September, and I have the benefit of seeing our development a year in advance, and it will continue to build on our icon strategy and the product is fantastic. Second is our people. We are nearly 90% direct-to-consumer, and our people know how to engage our customers on a global scale. A few weeks ago, I participated in our Asian Store Manager Conference. The enthusiasm and shared understanding of our mission and our brand positioning empowers and uplifts our people. Third is place. Because of our focus on Gen Z, we know that they love to shop in the real world, and our almost 1,000 directly operated stores are the environments to best express the world of Coach. Additionally, we are no longer restricted to only traditional malls and outlets and have the right to win in new locations where Gen Z shop. Fourth, promotion or marketing. Our purpose-led storytelling resonates with our consumers. In Q1, we spent almost 11% on marketing, a 43% increase in actual dollars from the prior year. Since our marketing activities are primarily focused on customer acquisition, that does not immediately take place in the quarter. This investment future-proofs new customer acquisition. And finally, price. Our brand position of expressive luxury and the sweet spot of the $200 to $500 range ensures that we have room to grow AURs while maintaining our compelling value proposition. So overall, I feel great about our growth potential. We're just hitting our stride and not only will we comp the comp, but the path to $10 billion is well within our sights. Operator: Our next question is from Matthew Boss of JPMorgan. Matthew Boss: Congrats on a great quarter. So Scott, at the Coach brand, 21% revenue growth represented 800 basis points of acceleration on the 2-year stack. I think every single geography accelerated sequentially. So first, can you break down the drivers of the material 2-year inflection this quarter? And then second, is there anything beyond just prudent macro planning that you've embedded in the back half guide, which embeds moderation on that 2-year stack? Scott Roe: Yes. Matt, thanks for the question. So first of all, I'd just remind you what Joanne and Todd just said about the structural advantages, the fact that this is a methodical approach to brand building and you see it on display. But maybe I'll give you some numbers behind some of that growth inflection that we saw in Q1. So you're right, we grew 21% in Coach in Q1 and 26% in North America. And we also talked about AUR being up mid-teens. So what that means is we had a significant inflection in units. And this has been a multi-quarter pattern that we've seen with for a while, we were talking about growth without the units and driven by AUR. We've now seen a meaningful acceleration in units. And I think tying that back to more than 2 million new customers acquired who we know are transacting at higher AURs and driving more transactions in the Coach franchise, that's driving both AUR and unit growth. And then geographic expansion, right? We grew significantly, as you mentioned, in every one of our major geographies, really led by North America and China, but for the Coach brand, almost 40% in Europe, which is a huge opportunity. So putting those things together, continued AUR growth opportunities, new customer acquisition and an inflection in units, significant geographic growth. That's one of the things that allowed us to take our -- to have a beat and raise, take our guidance up. And remember, we're talking about now double-digit growth on top of double-digit growth 1 year ago, right, based on the guidance we have. And you asked about the balance of the year. So we're 1 year in, we're 25% through the year. And our biggest quarter of the year is coming up with holidays. So I'll just take you back and remind you how we guided to the year. We looked at what we could see in the current quarter in Q1, and we also looked at the 2-year stack. So our balance of the year is the same approach that we entered this year, which is we're fairly consistent on a 2-year stack. The reality is in Q1, we saw a significant inflection. And quarter-to-date, we see that trend continue even though it's early in the quarter, we still -- we're not through the peak months in holiday, but we see nothing in our business that gives us any concern. We just feel like 25% of the year, it's prudent to maintain that. Let's get through holiday. We'll come back. We'll reevaluate and we'll give you guys an update on the picture for the balance of the year. Todd Kahn: I know you asked the question for Scott. I will tell you, our brand is one of -- we say what we do and we do what we say. We said that in our Investor Day. And we tend to have a conservative outlook. But I want to reinforce that as the person running the brand, as Scott said, we feel very good about our positioning, where we're at, what we're seeing in the quarter. We're the first quarter in, we're a team way ahead, but we got a lot of game to still play. So that's how we prepare you, but I feel very good about where we're at. Operator: Our next question is from Alex Straton of Morgan Stanley. Alexandra Straton: Perfect. I just wanted to focus quickly just on the gross margin pieces in the year. So it looks like you're assuming gross margin falls a bit after expansion in the first quarter. Can you just walk through kind of the puts and takes and the factors there and the shape if there's a difference from 2Q to 4Q? And then maybe just one for Joanne, just on industry trends. I think some experts are calling for a luxury resurgence. So just curious how you think about any implications for your business there or maybe what you're focused on from just an industry dynamics perspective? Scott Roe: Yes, Alex, I'll start on your specific gross margin question. So first of all, this is very consistent the way we've guided our gross margin, our understanding of the cost of tariffs are -- we've got our arms around that. It's essentially unchanged. I'll remind you, we're making progress, and we just took our gross margin guidance up by 20 basis points for the year, very strong performance in the first quarter. So we continue to make progress against the impact of tariffs and have great confidence in our ability to grow our gross margins as we go into '27. And I'll remind you, even this year, with those tariff pressures, we're growing our operating margins. So if you look at the second half, about 2/3 of the pressure versus last year is tariff related. Again, that's not new news. That's unchanged. And there's a little bit of noise on tax based on some timing issues in the second half. Joanne Crevoiserat: And I'll pick up the second part of your question, Alex. Our business is strong and growing. And we've been growing through what I would call a dynamic landscape. So to your point, what we're seeing in the in the background or in the market more generally is that the category, the handbag category inflected to growth in the last quarter. And so there is a more constructive backdrop developing, particularly in places like China, where we saw it also inflect to growth with 1% growth in the market, we estimate. And we welcome a more constructive environment, but that doesn't define our actions. We laid out a very compelling plan going forward and how we're building our business with this strong -- building on the emotional connection consumers have in the category, but building those emotional connections to our brands. And that's what's driving and powering our growth. You saw us grow through really difficult when the market was down. We were putting up substantial growth, and we're continuing to outperform the market very consistently. So we're seeing a customer who is resilient -- they are being choiceful and cautious as we've talked about before, but they're active around the world. And where we're delivering innovation and emotion, we are winning. And again, that's success attracting more young consumers to the brand. They're coming in, in a healthy way. And we're actually seeing them come back with more frequency. Our retention rates are higher among Gen Z, but they're also higher and growing in non-Gen Z cohorts. And Coach is really firing on all cylinders. Maybe I'll toss it to Todd to give you some color on how he's thinking about the market and our growth going forward. Todd Kahn: Thanks, Joanne. I'd like to say we play our own game. We're happy to see the category grow. That's why we love this category. It's the durability of it is fantastic. 1% globally, but we grew 21%. North America, we grew 26%. We think the category grew 4%. And it's exactly what Joanne said. It's about bringing new customers into the category. And we're achieving this incredible top line growth at some of our best margins in history. I had to go back 20 years, and I still couldn't find a better first quarter overall than what we delivered. So the good news is we're playing our own game. We love our brand positioning. We're bringing in new customers into the brand. That's how we're going to keep winning. Operator: Our next question is from Adrienne Yih of Barclays. Adrienne Yih-Tennant: Let me add my hearty congratulations to the entire team throughout. Joanne and Todd, kind of more of a kind of thematic question on the European market. Europe has historically been kind of extremely discerning, hard to penetrate. You really seem like you're at kind of a tipping point in the positive direction. Todd, what is going on in terms of kind of the brand positioning, the younger audience? And how much of the marketing are you spending in Europe? What's the kind of potential kind of penetration there? And then, Scott, can you just kind of talk about Kate's merchandise margin progress, excluding the tariff impact? We seem to have seen some stabilization in promotional activity, at least at the markdown side of things. I'm wondering if that's an accurate reflection of the merch margin there. Todd Kahn: Great. Thanks for the question. You're right. We've seen to materially inflect in Europe, and I love seeing that 39% growth in the quarter. And what's really working is what's working globally. Our value proposition and our purpose campaigns are cutting through. And again, what I said earlier, we're playing our own game. We're not just chasing a traditional European model. We are building this through customer acquisition, youth, incredible value. We're opening stores, not just on high streets where we look for adjacencies. We're building it digitally. We're building it where the customer is. So we feel very good. We have a lot of potential in Europe. And again, we're doing it at fantastic margins. So I feel -- I don't want to give you how big is big yet, but we feel very good about where we're going and the opportunities. And what I often say is a great bag is a great bag, and it's a great bag in London, Shanghai or New York. Scott Roe: Adrienne, I'll address your question on Kate Spade. I'm glad that you asked it that way because, yes, we're taking care to reduce discounting in the Kate Spade brand. We know that has an impact on the top line, but we also know that's the formula for long-term sustainable growth. So we are making progress. We're early days. And when you look at the margin pressure, it's really 2 things, right? It's the tariffs, which were even more disproportionately an impact at Kate, and it's, frankly, the investments we're making in customer engagement and all of these factors together are focused on long-term growth at Kate. Operator: Our next question is from Michael Binetti of Evercore. Michael Binetti: I want to ask you on the AUR versus units. You touched on this a little bit. Thanks for the detail. It was notable that this was the first quarter where the units really seem to have inflected relative to the total growth at Coach, 21% for Coach, mid-teens AUR. As you build to the rest of the year, should -- and the comments that you gave us for the rest of the year, Scott, should we think about continuing that wider spread of Coach total growth AUR, so a similar big unit spread like that? Is that -- and is that truly incremental upside to the revenue that you were planning earlier in the year? And then I'd love to just ask on Kate Spade. What's driving the sequential improvement in North America? I thought it was notable that you just said you are accelerating revenues there while reducing promos a little bit. How long does that promotional holdback continue? Is there a scenario where Kate North America could return to positive quarter this year? Scott Roe: Yes. I would say, tactically on the first question, we've said as part of our guidance that we expect a balance between AUR and units. I would say that the magnitude of the inflection in Q1 is significant and is a good indicator of the potential for improved outlook on the second half. So it's a very encouraging sign that points in the right direction. We haven't fully baked in that level of inflection for our guide, but should that continue, then that would be a good thing for us. Joanne Crevoiserat: And on Kate, Michael, the actions to reset the brand are underway. Our focus is on resetting our foundation for durable and profitable growth going forward. As you noted, reducing our discounting footprint is an important part of that. And where we focused our strategy and investments this quarter, we did drive progress. We saw a lift in consideration from our fall campaign. We saw improvement in Gen Z acquisition trends driven by handbags. And our handbag blockbusters are outperforming at higher AUR. And importantly, we are seeing an improvement in full price sell-through as well, and that's helping with the improvement. But we know turnarounds take time. And so we are confident in our path forward. We expect to deliver sequential improvement in the back half of this fiscal year, while holiday will be impacted by our reduction of discounting. And then a return. We expect to return to profitable growth in fiscal year '27. Operator: Our next question is from Bob Drbul of BTIG. Robert Drbul: Just a couple of questions on the product side. Just the footwear business in Coach and then the Charms business, are those consistent globally as well? Just curious on the penetration with both of those categories. Todd Kahn: Bob, thank you. Yes, is the short answer. We -- our more mature markets, China and North America, we have more space for footwear. And -- but we're seeing particularly our focus on sneakers is winning globally, and it's winning across both genders. So we feel very good about that. And the long-term value of that customer acquisition, we know if they come to the brand through footwear, we tend to get them as a multiple purchase across multiple categories. So we love that. We love the bag charms. You'll see us have a fulsome presentation for the holidays, everything from the beloved cherry to our plushie bag charms, whether it's a mini Rexy, a carrot or other things that I don't fully understand, but the young consumer does, which is much more important. So we feel very good about those add-ons, and they're meaningful. And what we love about it is while it may not always be a UPT driver at the point of sale when they buy the bag, they're often coming back a week or 2 later to buy the charm to buy something else. So that gives us another bite at the apple. And what I love is our salespeople know how to convert if we get them back a second time. Operator: Our next question is from Aneesha Sherman of Bernstein. Aneesha Sherman: I want to dig into the topic of AURs a little bit more and more focused on the short term. So you did -- you've talked about the long-term opportunity to keep raising AURs at your Investor Day, and that makes sense. But more short term, you did a mid-teens AUR raise led by North America specifically, and now North America is coming up against those tougher compares with mid-teens for Q2 to Q4. I know you don't specifically target AUR, but how are you thinking about the risk of that AUR growth in North America starting to moderate into these tougher compares and more difficult consumer sentiment environment? And then perhaps the second part of this, perhaps for Scott. AUR is the single biggest driver of your gross margin guidance. So if you were to see that AUR growth come in a little bit lower than expected, are there other levers on margin that you can lean on to maintain your margin guidance? Or could it be a risk to gross margins as well? Joanne Crevoiserat: Maybe I'll kick it off, Aneesha, and start with just the big picture here. Our AUR growth is driven from our understanding of the consumer, the balance of magic and logic. There are a lot of factors that go into our ability to drive this AUR growth. The creativity that our teams are bringing, it's not just knowing the consumer, but it's what you do with that information and bringing the creativity together, understanding the consumer and delivering incredible innovation into the marketplace is driving our AUR growth. Also, what's driving it is our ability to step away from discounting and the way we use data to make better, higher-quality decisions contributes to our better management of inventory, which contributes to a cleaner presentation for the consumer, and they start to build on each other. So that is the more functional, I guess, description of our AUR growth and the disciplines that underpin our AUR. Maybe I'll send it over to Todd to talk about the more emotional, the magic side of the business and how we're thinking about driving AUR growth, both from the innovation we're delivering, but also how we're managing the brand across channels. Todd? Todd Kahn: Thanks, Joanne. And Joanne, really focused on the big drivers. The only -- and it is an emotional business, and we have that opportunity to continue to engage emotionally with our customer. One of the structural changes here, which we talked about at our Investor Day that is going to be a driver for AUR even when we comp the comp in a meaningful way is our One Coach strategy. Remember what we introduced, we talked about bringing collection product into some of our largest stores globally. So if we can get them, and we're seeing it win, we're seeing the consumer trade up because the consumer comes in, whether it's a Woodbury Common, at Sawgrass, Bicester Village, they want to come. And when they're in those magnificent outlet stores that have the service levels of any Coach store globally, they want to buy the Tabby bag. They want to buy Brooklyn and they're buying them. So that has a wonderful effect of lifting our overall AUR globally. Additionally, as something Joanne highlighted, we are far less promotional than ever before. And that raises the floor. So we don't have to give up the sweet spot of that $200 to $500 to still have massive AUR growth in the quarters and years to come. What we have to do is just do what we're delivering now. On Coach, lower discounting, continue to innovate. Scott Roe: Yes. And I think, Aneesha, you had a question for me about margin, sustainability of AUR, et cetera. So first of all, just an observation, this is a team that really is focused on gross margin in case you haven't noticed. This is the vernacular of our organization. We talk about it a lot and growth is #1, but gross margin is right behind it. And I think you see that in the results. And we're looking at it very carefully. And a question we frequently get asked is kind of the opposite side of this is given the size of the AUR, should we even take more? I'd say we're getting it pretty right. When you look at the inflection of units and a 15% or mid-teens AUR growth, we're looking very carefully and listening to our consumers, they ultimately decide what they're going to pay. And I think we're getting it fairly right, right? When you look at the inflection of the business, we're finding ways to grow AUR, but we're also growing units. This is our moment, right? We're grabbing significant share, and we're looking at this very carefully. So do we have other levers? Yes, we do. We didn't even talk about AUC. We've got the best supply chain in the business. We're always fighting for cost opportunities very closely with the merchants and the brand teams, and we are finding those opportunities, right? we're driving efficiency throughout the business. So we have a lot of levers to protect our gross margin over time. But the most important thing is making sure that what Todd mentioned, that value equation that the consumer sees and is relating to is in balance and that we're delivering innovation and superior product, which they're willing to pay for it. That's number one, and that's the thing that we're maniacally focused on right now. Operator: Our next question is from Brooke Roach of Goldman Sachs. Brooke Roach: Joanne, Scott, Todd, I was hoping you could speak to customer acquisition and retention that you're seeing across various income cohorts. Are you seeing the same strength with a value-sensitive customer across the portfolio, particularly in outlets beyond the success that you're seeing in the collection strategy? Joanne Crevoiserat: Yes. Great question, Brooke. I know on everybody's mind. And what's been powerful about our model is we are seeing strong customer acquisition, strong retention across not only Gen Z, but all age groups, and we're not seeing any meaningful difference between income cohorts and the performance of our business and our brands. So the platform that we have, we reach a broad cross-section of consumers with our brands, and we're winning with all consumers right now. Operator: Our next question is from Mark Altschwager of Baird. Mark Altschwager: I wanted to follow up on the One Coach topic. Just any more color that you can share on the performance of the collection product in outlet? Where is that mix? Where do you think it can go? And just relatedly, on the real estate pipeline, just given the One Coach initiatives here, maybe speak to where you see the opportunity regionally and how you're thinking about different store formats. Todd Kahn: Great. We're really pleased. I mean we're only about a year in to introducing for the first time last summer -- a year ago summer, we introduced Tabby in some outlets. Today, it's more than just Tabby. It's really talking about the full lifestyle of Coach. So you see us then followed up with One Coach strategy in sneakers. You're going to see us do similar things with some of the tertiary categories. Jewelry this spring will become more and more One Coach price points. So you're going to see us penetrate quite substantially. I don't want to put a number out there yet. Let's deliver it, but we feel very good that this is going to be a meaningful contributor to growth. On real estate, what we said to you in September at our Investor Day is we see a lot of growth coming from international. 70% of our future growth is going to come from international. We have inorganic growth, particularly in China. We're going to launch probably close to 100 stores in the next 3 years. Remember, Scott, forewarn, if you model it, these are going to be some smaller format stores. But what I love about our strategy, which is very different from our historic norms is this idea, we have the right to win in places and neighborhoods and locations we had never played before. And that's a global phenomenon. So you're going to see us introduce stores and new store formats and food and beverage, particularly Coach coffee shops and outlets. Those are all going to be incremental to our growth, and we're going to do a lot of experimenting. But one thing you can bank on from this team, we fundamentally -- and I think Joanne and I both said this 4 or 5 years ago, we believe that stores are profit centers, not marketing activities. So our stores are going to open. They're going to be profitable. They're going to be engaging and they're going to attract a new consumer. Operator: Thank you that concludes our Q&A. I will now turn it over to Joanne Crevoiserat for some concluding remarks. Joanne Crevoiserat: Thank you, Leo. As we shared this morning, this quarter's outperformance reinforces that our Amplify strategies are not only working, they're winning. And I want to again thank our talented global teams for their creativity, discipline and relentless drive. These standout results are yours. Looking forward, with strong fundamentals and momentum, we are focused and committed to delivering sustainable growth and lasting shareholder value. Thank you for your continued interest in Tapestry and for joining us today. Operator: This concludes Tapestry's earnings conference call. We thank you for your participation.
Operator: Hello, and welcome to Albemarle Corporation's Q3 2025 Earnings Call. I will now hand it over to Meredith Bandy, Vice President of Investor Relations and Sustainability. Meredith Bandy: Thank you, and welcome, everyone, to Albemarle's Third Quarter 2025 Earnings Conference Call. Our earnings were released after market closed yesterday, and you'll find the press release and earnings presentation posted to our website under the Investors section at albemarle.com. Joining me on the call today are Kent Masters, Chief Executive Officer; Neal Sheorey, Chief Financial Officer; Mark Mummert, Chief Operations Officer; and Eric Norris, Chief Commercial Officer, are also available for Q&A. As a reminder, some of the statements made during this call, including our outlook, guidance, expected company performance and strategic initiatives may constitute forward-looking statements. Please note the cautionary language about forward-looking statements contained in our press release and earnings presentation that same language also applies to this call. Please also note that some of our comments today refer to non-GAAP financial measures. Reconciliations can be found in our earnings materials, and now I'll turn the call over to Kent. Jerry Masters: Thank you, Meredith. In the third quarter, we reported net sales of $1.3 billion, including another record production period from our integrated lithium conversion network. Adjusted EBITDA reached $226 million, representing a 7% increase as cost and efficiency improvements more than compensated for lower year-over-year lithium pricing. We generated $356 million in cash from operations during the third quarter, marking a 57% year-over-year increase, driven by higher EBITDA and disciplined cash management. We are enhancing our 2025 outlook considerations. Based on our year-to-date financial performance, prevailing lithium market pricing and stronger-than-expected energy storage sales volumes, we now anticipate full year 2025 corporate results to be toward the upper end of the previously published $9 per kilogram scenario ranges. Overall demand for lithium remains robust, up more than 30% year-to-date, supported by the energy transition and rising global demand for electric vehicles and grid storage. Notably, global EV sales have increased 30% year-to-date, led by China and EU battery electric vehicles. Grid storage growth was even more pronounced, climbing 105% year-to-date with strong growth across all major markets globally. Additionally, we have made significant progress implementing cost and productivity improvements while reducing capital expenditures. Capital expenditures for the year are now projected to be approximately $600 million. We expect to achieve full year cost and productivity improvements of around $450 million, surpassing the upper limit of our initial targets. Considering these factors, we now project positive free cash flow of $300 million to $400 million in 2025. Turning to Slide 5. Recent portfolio actions further demonstrate our commitment to long-term value creation and enhanced financial flexibility. We recently announced 2 transactions. First, a definitive agreement with KPS Capital Partners to sell a controlling 51% stake in Ketjen's refining catalysts business. Second, an agreement to sell Ketjen's interest in the Eurecat joint venture to Axens. Both transactions are expected to close during the first half of 2026. Together, these transactions are expected to generate approximately $660 million in pretax cash proceeds, giving us greater ability to delever while also retaining exposure to future potential gains in the refining catalyst business. This new structure positions the Refining Catalysts business to leverage KPS' manufacturing expertise and access to capital to accelerate its growth opportunities. At the same time, we will be able to shift our attention to our core businesses, Energy Storage and Specialties to set Albemarle up for long-term success. This transaction reinforces our commitment to boosting shareholder value, improving financial flexibility and maintaining Albemarle's strong competitive position. Neal will now provide additional details regarding financial performance and outlook. Neal Sheorey: Thank you, Kent, and good morning, everyone. I will begin with our financial results for the third quarter as presented on Slide 6. Net sales for the quarter totaled $1.3 billion, a decrease from the prior year, primarily driven by lower lithium market prices. This decline was partially offset by higher volumes in both Ketjen and energy storage. Adjusted EBITDA for the third quarter was $226 million, representing a 7% increase year-over-year. This improvement was driven by disciplined cost management and productivity actions, which more than offset lower lithium market pricing. Our adjusted EBITDA margin improved by approximately 150 basis points compared to last year. We reported a net loss of $1.72 per diluted share. Excluding charges, the largest of which was the noncash goodwill impairment related to Ketjen, our adjusted diluted loss per share was $0.19. Turning to Slide 7. I'll cover the drivers of our adjusted EBITDA performance year-over-year. We saw solid growth in sales volumes in both our energy storage and Ketjen businesses, and our consistent focus on cost discipline and productivity yielded positive results. By focusing on the actions in our control, we were able to offset lower pricing for lithium and spodumene. Turning to other segments. The Specialties team delivered an impressive 35% increase in adjusted EBITDA, largely due to cost improvements across the board in raw materials, manufacturing and freight. On the corporate side, we benefited from cost savings and favorable year-over-year foreign exchange movements. Turning to Slide 8. As usual, we're sharing outlook scenarios based on recently observed lithium market prices. This slide shows a full company summary for each price scenario. Our outlook ranges remain the same as last quarter, but we've updated a few key points. Specifically, we now anticipate our full year 2025 results will approach the upper end of the $9 per kilogram lithium price scenario for total company sales and EBITDA. This reflects our strong performance so far this year, including cost controls, productivity gains and slightly better market pricing. We expect lithium market pricing to average about $9.50 per kilogram this year based on year-to-date actuals and assuming current pricing persists for the remainder of November and December. Turning to Slide 9 for additional commentary by segment. First, in Energy Storage, sales volume growth is expected to be up 10% or more year-over-year, thanks to record integrated production, higher spodumene sales and reduced inventories. We are seeing most of that volume upside coming from a strong demand environment in China, where sales are at local market prices and not on long-term agreements. As a result, we now expect approximately 45% of our 2025 lithium salt volumes to be sold on long-term agreements with floors, primarily due to the mix impact of stronger-than-expected volumes in China. Our long-term contracts continue to perform in line with our forecast. Q4 EBITDA for energy storage is expected to be slightly higher sequentially. First, in terms of product mix, Q4 will have a greater proportion of higher-margin lithium salt sales versus spodumene sales. Second, Q4 is expected to benefit from current higher spodumene prices in JV equity earnings. In Specialties, we continue to expect modest volume growth year-over-year. Q4 net sales are expected to be similar to Q3, but EBITDA is expected to be lower, primarily due to weaker demand in oil and gas applications. Finally, at Ketjen, we continue to expect a stronger Q4 due to higher CFT and FCC volumes. Please refer to our appendix slides for additional modeling considerations across the enterprise. Slide 10 highlights our focus on running the business efficiently and converting earnings into cash. Year-to-date through Q3, our EBITDA to operating cash flow conversion has been over 100%. In Q3, conversion was strong due mainly to inventory reductions, along with a modest sequential uptick in dividends from the Talison joint venture. We continue to expect our full year cash conversion to average over 80%. The implication of that is that we expect Q4 conversion will be lower, mainly due to the timing of interest payments and higher working capital needs from increased revenues. Our strong cash conversion performance and reduced capital expenditures forecast mean that we now expect to be well into positive free cash flow territory this year between $300 million and $400 million. Slide 11 provides a comprehensive overview of our cash position and capital allocation plans in the near term. We closed the quarter with $1.9 billion in cash. Moving forward, we intend to repay with cash on hand, our Eurobond debt that matures later this month. Based on our free cash flow outlook, we expect modestly negative free cash flow in Q4. Moving into 2026, we expect to receive approximately $660 million of gross proceeds from the 2 transactions related to our Ketjen business. Considering these major cash items, we expect to have approximately $1.4 billion available for deployment across a set of disciplined and focused priorities as shown on the slide. With that, I'll turn it back to Kent to discuss the market outlook and provide updates on our operational execution. Jerry Masters: Thanks, Neal. The 2025 global lithium supply-demand balance had started to tighten with global lithium consumption growth up over 30% year-to-date, driven by robust demand from both EVs and grid storage, while supply growth has slowed in part due to recent lepidolite curtailments in China. On Slide 12, EV demand growth for 2025 continues, led by China and Europe. China EV sales are up 31% year-over-year even after reaching over 50% market penetration, driven by strong growth in BEVs due to incentives supporting low-cost options. Europe is also up over 30%, supported by EU emissions targets. North America posted 11% growth, supported by prebuying ahead of the 30D tax credit expiration. Turning to Slide 13. Global battery demand for stationary storage is up 105% year-to-date. China remains the largest market for stationary storage installations with 60% growth year-to-date and further policy support announced in the 15th 5-year plan. Europe has shown similar policy support as the commitment to decarbonization drives demand for renewables paired with storage. North America is the fastest-growing region for stationary storage, up almost 150% year-to-date as rising data center and AI investment in the United States increases the demand for electricity and grid stability. Globally, data center electricity use is expected to more than double by 2030. With the increasing need for grid resiliency, LFP batteries are well positioned to continue meeting ESS demand, thanks to their low-cost energy density and established manufacturing base. As a result, we expect lithium demand for stationary storage application to increase more than 2.5x by 2030. Advancing to Slide 14. I want to provide an update on our initiatives to sustain our competitive advantages through market cycles. First, on optimizing our conversion network. We set an energy storage sales volume growth target of 0% to 10% at the start of the year. We now expect to finish at or above the high end of that range with record production across our integrated conversion network, increased spodumene sales and inventory reductions. Second, our cost and productivity programs continue to deliver. We began the year with a goal of $300 million to $400 million in improvements. Today, we've achieved a $450 million run rate, exceeding the high end of our initial target. Recent projects have further reduced manufacturing costs and improved supply chain efficiency. Third, at the start of the year, we target a 50% year-over-year reduction in 2025 capital expenditures. By focusing on high-return, quick payback projects and optimizing existing scope, we now expect 2025 CapEx of about $600 million, reflecting a 65% reduction year-over-year. Finally, our announced asset sales are expected to generate approximately $660 million in cash, providing significant additional financial flexibility. We continue to adapt in a dynamic environment, adding new measures as needed. We're building a culture of continuous improvement and the mindset to identify opportunities to achieve savings and efficiencies. These actions are contributing to positive financial results as shown on Slide 15. Our commitment to cost discipline is clearly reflected in our financials. Sales, administrative and R&D expenses are down $166 million or 22% since last year. Cash flow has strengthened, driven by targeted cost and capital reductions and strong cash management. As of Q3 2025, we're generating positive free cash flow year-to-date, and we expect $300 million to $400 million for the full year. Our efforts have allowed us to shore up and maintain healthy corporate EBITDA margins in the 20% range even as lithium prices declined. Thanks to these focused actions, we are well positioned to expand margins further as the market recovers with potential for adjusted EBITDA margins reaching 30% or more at $15 per kilogram lithium pricing. In summary, on Slide 16, Albemarle delivered strong third quarter performance while continuing to act decisively to maintain the company's industry-leading position through the cycle and capture upside as markets stabilize or improve. We are maintaining our full year 2025 company outlook considerations with notable enhancements to energy storage volume growth, improved cost and capital savings and strong free cash flow generation. With our world-class resources, process chemistry expertise and a strong balance sheet, we're well positioned to generate shareholder value through the cycle. I'm confident we're making the right moves to stay ahead and capitalize on long-term growth opportunities. With that, I'll turn it over to the operator to take your questions. Operator: [Operator Instructions] Our first question will come from Aleksey Yefremov from KeyBanc. Aleksey Yefremov: Strong results. I wanted to ask you about dynamics at Atlas. You mentioned you'll have better profitability because of higher spodumene prices. But how do you think this would evolve in maybe first half of '26? Would you see higher spodumene costs? Would that be again offset by higher equity income or not? If you could walk us through that dynamic for your lithium margins. Jerry Masters: Yes. So maybe I'll start, Neal, you can add a little bit of color to that. But -- so we're not going to -- we won't predict the price for lithium, for salt or spodumene. But I mean the market is tightening. It is tight. It has moved up a little bit. So we're optimistic about that, but we don't plan on that. And I don't -- from a spodumene standpoint, I mean, it all depends whether if prices move up, the margin will either stay with salt or it moves over to spodumene. And we're a bit indifferent because of the integrated network that we operate. So I don't know that there's a big difference between the two. Recently, in the recent past, when prices move, most of the margin moves to the resource of spodumene. And then I think the other part is a little bit about the Talison and inventories and the way that, that gets costed. Neal? Neal Sheorey: Yes. Aleksey, I think you're thinking about it right that in a rising spodumene price environment, we get one immediate benefit, which is obviously any sales that Talison makes to our partner, we get some of that benefit immediately through our equity earnings. But then, of course, our portion of the profit does go into inventory and it comes out over time as we consume the spodumene. So you're right, there will be some lag. It's usually 6 to 9 months that some of that comes through in our cost of sales. But whether it leads to margin compression or margin improvement really depends on what happens with salt prices 6 months from now. But I think you're thinking about it right. There is one component that we realize right away, and then there's another component that has to flow through our inventory. Operator: Our next question will come from Jeffrey Zekauskas with JPMorgan. Jeffrey Zekauskas: You used the $9 price as a reference point. In China today, are we closer to $10 or $11. Jerry Masters: So yes, you're probably closer to $10 today. But as we look at it on a full year basis, it's kind of $9, $9.50, something like that. Jeffrey Zekauskas: Okay. Are you giving any consideration to starting up any of your plants where you've paused production or lost all the plants? Jerry Masters: So no, I don't -- no, I wouldn't say so. So we haven't brought that back. So we're just forecasting to the end of the year. So that's a couple of months. So -- and it would take us longer to bring those back on. So it's not in that -- they're not in that scenario, and it would depend on the market and how that works, but that's not really the plan as we think about it for next year either. Operator: Our next question will come from Colin Rusch with Oppenheimer. It looks like we are having some technical difficulties with Colin. Your next question will come from Vincent Andrews with Morgan Stanley. Vincent Andrews: Just a quick question. When you talk about the full year adjusted EBITDA margin potential of 30% or greater at $15 a kg, are you speaking of the energy storage segment or the company overall? Jerry Masters: The overall company. Vincent Andrews: Okay. And then if I could ask in the capital allocation slide, you talked about with the $1.4 billion paying down or deleveraging, but then there's also another language about liability management opportunity. What does that refer to? Neal Sheorey: Yes, Vincent, I can cover that. I don't have specifics to share today, but we are obviously looking at a combination of things, not just gross delevering, but also anything else that we can do with our debt towers just across our entire debt stack. So that's what is meant by liability management. It might not always be gross debt deleveraging, but it might be actually just thinking about our debt towers and being responsible with that. Operator: Our next question will come from John Roberts with Mizuho. Edlain Rodriguez: Actually, this is Edlain Rodriguez for John. So when you look at EV domain, do you have a good sense of how much is energy storage versus EV? And how do you see those percentages moving over the medium term? Jerry Masters: So yes, we do. We have a pretty good view and those are reported independently. So we're -- and the numbers that we're showing are independent of those. So we think that -- I mean, look, there is some mix because it is kind of the base -- it's the same base technology that goes into both, but we feel like we understand where it's going and what the markets are doing. So it's -- I think energy -- the fixed storage is about 1/4 of the market today, and it's growing at a couple of times the rate, but it's -- we still see it probably being -- long term, the market is more EV-oriented than fixed storage, but that's the dynamic and you just look at the math, right? If it's 1/4 of the market, maybe it gets to half, I'm not sure. And over time, it will depend a little bit on substitute technologies. I think fixed storage is more exposed to substitutes than BEVs. So I think that has to play out over the next decade to see where that really ends up. Operator: Our next question will come from David Begleiter with Deutsche Bank. David Begleiter: Ken, for you and Eric, on Chinese lepidolite, how much supply do you think is being currently curtailed? And versus the high of lepidolite production, how much is production down today versus that high? Jerry Masters: Yes. So Eric can give us some details on it. So look overall, it's not been a huge impact. There has been some impact. They've come out of the market and come back in. That's probably been the bigger piece. There are a number of plants that are looking for permits and -- but they are operating through that. That's our understanding of that they need to get new permits. They've applied for those, and they're allowed to operate through that. So Eric, maybe you can give some numbers or some of the scope of what has come out and not come back on. Eric Norris: Yes. I think since the middle of the year, David, about 1/3 of the production was impacted through a repermitting exercise and/or as to idle for a period of time, some of that is -- we don't know all the cause for that. I mean there's a lot of discussion about what's happening in China on policy. But nonetheless, that's what we've observed. That's about 8 different lepidolite operations, including the largest, which is CATL. It's a reduction of about 30,000 tons annually. But I think the question is how long they remain down as they go through permitting. It's -- in the scheme of the market, if they -- should they come back, you're only talking about a couple of percent of supply over the course of a year. So it's a minor blip, and we'll continue to watch it carefully. David Begleiter: Very good. And just on lithium demand, you didn't include -- you did not include your slide from last time lithium demand forecast. So for 2030, has there been any change to your lithium demand outlook? If it hasn't been, has the bias moved to the upper end of that range, i.e., 3 million tons or above given what you've seen in the last maybe 6 to 9 months here? Jerry Masters: Yes. So we didn't show that. I would say it hasn't really changed, but it has probably moved up a little bit within that range. If you recall, we had a pretty big range because of some of the uncertainties. And then I think the both -- on both the EV and on fixed storage, it's probably more demand. I think it is a demand story, and that's higher than we were thinking about at the beginning of the year. So it's been a positive surprise. The range stays the same. It's well within that range, but I would say it has moved up a little bit. Operator: Our next question will come from Josh Spector with UBS. Christopher Perrella: It's Chris Perrella on for Josh. As I think about the ramp of the extra train and Greenbushes and your production in La Negra, how much could your resource production be up in 2026 with just the scheduling of those ramps? And then also, do you have a first right of refusal on Wodgina? And are you guys discussing the future of that asset and the ownership with your partner down there? Jerry Masters: Okay. So first, I guess, on the asset. So La Negra is pretty much ramped at capacity today. We have some marginal improvement. We can do that as a result of Salar Yield and as that works its way through the process in the Salar. So we'll see better feedstock at La Negra, and that will give us a little more capacity, but it's incremental compared to the overall ramp that we've been through the last couple of years. And then CGP 3 at Talison will start up at the end of this year, and then we've got a kind of plan to ramp through next year. So it's kind of a ramp through the year. It will depend on how well we execute on that and that's how fast it comes up, but we kind of -- we tend to straight line it through the year to kind of more or less full capacity by the end of the year. And then you can do the math to see what that gets you throughout the year. And Wodgina. So you're asking about Wodgina. So look, I'm not going to comment on the process that's happening down there. You probably -- you can read about it in the Australian press that's doing that or what's happening there. So we talk to our partner. We're aware of what they're doing. So we'll see. We'll let -- that has to play out. Eric Norris: Think another feature to bear in mind as we look to next year, Chris, is that a good part of our growth this year, as referenced in the prepared remarks, has been that we've taken a lot of inventory out of our supply chain this year, and that would largely be spot inventory in the case of energy storage that has fed growth that is onetime in nature. And so we don't get the benefit of the inventory reduction next year. So the factors that have been described are going to help to offset that. It's important to keep in mind as you think about next year. Operator: Your next question will come from Christopher Parkinson with Wolfe Research. Harris Fein: This is Harris Fein on for Chris. Just curious maybe if we could talk about the stronger volumes this quarter. How much of that was just you being opportunistic on spot sales because of price volatility? And I guess dovetailing off of the last question, how should we be thinking about the impact on volume growth next year versus the higher baseline? Jerry Masters: Yes. So look, it's -- I mean there is some us being opportunistic. Eric just described that inventory reduction. So that's part of our cash management initiatives we were doing to drive that, but it did give us a little extra growth this year, and we won't have that opportunity next year because we've driven inventories down. But the market has been -- the market is strong, right? -- both demand and pricing is a little stronger than it has been. So we're optimistic about that. We're not counting on it, but we're optimistic about that. And it's been a bit of a demand story, I think, over the last quarter or maybe even a little bit longer, that it's stronger and both -- and that's both EVs as well as fixed storage. Fixed storage has been the big upside surprise this year, and it's been very strong, and we see that continuing. Harris Fein: Great. And -- also just wanted to touch on -- there's been a lot of news flow about critical minerals support. We saw what happened with Lithium Americas. Just curious to hear what the latest you're hearing is. And in the event we start to see maybe the government engage a little bit more concretely on the localized energy storage infrastructure. Maybe just some thoughts on the scenario planning you're doing in terms of how that might shift your strategy either way. Jerry Masters: Right. So I would say -- look, we're very happy to see the government focused on critical minerals, the U.S. government, but other governments around the world, we think that's important. We've been saying that for years that it's important to build out a globally diverse competitive lithium supply chain and to see governments focused on that is fantastic, not going to speculate on what could happen with the governments. We're talking to governments all over the world all the time, everywhere that we operate. But there won't be one solution. So it will be a mix of things that will help the market in the West get to reinvestment levels. So tax incentives, trade policy, direct investment maybe. I mean I think it will be a mix, and there'll have to be a combination of some public-private partnerships to drive this because it's a big problem, but we've been talking about it for a couple of years now, and we're happy to see governments focused on it. Operator: Your next question will come from Laurence Alexander with Jefferies. Laurence Alexander: So as you look at the way policy is shifting both in Latin America and in the U.S. What do you see as kind of the appropriate return hurdles for you to engage in new projects as opposed to just focus on your existing assets and/or opening up Kings Mountain? Jerry Masters: Yes. I don't think our return criteria has changed, right? We've been pretty consistent about that. The issue has been with the pricing that we see in the market, we can't get those returns, which is why you don't see us investing. So we -- and we've been focused on kind of balance sheet cash, driving cost out of the business so we can compete at that lower level. And look, our view is -- and we've said this, we don't -- we're not able to predict the lithium price, and we're not going to depend on that. So we have to be able to compete through the bottom of the cycle, which is why you've seen us so focused on cost and cash and getting our business in a position to do that. We're getting there. We still have room to go. And if the market -- but our view is we plan for the bottom of the cycle, but stay agile so we can pivot when the market gives us that opportunity to invest. We still have good investment opportunities. We mentioned Kings Mountain. We have very good resources that we can still leverage as we go forward. And conversion is still a possibility, but the economics aren't -- they're still not there today for Western economics or conversion -- Western conversion economics. Laurence Alexander: And is your cost structure at the point where if prices do not improve next year, your cash flow -- you are free cash flow positive? Jerry Masters: So we're not forecasting next year yet. So we'll do that next quarter. But we're in a -- look, we've driven cost out. We -- I feel pretty good that we've built a cost-out mentality around productivity, particularly in our operations. I think we could be better at it from an overhead and back office, but we're working on that. We've made good strides around that, and we'll continue to drive that. So we'll continue to drive cost and work on our cost position. Look, it's still a new market, and it's going to be volatile and dynamic, and we have to be able to ride that on to capture the upside, but work our way through the downside. So I don't want to forecast -- we're not going to forecast next year today, but we're continuing to stay focused on that cost out, and that will drive the result for next year and years going forward. But I think you should think of our business as that we make sure that we can ride through the down cycles and then take advantage of the up cycles. Operator: Your next question will come from Patrick Cunningham with Citi. Patrick Cunningham: Just a couple of related follow-ups to your last comments. I guess, anything else you're looking at in terms of productivity savings program into next year? And what would be the size of sort of the incremental carryover? I know you reached run rate sometime in the middle of the year. Jerry Masters: Yes. So Neal can talk about the run rate carryover, but we're going to -- we continue to have productivity programs, and they go across the breadth of our business. We are -- our programs around operations are the most mature, and it's not surprising given our legacy as a specialty chemical company, but we are -- that's pretty mature and we go down the range. Our supply chain is a little less mature. Our back office is even less mature than that, but we're building the capability and leveraging off of the program we have in manufacturing. So you'll always see us have productivity programs and goals. Even if the market is hot and on fire, we're still going to be pushing to take cost and productivity out of the business. That's just -- I think that's just going to be a feature of our business, and that should be a feature of a healthy business. Neal Sheorey: Yes. And Patrick, maybe the other thing I can add is just to reiterate, so we see line of sight to a $450 million run rate in cost and productivity savings this year. So obviously, we'll have to see how we finish up the year in terms of the actual savings, but you're already seeing those savings come through in our S&A line and our R&D line and so on. But obviously, some of those will continue to roll into 2026, and we'll give you an update on that with the next quarter once we finish the year. But let me give you an example of what you can expect to hear as you get into 2026. Just a small example, though, is that we continue to ramp our facilities to full rates. That's a perfect example of the productivity measures that we're really working on. Kent kind of highlighted that in Chile, we're almost to the kind of top end of what we could do with La Negra. Our Meishan facility in China is, I think, about a year ahead of schedule in terms of its ramp, and it's getting almost up to full rates as well. So you can expect that kind of continuing to sweat the assets as kind of a key theme in our productivity on top of any other additional cost actions that we can take as well. Patrick Cunningham: Got it. That's helpful. And then maybe just a quick one on bromine. It seems like there's some strong demand there in areas like electronics, but maybe some offsets that have pulled performance down and have seen some normalization in prices. How have sort of the bromine supply and demand trended throughout the balance of the year? And what sort of outlook are you seeing for the fourth quarter? Eric Norris: Yes. So -- this is Eric. First, on the demand side, you're right. It's still a mixed market, reflecting probably the many of the GDP-oriented markets, growth markets that we serve. So for instance, you mentioned electronics, pharmaceutical, those have been stronger markets. Weaker markets have been building construction and oil and gas of late, stronger earlier in the year, but with drop in the price of oil, a little weaker in the second half of the year. We saw -- if you look at the supply side and the tightness or balance of supply and demand, middle of the year, we saw some tightness. You may have seen if you follow bromine -- elemental bromine prices, particularly out of China, there's an index you can follow. You've seen that price rise. It's now started to come down again as the market has become more balanced on the one hand. On the other hand, we're headed in a time of year where seasonally production -- some seasonal production in India and in China that comes offline due to the winter months, and as that happens, I don't think we're going to get to a tight situation, but we'll remain fairly balanced. So we're not looking at this as being supremely oversupplied or undersupplied, therefore, dynamic from a price standpoint on elemental bromine at the moment, fairly balanced as we go into the end of the year. Operator: Your next question will come from Rock Hoffman with Bank of America Securities. Rock Hoffman Blasko: I guess does the energy storage volume beat contain any pull forward? And just given the stronger near-term volume assumptions, where would you expect the contract spot mix to shift in 4Q and thereafter? Jerry Masters: Yes. So the pull forward, as you described, that's mostly inventory, right? So we had inventory that we were able to use that. The market is strong. So we're selling into a strong market. But it's not we're pulling next quarter's volume forward, but we are bringing to some degree, capacity forward by selling inventories that we had. It's also just us being leaner on cash and inventory, so us being leaner and operating around that. That's the piece. The other piece, I guess, we saw from a pull forward would be the expiration of the 30D tax credits in the U.S. So there was a bit of a rush for people to buy EVs in the U.S. It's 10% of the market. So it's not going to be dramatic overall, but that is one where demand did get pulled forward a little bit. Rock Hoffman Blasko: Understood. And just as a follow-up... Eric Norris: I'm sorry, Rock, I think you had asked about contract spot mix going forward. I just wanted to add one point, which is, look, I think Kent had mentioned in the prepared remarks that our contracts continue to perform. We don't have any major contracts that are rolling off until you get towards the end of 2026. But look, the demand has been so strong in China, in particular, where we don't sell volume on long-term contracts. So if that trend continues into 2026, just based on mix alone, you can probably expect that our 45% that we're at this year will tick down just because of where the product is going and the fact that it's not going on these long-term contracts. But it's not a shift in our long-term contracts. It's really more about geographic mix of sales. Rock Hoffman Blasko: Makes sense. Just as a quick follow-up. Any preliminary thoughts on 2026 CapEx? And I guess, more broadly, when you would need to turn on CapEx in order to incentivize any meaningful volume growth after 2026? Jerry Masters: Yes. So I think -- I mean, look, we've been -- we've worked our CapEx down, and we try to be very thoughtful about that. So we would anticipate unless we pivot to do some investments, I'm not thinking of right now, we will continue at that run rate or maybe a little bit lower. We'll continue to work on that to get it down. We don't think we're shorting our assets with the cuts that we've made. We're just -- we're getting more efficient at it, but we're being thoughtful and careful. That's why we legged down slowly, I would say, particularly on maintenance capital. And so without forecasting -- not forecasting some investment that we might make as a result of the market taking off, you see us in a range where we are maybe another leg down. But the legs are incremental now, not -- we're not going to make 50% reductions within -- that's not in the cards, there maybe 10%, something like that. Operator: Our next question comes from Arun Viswanathan with RBC Capital Markets. Arun Viswanathan: I guess I'm just curious to get your thoughts on spodumene and the impact on pricing. So it looks like prices are for both carbonate and hydroxide are kind of settling out at marginal cost levels. Would you agree with that? And would it take spodumene maybe to go up to $1,200 or $1,500 to see some more robust activity in lithium salt pricing? And if so, what would drive that? spodumene, do you feel that supply/demand is balanced or tight or loose? Or maybe you can just comment on that relationship. Jerry Masters: Right. So we commented on it just a little bit earlier, but I think you're probably right. So conversion right now is at basically marginal cost of conversion and in China. And then when you see price move, most of the value and the price movement, the conversion stays at that cost, that marginal cost and it moves to the resource, the margin moves to the resource. So that's kind of what we've seen, I guess, for at least a year now. Most of the value moves to the resource because you have overcapacity for conversion in China primarily. It's a little bit different when you start talking outside of China, but the majority of the market is in China. And -- but the market is getting a little tight. And I think that's why you see prices move up. It's probably a bit more as a demand story, but supply has not kept up. Demand is stronger than we thought and supply growth is less than we thought, and that's tightening it. Inventories are coming down in both salts and in spodumene in the system throughout the system. So I think it's a demand story. I guess maybe it's both because supply has not been as strong as we were originally thinking and demand has been stronger. So the market is tightening. So it's a supply-demand piece, but all the value at the moment does move to spodumene. Arun Viswanathan: Great. And then could you also comment on your potential commercialization in the energy storage market? What are you seeing there? And what do you kind of expect over the next few years from a demand standpoint? Jerry Masters: Well, it's the same supply chain and value chain as it is for batteries for EVs for the most part. I mean there are people specializing in that and the core technology, it's pretty much the same thing. And from our standpoint, it's about the same. We sell the same material and just which value chain it goes to. Many cases -- most cases, it's the same customer that's playing in both energy storage and the electric vehicle market. But the growth has been very strong. A lot of that is grid stability. Well, it's about renewables and storage to go with it in Europe and China to some degree. But it's also about grid stability and data centers, you could say, artificial intelligence, but that system is what's driving it, particularly in North America. So it's a pretty dynamic market. You always get the question or you think about it, is lithium-ion technology the right technology for that? I mean it's what's available today at scale. Supply chain has been built out, and it still has a significant cost advantage over other technology like sodium ion. So they don't have scale at sodium-ion yet, and the cost is still significantly higher. So I think in the near term, it's going to be mostly LFP technology. Long term, you probably see sodium coming into the mix. But I think we're kind of forecasting about 80% of that stays with lithium-ion technology. Operator: Your next question will come from Joel Jackson with BMO Capital Markets. Joel Jackson: Kent, you talked about for a while and today about really being able to ride out the cycle here. What do you think Albemarle is going forward? If you're not really doing any growth beyond CGP3 and some conversion in China and you're looking at taking CapEx maybe down a level, economics don't justify new builds or new capacity. What is in this growing, rising sector, EV and ESS, what will Albemarle be? Are you worried about not growing proportionately with the industry? Jerry Masters: Yes. So look, we -- a lot of the work that we're doing is to preserve that growth optionality as we go forward, but we need to see good business cases in order to do it. So my view is we're being disciplined. Look, we probably are risking some of the upside by being -- taking the approach that we have, but we are making sure we can go through the bottom of the cycle and then take advantage of that uptick. So we will capture growth. We have opportunities. We think resource is the key to that, and we have some of the best resources on the planet. So it is about optionality, and we're having -- and we have to manage our balance sheet and the market opportunity out there, and we don't want to get caught flat-footed. But I think we're -- what we're trying to build is a business that is agile, and we'll be able to pivot to do those investment projects when we see the right economics. Joel Jackson: Okay. And then my second question is maybe a little strange. But I mean, we've seen a lot of good data out from a lot of different industry sources about the acceleration in growth rates in ESS. Can you talk about on the ground what you're actually seeing? Is the hype real? Is it being exaggerated? How much tangible evidence do you have of accelerating growth rates in ESS you can share? Jerry Masters: Well, Eric can comment on that, but I think the most tangible is the volumes that we see going into it. I mean that is not -- I mean they are shipping and going into battery. So that's not forecast. That's legitimate. That's real. And so I think that -- I mean that market is there. Eric, you can comment on more specifics. Eric Norris: Yes. It's akin Joel to the last question that came up around where -- what's going on in this market? Is it a different channel? It's not. It's the same big battery names that are in the EV space. And I guess there are a couple of things we see, certainly in China, which is the largest market and where -- and really the home of LFP technology, we're seeing a lot of -- in all of our discussions with both cathode, particularly LFP cathode and battery producers in China, those cell lines are at full utilization now to meet the demand, both domestically in China and abroad. The interesting thing about the grid storage market is it looks a little different from a global perspective than the EV market, meaning it's not all just about Europe, China and the U.S., it's the rest of the world and the grid demand, grid stability, renewable power are important, whereas in North America, of course, the big driver is more about AI data centers, and even now pivoting to the U.S., we have a great number of battery partners -- partner with OEMs here in the U.S. who are taking those same facilities and looking to retrofit them to make ESS technology, whether that's moving to a lower nickel technology or to an LFP technology. And then finally, we're seeing a big uptick, and this is both an EV driver and an ESS driver amongst all cathode produced, certainly in China, I referenced, but now outside of China, the Koreans, the Japanese, they're all aggressively pursuing their own LFP in-house technology programs. And it's both EVs, but probably more importantly of late, that's ticked up because of ESS. So those are -- that's a little bit of an on-the-ground commentary of what's driving this enthusiasm for the space. Operator: Your next question will come from Abigail Eberts with Wells Fargo. Abigail Eberts: I understand you're not guiding to 2026, obviously, but I was just wondering about your expectations for underlying EV demand as we look to next year. Jerry Masters: Eric, do you want to... Eric Norris: You said we were curious about underlying EV demand for next year. I think... Abigail Eberts: Yes. Eric Norris: We continue to have -- go ahead, sorry. Okay. This is part and parcel of the long-term forecast. We did not put in the slide deck we have in prior decks. It's a growth in the market we see of 2.5x between now and 2030 of the total market consumption for lithium. And while we spent in the last question, a lot of time talking about AI data centers and grid storage demand, that's about 25% of demand. The well over close to 70% of demand in the space or more is for lithium is driven by EVs. We -- China continues to be strong. The interest thing about China is that it is now over 50%. It is well below the tipping point from a cost standpoint. So the pack costs are well below $100, in some cases, half that level. And so that's producing a car that's now more competitive than an internal combustion engine with an incredible amount of vehicle choice to consumers there and healthy demand for both battery electric and plug-in hybrid vehicles. Now as that market gets bigger, the percent growth rate obviously gets smaller because it's just the law of large numbers, if you will. The growth is still -- the penetration we still expect to continue. We're encouraged most recently and expect a continuance into next year in Europe. Europe has -- there's a lot of discussion about the long-range emission targets, and we have to just remain vigilant as to what the policy decision there is. In the short term, there's been a commitment to the next step in that CO2 reduction across the fleet on average. And while some benefit was given to go slower this year, they still have to hit an average 3-year target, which means they're going to have to go faster from a supply side to produce such vehicles in the coming years. Probably our most -- not questionable, but difficult to predict market for EVs would be the U.S. All of those technology trends that I described should be favorable to cost and adoption. Even here in the U.S., we're at that tipping point on pack costs. However, policy and other things are -- may not be supportive of that. So we just have to wait and see. However, that is the smallest of the 3 major markets. It's only about 10% of the lithium or lithium demand or not saying that rate of EVs are in the U.S. So that outlook we see flowing into next year as well. Operator: Your next question will come from David Deckelbaum with TD Cowen. David Deckelbaum: I did want to follow up and maybe with Neal, just post Eurecat and Ketjen partial monetization, obviously, a significant amount of capital coming in. One, I'm trying to think about how much capital you'd be saving on the CapEx side, '26 just from divesting those assets. But more importantly, once the proceeds come in, in the first half of '26, I think you've talked about it increasing your ability to delever. What do you see doing with those proceeds near term? Or has this just become a cash hoard to opportunistically look at the balance sheet? Neal Sheorey: David. So let me -- if I hit all your questions here. I think in terms of -- I think you were asking what is the CapEx from Ketjen. I think on a going-forward basis, you should think about roughly 10% of our CapEx is related to Ketjen, and that will be what would potentially come off as we get into next year. Now we obviously have to see when the transaction will close. So there might be a little bit of Ketjen CapEx in our numbers next year, but maybe just for the first half of the year. This year, Ketjen's CapEx admittedly was a little bit higher than that. That was mainly because Ketjen was finishing its own growth investment called ZSM-5. That project is done, but we did have a little bit higher CapEx through the year related to Ketjen. In terms of -- I think the second part of your question is sort of what are we going to do with that cash? Look, I think we have always said that delevering is one of our top priorities as a company, and we're at that point now. We obviously have enough cash on hand to take out or repay the debt that's coming due here in a few weeks. That will happen in the normal course. And I think what you can expect is that once we have line of sight to getting to the proceeds around Ketjen, look, I think that's when we'll get a lot more serious about acting with that cash. We're not going to necessarily let it sit on the balance sheet for too long. And we have some thoughts around how we want to do that with regards to delevering as well as the other capital priorities that we have on our slide in the deck. So I can't give you any more specifics around timing, but obviously, we're developing our plans now. David Deckelbaum: Appreciate that. And maybe just a second one for Neal or Kent. Obviously, super commendable job this year, just getting the free cash neutrality. I know part of the benefit was -- or you did have some help from a customer prepayment, but albeit at the bottom of a pricing cycle here. As we go into '26, I know a lot of people have asked about the free cash outlook. But I guess in isolation, one tailwind that I am curious on is just the outlook for dividends from Talison, which I guess, as I think about CGP 3 completing and coming online, should that be a credible tailwind going into '26 in your view? Neal Sheorey: Yes, David, I can start on that. So we kind of covered that a little bit earlier in the Q&A, just to go back to that is that CGP 3 is basically in the tail end of the investment part of things, and it will start to ramp as we go through 2026. But you should think about kind of the majority of 2026 really being the ramp period for that facility. So 2 big things, I think, that the Talison dividends will be dependent on is, obviously, number one, how well or quickly that unit ramps up, and we're working with the JV right now to understand what that's going to look like as they tip over into start-up. But then the other part, of course, is pricing. And so it's a little early for me. We never do try to call pricing. It's early for me to call pricing for spodumene across the balance of 2026. We're also working with the JV also through their budgeting to understand the levers that the JV has as well. All the partners are very interested in dividends out of the JV, especially as we get through this investment phase. Operator: Thank you. That is all the time we have for questions. I will now pass it back to Kent Masters for closing remarks. Jerry Masters: Thank you, operator. In closing, I want to thank you all for your continued support and trust in Albemarle. Our strong results this quarter, enhanced outlook for 2025 and ongoing focus on operational excellence position us well for the future. With our world-class resources, leading process chemistry and commitment to customer success, we're confident in our ability to create lasting value for our shareholders and seize opportunities ahead. We appreciate your partnership and look forward to connecting at our upcoming events. Stay safe, and thank you. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Masataka Kaji: Good evening, everyone. Thank you very much for taking precious time to attend Ajinomoto's Fiscal 2025 First Half Earnings Call. We thank you very much for your time this afternoon. I am Kaji of the IR office. I'll be serving as moderator. Let me first introduce the participants from the company. We have Representative Executive Officer, President and CEO, Mr. Nakamura; Representative Executive Officer and Executive Vice President, Mr. Shiragami; Executive Officer and Senior Vice President, General Manager of Corporate Division, Mr. Sasaki; Executive Officer, Senior Vice President, General Manager, Food Products Division, Mr. Masai; Executive Officer, Senior Vice President, General Manager, Bio & Fine Chemicals Division, Mr. Maeda; Executive Officer and Vice President, in charge of Finance and Investor Relations, Mr. Mizutani; Executive Officer, Vice President of Supervision of Frozen Foods, Mr. Kawana ; Executive Officer in charge of Diversity and HR, Ms. Kayahara; Corporate Executive General Manager, Bio-Pharma Services Department, Bio & Fine Chemicals Division, Mr. Otake. 9 members from the company are present today. For today, at the outset, Mr. Nakamura will explain the overview of the first half results for the year ending March 2026 and also the corporate value enhancement initiatives, after which we would like to move on to the Q&A session. We expect to finish the entire meeting in about 1 hour and 30 minutes. The materials to be used for today's presentation is already posted on the IR information site of our corporate home page. Please look at them as adequate. Please be advised that this session will be recorded, including all the way to the Q&A session to be posted on the company's IR site later. Now without further ado, we would like to begin the meeting. Mr. Nakamura, the floor is yours. Shigeo Nakamura: Now I, myself, Nakamura, will make presentation. What I would like to talk about is 2 points. Both sales and business profit in first half of FY 2025 remained at the level of previous year, while progress toward the full year plan is slightly behind schedule, we are quickly addressing the issues faced in Q2 FY 2025 and aim to steadily achieve our forecast for FY 2025. In our efforts for further growth and evolution of ASV initiatives, we have identified issues, set out a direction for actions and worked out concrete strategies. We will evolve our activities to achieve the 2030 Roadmap and we'll tackle the creation of innovation to achieve sustainable growth over the medium to long term. This slide presents a digest of first half financial results of FY 2025. Sales was JPY 738.8 billion, nearly unchanged year-on-year. Revenue increased in Healthcare and others with the impact of the sale of Althea excluded as well as in Seasonings and Foods, but decreased in Frozen Foods. Business profit was JPY 86.7 billion, nearly unchanged from the previous year. Profit attributable to owners of the parent company increased 2% from the previous year. We are thoroughly committed to achieving bottom line profit as well. This slide shows an analysis of the changes in the business profit in the first half of FY 2025 and of FY 2024. The change in GP due to changes in sales decreased by JPY 2 billion due to decreased revenue. The change in GP due to change in GP margin in both the Food and Healthcare and others businesses contributed to improvement of the GP margin and GP increased by JPY 10 billion overall. In line with our 2030 Roadmap strategy, we'll firmly control SG&A expenses while undertaking investments aimed at future sustainable growth. This slide shows a year-on-year analysis of changes in business profit by segment for the first half. For reference, at the bottom of the slide is analysis of changes for the full year forecast from the previous year's results. In the first half, profit decreased in the Seasonings and Food and the Frozen Foods businesses. Profit increased in the Healthcare and others business. While progress appears to be lagging versus the full year forecast, we expect an increase in profit in the second half. Looking closely at the 2 businesses where profit decreased, the Seasonings and Foods was affected primarily by a profit decline in Umami seasonings for processed food manufacturers and oversupply in the market due to increased production and new entry by major Chinese manufacturers. In the Frozen Food business, key reasons for the decrease were the inability of home use frozen foods in Japan to fully meet the diversifying needs of consumers and the loss of mainstay product market share to private brands, et cetera, following price increases with the result of sluggish sales. Later slides will look at the current situation and our comeback strategy. In Healthcare and others, business profit increased significantly in the Functional Materials. Profit also increased in Bio-Pharma Services & Ingredients. This slide shows our forecast for FY 2025. Due to the shift of promotional activities for Frozen Foods in North America to the second half and expectation of a significant profit increase for CDMO business in the second half, sales and profits are projected to rise in the second half. In Umami seasonings for processed food manufacturers and frozen foods in Japan, as areas in which progress is behind schedule will act agilely to recover sales and profit in the second half. At the same time, amid positive market conditions, both sales and business profit in the Functional Materials grew to 120% of the previous year's levels in the first half. We will continue to accelerate growth in the second half. We aim to achieve our forecast for the group overall. This slide shows progress toward ASV indicators of the 2030 Roadmap in the first half of FY 2025. The organic growth rate remained 1.9%, but EBITDA margin steadily grew to 17.5%. These are the ASV indicators for each segment. This slide breaks down sales into volume and unit prices for Sauces & Seasonings and Quick Nourishment both in Japan and overseas with an analysis of change in business profit. Sales in Japan in the first half were 107% year before, and volume was 94% and unit price was 113%. Within this, sales of coffee grew to 120% versus the previous year due to price increases despite a decrease in volume. Consumer frugality increased and second quarter was also affected by extremely hot weather, but sales of Food Products in Japan, excluding coffee, exceeded last year's results, achieving 101% in overall sales with volume at 99% and unit price at 102%, responding to high raw material costs and the weaken with price increases. Overseas sales increased to 103% versus the previous year. Volume remained flat, while unit prices rose to 103%. Volume in Sauce & Seasonings achieved low single-digit percentage growth. In addition to Umami and flavor seasonings, both exceeding last year's levels in terms of growth and volume and unit price. We achieved solid growth for menu-specific seasonings. We realized unit price growth not only through price increases, but also by increased sales of high value-added products. On the other hand, RTD coffee, sensitive to economic trends, saw a decline in volume. In SG&A expenses, we focused investing in advertising to enhance our future brand value. As a result, business profit increased by JPY 2.5 billion, coming close to our full year forecast of JPY 3 billion. Now I will look at results by subsegment, beginning with combined overseas and Japanese results for the Sauce & Seasonings business. This business, a cornerstone of our group, is resistant to changes in the macroeconomic environment and is steadily growing sales. Business profit margin fluctuated significantly during the COVID-19 pandemic and in FY 2022 fell to the level of 10 years earlier. Due to soaring raw materials prices due to initiatives such as repeated price increases and increased sales of high value-added menu-specific seasonings and also introduction of new products, business profit margin in the first half of FY 2025 exceeded that in FY 2019, which was before the pandemic, we'll continue working to increase sales and profit margin to support the stable growth of Food Products business. This slide looks at Umami seasonings of processed food manufacturers. In the first half, revenue and profit decreased in MSG and nucleotides. This was mainly due to both increased production and new market entry by major Chinese manufacturers, leading to oversupply in the market. This business has suffered drops in profit in the past due to increased production by competitors and high prices of raw materials and fuels, we see the decrease in revenue and profit shown here as originating in a cyclical phase, not a change in business structure. We believe we can restore a business foundation that generates stable profits. Umami seasonings for processed food manufacturers is an important business that supplies main ingredients for B2C seasonings. In April this year, we established the MSG business collaboration promotion department as part of our Food Products business orchestration and further strengthen the linkage between B2B and B2C. By centralizing the management of B2B and B2C businesses to optimize company-wide operations, the MSG business aims to achieve sustainable growth and maximize profitability. We also actively engaged in protecting our intellectual property, including filing lawsuits against infringement of our MSG manufacturing patent, an intangible asset of our group to maintain our competitive advantage. We also use our proprietary technologies to enhance productivity and cost competitiveness. With these measures, we will secure our competitiveness and advantageous position to grow continually. Next, Frozen Foods. The issue in Frozen Foods in Japan is sluggish sales of home-use products. Strong performance continues in restaurant and industrial use products for which we have narrowed our product strategy targets and channels as well as in the Aete frozen lunch box within D2C services that meet niche consumer needs. In particular, Aete is expected to achieve growth with annual sales projected to reach billions of yen. However, our home-use products, which enjoy strength in mass production have been slow to fully meet the diversifying needs of consumers. Following price increases, our mainstay Gyoza products lost over 10 percentage points of market share, primarily to private brands. Amid increasing consumer frugality driven by rising living costs since September, we have been revising our pricing strategy under awareness that we have not been providing products at prices that meet the needs for cost effectiveness. Results have quickly become apparent. In September alone, following a strategy revision, we regained the top share with an increase of over 2 percentage points. By recovering market share, we will further increase points of contact with consumers to enhance corporate value for the Ajinomoto brand. In our mainstay Gyoza products next spring, we'll introduce revised products intended to balance product strength with profitability. We'll work to recover share and strengthen our profit structure. In the medium to long term, we'll reinforce the consumer perspective for Gyoza and for home-use products as a whole, expand a new lineup of products with those that meet consumer needs and revitalize the business. Heading toward 2030, this business will contribute to the growth of the Food Products business by increasing sales to a CAGR of about 3% and business profit to about 7%. This slide deals with Frozen Foods in North America. In the first half, both sales and profit declined year-on-year even on a local currency basis. The main factors are transient, the U.S. tariff policy and a timing shift in customer sales promotions to second half. We believe that we will be able to grow sales and profit in the second half. Our North American Frozen Foods is essentially a local production for local consumption business. However, some products are imported from group companies in China and have been affected by higher tariff rates. We have already responded with price revisions to these products and believe that we can improve profitability in the second half. Performance was also affected by the fact that sales promotions in large-scale distribution channels carried out in the second half of the previous fiscal year were not carried out in the first half of the current fiscal year and are planned to be carried out in the second half. The North American business structure has evolved into a stable one with structural reform and initiatives to expand TDC margin. While quarterly fluctuations may occur, we will solidly expand the business throughout the year and in the medium to long term. Previous slides looked at current status of the Food Products business and action taken. We recognize that in the first half, we faced the issues in the Frozen Foods in Japan and Umami seasonings for processed food manufacturers. We'll strictly manage these areas. As CEO, I recognize the importance of properly assessing the true nature of the issues. In addition to a return to growth through actions to address Frozen Food business in Japan and Umami seasonings for processed food manufacturers, we will achieve steady volume growth in the Food Products business overseas and with the recovery of profit margin to the pre-pandemic level in the Food Products business in Japan, we work to achieve the 2030 Roadmap. Next, about the Healthcare and other segment. I'll begin with Functional Materials. In the first half of fiscal '25, there was no change in the environment, i.e., the strong sales for AI servers, the recovery of PCs and general purpose services continued from 2024. Both sales and business profit grew year-on-year in excess of our expectations. Assuming no major changes in the environment, we expect to maintain strong momentum in the second half as well, sustaining a trend from the first half. We will work to grow our Functional Materials business, including in areas peripheral to the Ajinomoto Build-up Film by solidly fulfilling our responsibility to supply and meet demand by undertaking next generation and next-generation development within the ecosystem with the end users included. This shows the current status of Bio-Pharma Services CDMO by geographic area. Europe continues to perform well. India is also receiving many recoveries and contributing to profit. There's no change in the status of orders, and we expect this momentum will continue in the second half. The results for AJIPHASE in Japan are below the previous fiscal year. This is due to the shipments being moved back compared to the fiscal -- previous fiscal year when shipments were concentrated in the second quarter. However, the progress vis-a-vis the full year trend target remains unchanged. In the second half, we expect growth in AJIPHASE shipments and AJICAP to make a profit contribution. In North America, Forge is performing well, and I'll explain the details in the next slide. This slide is about Forge, the North American gene therapy CDMO that we acquired in 2023. Within the advanced medical care field of gene therapy, Forge has won the trust of customers and increasing its sales on the strength of its proprietary technologies. Projects are also progressing smoothly as sales grow dramatically and customers steadily increasing. The number of projects that have obtained IND approval, that is the U.S. FDA approval for the start of new drug clinical trials has also increased significantly following our acquisition. There are also projects aiming for early commercialization. Funds to cover the expenses of preparing for commercialization, which are scheduled for next year or later are being used earlier than planned. While this will weigh down short-term profit, we will pay these expenses ahead of schedule as investments to accelerate future growth and will aim for early commercialization. We will work to achieve the target of a positive EBITDA during the current fiscal year by doing our best to absorb these upfront costs through increased sales. And Mr. Otake, who is a member of the Forge management and well versed in on-site operation is present today, so we welcome your questions. AJICAP is a proprietary antibody conjugate ADC technology based on AminoScience. Our ADC drug discovery support services and manufacturing adopt an asset-light business model centered on AJICAP technology licensing. Last month, we signed 2 new AJICAP technical license agreements. One of these is with an undisclosed overseas companies and the other is with Astellas Pharma Inc. And we will continue to conclude new license agreements with companies in Japan and overseas with both major and venture enterprises and will contribute to develop AJICAP as a growth driver. With the aim of maintaining financial soundness and maximizing capital efficiency from 2025, we are changing our fiscal discipline indicator from previously net D/E ratio to now net interest-bearing debt over EBITDA ratio. We will continue to keep our financial leverage at an appropriate level, one that can contribute to organic growth and capital efficiency. Operating cash flow in the first half fiscal 2025 was JPY 93.2 billion, about JPY 11.5 billion higher than the first half of 2024. We will continually strive to improve our cash generation capability. As reported in our recent release on the construction of a new factory in the Philippines, we will steadily invest to grow organically, and we will also promote -- proactively invest in intangible assets that can create innovation. These are the key management indicators of our midterm ASV management 2030 Roadmap. We will aim to steadily achieve the guidance for fiscal 2025. Based on our foundation of sustainable business growth, we are working to further strengthen our cash generation capabilities or our earnings power. Building upon these achievements, we are promoting resource allocation with a focus on capital efficiency in line with our Roadmap. To further improve capital efficiency, we are actively implementing shareholder returns and striving to enhance our corporate value. In addition, we remain committed to achieving the goal set out in our Roadmap of tripling EPS in 2030 compared to the 2022 level, and we will make -- we will continue to make steady progress towards this target. Based on this approach, in addition to the JPY 100 billion share buyback announced on May 8, we are pleased to announce a new share buyback program of JPY 80 billion with the acquisition period starting from December 1 and until November 2026. Going forward, we will continue to enhance shareholder returns as we strive to further improve capital efficiency. From this slide, I would like to talk about the progress of our initiatives aimed at further growth of the Ajinomoto Group and the evolution of ASV initiatives. After I took office as CEO, we implemented a 60-day program from April to address the issues identified through cross-water analysis and constructed a framework for identifying management issues and clarifying the responsibility and what actions to take. The outcome was that we were able to lay the groundwork for change. Since July, we have discussed concrete strategies and actions based on this framework in what is called the Ajinomoto Group Executive Seminar or AGES, with a focus on executive training for all executive officers, corporate executives and corporate fellows. And the content of this is described on the next place onwards. At the AGES meeting, we discussed 7 topics. We first focused on the creation of the new businesses that will drive our mid- to long-term growth, and we discussed concrete strategies and actions in 4 key areas: health care, food and wellness, ICT and green. In the future, we will deepen discussions from the angle of 3Cs: continuity, change and challenges. I recognize that creating new businesses that comes after ABF is my duty as CEO. And I will establish an R&D budget that we can flexibly utilize, and I will leverage my experience of commercialization APF to nurture the seeds of new businesses. At the AGES, in addition to the 4 topics that I mentioned, we discussed 3 other topics aimed at maximizing management's resources, strengthening corporate brand, strengthening global management structure, strengthening data-driven management. For example, with respect to strengthening corporate brand, we examine the ways to increase brand value and so that it can lead to business expansion, taking into account the different conditions in each market and regions. Furthermore, to strengthen data-driven management, we will further promote the advancement of management through the utilization of data. We will confirm our progress on these topics at the Executive Committee meetings and lead it to actions. Our group will work as one to increase our corporate value. The Ajinomoto Group is working steadily to achieve our 2030 Roadmap by evolving our ASV initiatives while making regular course corrections to our medium- to long-term plans and group-wide strategies aimed at addressing the management issues. Also drawing on the discussions at the AGS meetings, we plan to begin discussions of our long-term vision during the current fiscal year, which is 1 of the 7 important management matters for the Board of Directors, and we'll make those discussions on the starting point for the post-2030 by looking at our strategy for achieving the 2030 Roadmap with the post-2030 plan. And by agilely making course recorrections, we will drive innovation and endeavor to create new businesses that can come after ABF. Here, I intend to demonstrate the leadership as positive energizers promoting this linkage. Next, about our human assets. Human assets are the most important intangible assets for the Ajinomoto Group. We are currently in the phase of strengthening our ability to plan and execute. The evolution of our human assets organization and corporate culture is vital in supporting this. During the time of former CEO of Fujie, we broke down the silos in Japan and achieved growth for the group. During my time, we will advance global integration and aim for further growth. Towards this end, we will appoint diverse human resources regardless of gender or region to overseas assignments or key positions. We will also develop career paths that cut across business departments such as Food Products and bio and fine chemicals and functional departments such as technologies and sales to achieve further diversity, evolution into a truly global company. That is the future that I envision for Ajinomoto Group. The preliminary scores for the 2025 engagement surveys are shown here. For ASV realization process, there were increases in every category, a 2-point increase from the previous fiscal year to 78 points. The score of empathy for our purpose rose to 94 because of the activities to promote empathy with our philosophy, which tie the purpose of individual employees to the Ajinomoto Group's purpose, contributing to the well-being of all human beings, our society, our planet with AminoScience. We see this increase as an indication that activities are steadily taking root throughout the group. The score of enhancement of productivity, which has been an issue, improved by 9 points to 28. Although the score remains low, we added a new question this fiscal year. I believe the unnecessary approvals are kept to a minimum in my daily work when making decisions. This question received a favorable response score of 78. While there are still many approvals required before decisions are made, we have confirmed that a certain number of employees do not necessarily perceive these approvals as unnecessary. We will continue to analyze the engagement survey and work towards further improvement. Innovation for the future is created by our human assets. Through the creation of ASV, we will strengthen our human assets and aim to become a company that can continue to create new innovation. This is the last message for myself. Even in an uncertain environment, we will properly recognize change, respond quickly and aim to achieve our 2025 guidance in a steadfast fashion. We will endeavor to achieve the 2030 Roadmap ahead of schedule through sustained growth in the Food Product business and dramatic growth in the Healthcare and others business, always maintaining a healthy sense of urgency. Aiming for growth beyond the 2030 Roadmap, we will further enhance corporate value by creating concrete strategies for realizing a vision and by sustainably driving new innovations. I believe that creating new innovation is my duty as CEO. The assumption that the present state will continue is the most dangerous thing that we could do. By always maintaining a healthy sense of urgency, we will sustainably grow the group. That's all for myself. Thank you very much for your attention. Operator: [Operator Instructions] The first question, Saji-san from Mizuho Securities. Hiroshi Saji: On Page 38, full year segment numbers, how to look at this? In first half so it was flat mostly. And the full year forecast has remained unchanged. So you have -- you are increasing -- expecting a significant increase in second half? As for CDMO in Healthcare, there's a good response. That's what you have explained. But especially for Seasonings and Sauces and Frozen Foods, I think this is quite deviant from the plan in the first half. So in the second half, to what extent you see the viability of your forecast? What will be the driver for increased numbers in the second half? Shigeo Nakamura: Can you -- do you want me to explain the second question? Well, thank you very much for your question, Saji-san. For the full year forecast, we haven't changed. In the first half, in the food business, the Umami seasoning for processed food manufacturers has seen a decline in profit, and there was an extreme heat in Japan. And because of a shortage of rice, there was some decline in sales and profit, but we have to provide some 9, 10, 11, they are all performing well. So we can increase the months in the second half. So for Bio and Fine, Maeda will explain. Sumio Maeda: First, as for food business, Masai will answer the question. So let me give you more details. First of all, as for Seasoning and Food, there will be 50 more in the second half compared to the first half. That's what you had asked about. As for Seasoning and Foods, there's B2B and B2C, and this is the total sum that we're talking about. As Nakamura said, especially for Umami seasonings for processed food manufacturers was quite challenging in the first half. So how to recover this is what I'm going to explain. And then I will talk about home-use seasonings. In the Solutions and Ingredients division or B2B business, the following 3 are the differences between first half and second half. The first one, is the special factors, extraordinary factors. So this year, Brazil Ajinomoto, the largest site for us in Brazil, in the first half, MSG new technology introduction was prepared and construction work was done, but we got stuck and introduction didn't go well, and we struggled slightly. However, this issue has been already resolved. So in the second half, from the beginning, we can expect increased production because of this new technology introduction. So this will go well, and this will also lead to cost reduction. That's the first one. And second one, the North America, in the retail, there is a loss of a major customer, but this can be made up for. So this will be -- there will be a recovery in the second half. In the fermentation, the raw materials are going to be below budget in the second half. That's what we're expecting. So we are seeing signs of recovery in the second half for B2B because of those 3 factors. And as for home-use, B2C, especially in Japan, there are several points that I'd like to emphasize. First of all, as you know, our seasonings food is strong in winter. And ahead of the peak in the second half, there's a very favorable environment that is being built up. Especially what is important is [ HEF ] coffee and there's a lot of recovery signs and green beans or the raw material prices are going up. But overcoming that, this business has started -- has been set up in first half, and this will be carried over to second half. So AGF will be in even better position in the second half. And usually, the sales promotion expenses are recognized in February and March, but we have intentionally distributed and evened out this sales promotion expenses in the first half. So this will be favorable in second half. And in first half, mayonnaise, which is one of the major businesses for us, the competitors in mayonnaise has run centenary anniversary campaigns in a large scale. So we struggled because of that. But from September and October, we have been successful in recovering our share. So this will be all reflected as it is in the second half. And last but not least, in last year, there was a large-scale sales promotion for Umami seasonings, that went well. But in the first half this year, we were below the last year's level because customers have bought a lot, and there was a home inventory that was built up, but this has been resolved now. So we can see a recovery in Umami seasonings in the second half. There are many others favorable points, but that's why we are expecting recovery in the second half of seasonings. Yoshiteru Masai: Thank you very much, Saji. As for Bio, Fine, just I'll be very brief. On Page 38, it's JPY 17 billion increase. But if you go back to JPY 4.2 billion ahead of the last year's and only JPY 4.2 billion improvement in first half, but JPY 17 billion in second half. So in '24, in Q2, there was a peak. But in fiscal 2025, in Q4, as Nakamura said, we'll see profit peak. So JPY 17 billion improvement from the previous year against the budget, as you can see in the material, Bio, Fine and Healthcare after first half, 48% progress against profit budget for the full year. So there will be stronger profit in the second half. So 48% in the first half and 52% in the second half. So this will be how we can match the full year forecast. Hiroshi Saji: This will be leading to the second question. So the Umami seasonings for processed food manufacturers, I think there was a JPY 1.4 billion profit decline. So there were some troubles or a challenging environment in the past. So Meihua has already announced like 10,000 ton class production capacity increase. So there could be a sustained oversupply next year. So with this seasonings, is there any prospect for recovery for the second half? Is it really realistic to expect recovery? Shigeo Nakamura: So Masai will continue to answer that question. Yoshiteru Masai: First of all, there is a mid- to long-term prospects and also short-term issues. As for MSG, including nucleotide, the Chinese manufacturers increased production capacity was started in 2023, 2 years before. And from that timing on, we have been quite concerned and taking actions, as Nakamura said. This Umami seasonings, we have combined B2B and B2C businesses and centralized management was considered to be important. So MSG collaboration promotion department was established. So we struggled with the production capacity increase by Chinese manufacturers in amino acid in the past. But MSG and amino acid, the biggest difference between these 2 is that in MSG, in Ajinomoto Group, there is internal sales within the group, and that proportion is quite high. More than 70% of MSG is intra-group sales. So home-use Umami seasonings or flavor seasonings are expected to increase steadily. So in the long term, this internal sales proportion of 70% is going to be raised to more than 85% by 2030. And that is our plan. And also going forward, even if prices are increased, fortunately, there are customers that want to buy from Ajinomoto. There are so many customers that say that. So because of those 2 factors, in the mid- to long term, even if there's a continued competition from Chinese manufacturers, we are seeing the environment where we can compete. And in the short term, there are various actions to counter competitors in this MSG collaboration promotion department. And one of them is what we announced on October 14 as a press release. Our Chinese competitors have infringed upon our intellectual property rights, and we have taken action. And this will break -- put the break on export increase. And as for nucleotide, we are planning various initiatives to counter the competitors. We can't say everything here, but organization on a systematic basis, we are taking actions against competitors. So please feel assured. Especially for the short term, as I said, in Brazil, this new technology introduction will contribute in the second half to the profits. And in the short to midterm, there will be new technology introduction that will be done in various factories around the world. So there will be a long-term recovery in MSG business. Operator: Now moving on to the next question. This is from Goldman Sachs. Miyazaki-san, please begin your question. Takashi Miyazaki: This is Miyazaki from Goldman Sachs. I also have 2 questions. The first question, from the first half towards the second half, you just talked about the trends. According to the presentation material, strategic expenses -- strategic investments, you said that there are several initiatives implemented for strategic purposes in the first half already. You also talked about SG&A on Page 5 and also the Frozen Foods structural reform-related initiatives. And for Forge towards commercialization, you talked about investments and expenses for commercialization. So are there some one-off things that are incurred in the first half only, but not in the second half or something that will not incur in the next year? So what is the amount of strategic spending and how much in which area, if you can explain that? Shigeo Nakamura: Thank you very much, Mr. Miyazaki, for your question. As you rightly pointed out, SG&A changes are presented on Page 6. And roughly speaking, personnel expenses, marketing spend, R&D investments, those are recording increases. Besides them, separate from them, DX-related and AI-related system investments have been made. And this relates to licensing fees. So these expenses are likely to continue in the future. Regarding the expenses for bringing forward the commercialization of Forge, this is a one-off expense for commercialization. So this is not going to be recurring. Anything to add, any members? Is there anything to add? Unknown Executive: No, thank you very much for that. Yes. On Page 20, as you can see on Page 20, the IND approval, this is, I think, pleasant cry, but this has happened much earlier than expected. So you have to produce larger quantity than expected. So this, I think, is a one-shot expenses for commercialization related including consulting expenses. I think as Nakamura mentioned, so those one-off expenses have occurred in the first half of this year, and that had an impact on the performance. Takashi Miyazaki: Okay. I just wanted to confirm, so Forge-related expenses, it's difficult for you to quantify. Is it difficult for you to quantify? And also for the personnel expenses on Page 6 and marketing spend and DX related? Those investments incurred in the first half of this year and those are likely to continue and be recurring in the future as well. Is that the right assumption? Shigeo Nakamura: The Forge-related expenses is not disclosed, but that was quite a hefty amount. Takashi Miyazaki: Okay. I understood. Okay. and the remaining expenses are likely to continue in the subsequent years according to my interpretation. And the other one is Functional Materials related. So I have a question relating to Functional Materials. In the second quarter compared to the first quarter, I think the sales was slightly declined, but still be higher than the target and the plan and the profit margin was higher than the first quarter in the second quarter. So I think you are seeing a favorable trend here. So as in the second quarter, can we expect a favorable performance comparable to the first half? Shigeo Nakamura: For semiconductor overall, I think the demand and also your competitiveness in the market? I'm not worried about these factors. But ABF packages, for example, there is a restriction in the supply of some of the components. And because of that, the demand for ABF was dragged by that. And I think the demand has come down -- will likely come down. Takashi Miyazaki: Do we have to anticipate such kind of risk? So can you talk about the second half and towards the next year? What is your recognition? If you can update on your recognition of this business? Shigeo Nakamura: Thank you very much for the question. As I explained earlier, the AI-related demand, high function semiconductor is enjoying great demand, and I think that is the most advanced products. So therefore, the gross margin is high, and that's the reason why we are performing like this. The semiconductor WSTS, World Semiconductor Trade Statistics, WSTS, this is an indicator used in the semiconductor business. On June 3, it was not updated, but the calendar year logic IC growth was plus 23.9%. That was the expectations back then. And I think we are close to 20% growth is already shown here. So we have been able to enjoy growth as planned. In calendar year 2026, this is going to come down to 7.3% according to WSTS projection. We believe that is too conservative. That is rumored to be too conservative, but there might be some factors behind that. It's impossible for us to comment on the supply situation of other components. But according to what we hear from customers, in the second half, we expect a favorable performance in the second half as well. Takashi Miyazaki: Okay. Then let me confirm. So the -- set aside the components of other companies, I cannot -- I don't want to ask that. But as you have been engaged in communication with your customers from before and according to that conversation, you have an outlook that is expecting a favorable growth? Shigeo Nakamura: That is correct. Operator: Next, from English webinar, there is a person who wants to ask a question. Bernstein, Mr. McLeish, please. Euan Mcleish: Just following on from the ABF question there. Can you confirm that you're not seeing any negative impact at all from downstream production bottlenecks at this stage? Is that the right understanding? Shigeo Nakamura: Thank you very much, Mr. McLeish for your question. So in terms of first half growth, well, if there is more needs, then it could be settled down. But with regard to the growth in the first half, we can continue on with that pace of growth in the second half. Euan Mcleish: Okay. And then over in the domestic food business, we've seen that coffee bean prices have been declining for almost 8 months now. When do you expect that to benefit your margins? And how does this change your coffee portfolio strategy in Japan going forward? Shigeo Nakamura: Well, as coffee beans procurement lead time is long, 6 months to 1 year is the contract period. So the most recent coffee beans lower prices will be reflected at the lagging timing. So I'd like to let Masai answer the question. Yoshiteru Masai: Masai speaking. Let me answer the question. Actually, -- so there is some time lag, but in actuality, AGF coffee business from this first half compared to the previous year has been making more contribution to profits. So there's no detailed breakdown. But if I may say, in Japan, in this page on the left, so plus 0 compared to last year as this graph shows. But in the coffee business, actually, in the first half alone, compared to the previous year, more than JPY 1 billion profit increase was recorded. So then you may ask what are the negative businesses that are offsetting that. So let me make some comments. So in this graph, it's not from the apple-to-apple comparison perspective, from this fiscal year, part of the common fee has been allocated to the business units. So about JPY 600 million has been paid for by the business units. So excluding that, then in the previous fiscal year, plus 0 is shown in this graph, but actually plus JPY 600 million or JPY 700 million is actually -- would have been shown. And then part of that is borne by coffee business. And there's JPY 600 million negative numbers in other business. But at least for the coffee business, there is significant signs of recovery that is manifesting in coffee business. So I'd like you to understand that way. Operator: Now moving on to the next question. Morgan Stanley MUFG Securities. Miyake-san, please. Haruka Miyake: This is Miyake from Morgan Stanley. I'm sorry, I have a sore throat, so maybe it will be difficult for you to hear. The overseas seasoning -- food and seasoning for processed food, I just wanted you to give me so much color regarding the changes. If you look at the Page 11, as far as I look at this, the SG&A increase is a major factor behind the changes that is diluting the revenue growth. So if we look at this by region, S&I is also included here. But if you just single out the second quarter only and talk about the Sauce & Seasoning altogether, there was a decline of JPY 1.8 billion in revenue. So the seasoning for processed food accounts for JPY 1.4 billion out of that, I believe. But the raw material prices is also decreasing for fermented food. And also you have increased expenses, you said. But if you look at the general trend of revenue, the July, September quarter, I think the trend was strong. So if you could just talk about the profit performance driven by revenue growth. And also, if you can divide between consumer and also the restaurant channel demand and how have they affected the decline in revenue by those different channels? Shigeo Nakamura: Okay. Thank you very much for the question, Mr. Miyake. For overseas, first, SG&A. In order for us to increase the brand value, we have made intensive investments for the brand investment. And if you look by segment, the volume is not increasing in Thailand, and that is due to the coffee bean raw material price increases, and therefore, the coffee drinks, beverages in Thailand did not increase so much in terms of volume vis-a-vis the competition. And also instant noodles due to geopolitical reasons in Cambodia, those exports that we had made in Cambodia did not grow as much. So those are one of the factors behind the revenue performance. And maybe Masai-san can add some more comments. Yoshiteru Masai: Thank you very much, Miyake-san, for the comment -- for your question. I would like to supplement. As Nakamura-san just mentioned, in addition to what he just said, I would like to add that, as you rightly pointed out, in fact, the situation was difficult in some regions, especially for overseas home-use business. What are the challenges? And in the second half, what are the countermeasures that we are going to implement? I will have to talk about that. Especially in the ASEAN region, the Asian regions, there are 3 points that I would like to share with you. For the Umami seasonings, home-use, because of the competitor in China, there was an indirect impact from this Chinese player because this competitor, they are -- they have been using China. So that's the reason why we are affected by them. And China's players, they are also engaged in a B2C business. So they are a direct threat for us as well. So against this, we have been trying to reinforce our sales. We have taken a meticulous look at it and leveraging our strength, i.e., the strength -- our sales rep strength. We are trying to counter them and fend them off, especially in Nigeria, in Myanmar, we have struggled in some of these markets, but we are seeing the recovery trend already. So I think this will have a positive impact on the second half performance. The second was the flavor seasoning. Flavor seasoning previously, mainly in Europe, there was a global competitor, and that was the main player in the past. But recently, in many ASEAN regions, we are seeing the emergence of local competitors competing directly against us because they are stepping up their activities. The way of combat is different. So therefore, we were confused a little bit in this first half, but we have analyzed already, and we now see how to compete against them. So the competition with the local player is going to be a key factor in the second half of the year. For instant noodles, Mr. Nakamura already mentioned that and talked about Cambodia. But if I add one more comment, another thing that I would like to comment on is Latin America. Latin America, instant noodle is performing quite well. Having said that, however, the production facility is located in Peru, and there is a shortage of production capacity, and that's the reason why we are not able to sell the quantity that we intended to. But we have completed the construction of new line in September. So we are now already pressing the accelerator. So the produced the instant noodles produced in Peru is now expanded sales in other markets, in the peripheral market. So although we struggled a little bit in the first half, but I think these efforts will begin to bear fruits in the second half of the year. For processed food, I've already commented, and I think that will be overlapping. So I won't comment on processed food anymore. Haruka Miyake: And regarding Brazil, you talked about the introduction of new technology, and you struggled in the initial introduction of the new technology. In terms of expenses in the first half, especially in the second quarter, was there any cost associated with that? Shigeo Nakamura: Thank you. That's correct. Yes. Exactly. With the introduction of this new technology, we were not able to produce. So meaning that we only had to incur these fixed expenses. So that had a weight on the cost. But that is not going to be the case from October onwards. So this will have a positive impact on the performance of the second half onwards. Operator: Now let us move to the next question from Daiwa Securities, Igarashi-san, please. Shun Igarashi: I am Igarashi from Daiwa Securities. I have 2 questions. First question, you talked about ABF and to the question of ABF, in the next fiscal year, the numbers look a bit lower, but the major players are coming up with new chips. That's what we heard. So unit price could increase or area could increase. So this could accelerate your growth. Isn't there such expectation that we can have? Can you elaborate on that? Shigeo Nakamura: Thank you very much for your question, Igarashi-san. In terms of statistics, as I said, this is from June and industry is on the conservative side. As you said, each player is coming up with new products. And if you look at our customers, their investments are going well, and there will be more plants that are coming online. So for us, the growth in the statistics is not realistic in our view. So in terms of volume and unit price, you believe that the numbers will be accelerated? Well, for the cutting-edge technologies, the best mix with the cutting-edge products are coming out. And Ajinomoto Fine-Techno Gunma plant, we made investment and that production equipment will have the latest version for AI applications. So what you said is right. Shun Igarashi: And profitability rate in first quarter, you hired people aggressively and profitability lowered. But in the second half, there was a recovery. So is there any changes in the policy? Shigeo Nakamura: Well, we are growing. So we have -- the personnel expenses are increasing and the Gunma new plant has come online. So there will be depreciation costs that will be incurred. So there will be profitability that will suffer a bit. But in terms of cutting-edge semiconductors like AI chips, the products with the better mix are being launched and sold earlier than expected. So that has helped us improve profitability. Shun Igarashi: The second question, the frozen food business in America. So if you look at the profit decline in the second quarter, that seems to be larger. In Slide 16, the tariff has impacted and sales promotion timing, those were the 2 factors you mentioned. Were they all transitory and tentative? And can you see a recovery and also product initiatives like pricing strategy that you talked about in Japan, but in the North America, what are the initiatives that you have in mind specifically? Shigeo Nakamura: So as you said, so the tariff policy in the U.S. and the customer sales promotion timing that have been lagged. Those are the 2 main factors in the U.S. There's nishiki gyoza, that is a premium, and it is performing well and major retailers are having those in the stores in the shelf. And so things are going well. So Kawana will make more comments. Hideaki Kawana: So as Nakamura said -- so with regard to tariff policy, the price increase will be a bit delayed. So there is some impact, but there are some production disruption. So those are all tentative factors, so we can make a recovery in the second half in our view. And as for sales, as was said, nishikino gyoza and the shumai dumpling, they are all delivered to our customers, and we can expect sales increase from there. And also previously, in the food service, we are not selling too much in Asia. But now the shift is for Asia. So there could be more profit margin expected. So we could be more positive in the second half. Shun Igarashi: What about the production disruption? Has it been resolved? Shigeo Nakamura: Yes, this has been completed. Operator: Now moving on to the next question. UBS Securities, Ihara-san. Rei Ihara: Can you hear me? Shigeo Nakamura: Yes, we hear you. Rei Ihara: Ihara from UBS Securities. I also have 2 questions. First, regarding domestic Frozen Food business structural reform, you previously mentioned that you're going to announce your structural reform program, and you did already. But this did not live up to our expectations because, to be honest with you, the second quarter Frozen Food business' profit margin is less than 1%. And then 3% of sales and profit growth of 7% CAGR, that is not going to be a strong impact in any event. And even if the Frozen Food gross profit margin is returned to the pre-COVID era, still that level in the first place is low. So this Frozen Food business in Japan, I think you are at the phase of having to go through a structural reform. With a shorter time horizon, can you take any actions in a shorter time frame? That's my first question. Shigeo Nakamura: Thank you very much for the question, Ihara-san. For the Frozen Food business, drastic reform, well, we have been engaged in structural reform all the time and the integration of our production facilities, manufacturing centers and producing multiple products in a single line. And through these efforts, we try to improve the production efficiency. And also, we have focused on delicious food and launched Gyoza products and so forth. This time around, we have conducted a price hike that does not match with the customers' perception for value. So not only this deliciousness, but we have also decided to focus on affordability and release products -- Gyoza products. So we changed our strategy in that regard. Maybe that will not be conducive to profit margin. So we would like to provide different levels of products. So on one hand, we would like to focus on cost performance, but also time performance and health value and experience of cooking. So we will produce and prepare different menus, different pricing ranges so that we can optimize overall. So the highest productivity -- highest product will be the ready-to-eat with microwave heating only. So those are kind of products that are already available. So wherever possible, we would like to generate profits with all these 3 different patterns of categories. And as I mentioned earlier, Gyoza is a touch point of ours with many different customers. So because Ajinomoto is known for the delicious products, we would like to have customers try many other food products that we offer. So this is a touch point to enhance our brand value. So we are not really complacent with the low profit margin, but I think this offers additional value, not only the prices. Then Kawana-san can add some comments if necessary. Hideaki Kawana: Thank you. I'm so sorry for the concerns that you have. As I mentioned, the growth overseas is larger compared to the Japan growth rate. So that's the reason why we have shifted the focus of resources to overseas. And we have tried to improve efficiency of Japan as a cash co, and that's the reason why we were related in structural reform. There are 2 major challenges that we are facing today. One is that the market is diversified much more than before. So in that environment, the traditional approach of selling only to the mass market will deprive us of some segments like the Gyoza product that we have today is tuned towards the mass market. So the biggest audience -- we are trying to sell the products to the largest audience. But in the current contemporary age, there are more diverse needs, people who want a larger with greater meat portion gyoza, that's taken by other competitors. And there are some other people who want something affordable gyozas, and those are taken by PBs and PB brands. So we have been taking away the market share for different needs of Gyoza products. So in order to address this, previously, we focused on this production efficiency, and we focused on the single products, and that was the reason why we were not able to address these needs, and that has diluted our profit margin. We are now currently going through a reform and so we would like to look into different lineups and have a more broader range of product lineup. So we had this business lineup, but now we look into a different portfolio for different categories of products and thereby improve the utilization of the factories. Fortunately, in October, we have seen a very steadfast growth. So I think you can be reassured about that. The other thing that I wanted to address and the other challenge that we are facing today is that in the market, the frequency of people cooking is now declining in the market. And we have been selling complete meals and staple foods, not only the ready-to-eat meals. And that is the trend that we are seeing in many other industrialized markets. So we were belated in addressing these needs. So we now have the Aete products. So we would like to focus more on the meal products going forward. As we started this initiative, we believe that this is an area where we can leverage our strength, the design of deliciousness, the design of new nourishment, I think we are very good at that. So I think depending on the preferences of the customers and health conditions, we are able to customize. So we realize that we have the strength. So in these areas, we would like to achieve growth in the future. Rei Ihara: Okay. Understood. So my second question, if I may, the share buyback. This year, JPY 100 billion share buyback is already ongoing, and you have additionally announced another JPY 80 billion program this time around. So JPY 100 billion plus, I think, is going to be the size that you are going to address for share buyback per year -- per fiscal year. But if it's JPY 110 billion this year and again next year and then the year after that, if you continue this, the net debt-to-EBITDA ratio will be lower than 2x. I think you can continue that. But the net D/E ratio with more leverage, I think that will have a detrimental impact on your financial leverage according to what I think. So this share buyback program, do you think this can be sustained? If you can comment on that, that will be appreciated. Shigeo Nakamura: Thank you very much for your question. This is on Page 26. We have this cash management policy on Page 26. Of course, the cash that we generate will, of course, be first allocated for investment for organic growth so that we can properly grow the company. Then we'll look into M&A, other inorganic opportunities and the share repurchase is the third priority. So this is the cash management priorities that we have. And on top of this idea, we have decided on the share buyback program this time around. Mizutani will explain in more detail. Eiichi Mizutani: Thank you very much, Ihara-san, for your question. As Nakamura just mentioned, this time around, this share buyback period, if you look into that period, this will end in November 30 next year -- on November 30 next year. So this includes the repurchases planned for next fiscal year as well. And if you can go back to Page 26, this is the cash allocation policy that we have. And at the bottom, you see on the right-hand side, we will shrink to JPY 900 billion as for the cash balance. So the current cash balance plus the JPY 90 billion, if you look at that, the extra things -- because we would like to improve the capital efficiency with this new decision. And the profit that can be spent out for dividends, we'll look into that as well and also manage the debt. We will look at the leverage level. So I don't think you have to worry about that. So that's all for myself. Rei Ihara: But like JPY 100 billion, if you wanted to buy back with a 6-month period, and I think this is -- this period is going to get over shortly. And this JPY 80 billion is going to be done over a 1-year period. If you look at things from that angle, your capability for share repurchase, given that your leverage is now increasing, I think the leeway for additional repurchase is now coming down. Don't I have to be concerned about that? Shigeo Nakamura: Well, again, at the risk of repeating myself, this program will last up to November last year -- next year. And the budget for next year is not formally decided yet, but we have some assumptions for next fiscal year, and we will make sure that the leverage will not be over this level. So we are properly managing that. So I hope that you understand that. Rei Ihara: But the market participants, not JPY 80 billion, but I think they are looking at the level next fiscal year on top of this. I just wanted you to be mindful of that. So that's all from my side. Operator: Now next question from JPMorgan Securities, Fujiwara-san, please. Satoshi Fujiwara: Fujiwara from JPMorgan Securities. I'd like to ask this question to Mr. Nakamura. It's not about specific segments, but in the financial results this time, honestly speaking, it seemed negative and disappointing slightly. That's a fact in various businesses, there are some problems that we are seeing. And as we listen to the presentation, you say that these are all tentative and you can do better in second half. So this could be assuring, but root cause is Japanese -- Chinese players and more intense competitive players' activities. So maybe you have to revisit your management in the core. So the response speed -- I think your company has been quite quick in responding to the changes, but you may have to accelerate that in order to tighten up your management. That may be necessary. So how to run your business? Can you give your thoughts on this as President, Nakamura-san? Shigeo Nakamura: Thank you very much, Mr. Fujiwara-san. Well, this time, there is a healthy sense of urgency that we have. So as much as possible, we have to earn and those business that are growing are growing. But as you said, because of competition from Chinese players, we have been a bit late in responding, as Masai said, but however, in the short term, we have taken actions that we were able to take. And as for mid- to long term, we have instructed business units to accelerate. So it's not exotic materials, but those products that are weakening, including Frozen Food, so successor development has been instructed to Ajinomoto Frozen Food. So we have to increase the speed to even higher level. And we have to be strongly aware of the competition. And that's what we -- I have been saying in my dialogue. So Chinese players more recently have been gaining momentum. So I talked to Korean customers, and I talk about this to our employees and there are 3 impossible or unknowns. You don't rest, you don't go home and you don't sleep. That's what they say about Chinese. But -- and they have 3 shifts, and so they are catching up with Toyota Motor in terms of EV. That's what we are -- I am telling our employees in dialogue. So we have to look at the global environment, and we have to compete with the players around the world. So we have to keep this sense of urgency. Satoshi Fujiwara: There's another question. So I'd like to ask one more question, if I may. In the Frozen Food, I do understand what you have taken as actions. But as for home-use, other than Gyoza, there are other categories. And compared to competitors, your competitiveness is not that high in my view. So for those categories, you may have to narrow them down further like Gyoza or restaurant, industrial use dessert. So you have to focus more on those where you excel strongly and then you throw away other categories. Isn't that the risk that you can take? Shigeo Nakamura: As Kawana said, as for Gyoza, in a single production line, there will be multiple products that are coming out. So shoga, ginger gyoza and miso paste gyoza have been launched on top of the regular gyoza, and they're selling well. So in the current production line, we can create some products in terms of different SKUs that will sell. And as for dessert, as you pointed out, this is something that we can focus more on. And the frozen food without meat through desserts, there is some qualification for exports or a profit for exports. So we are planning to also consider the potential exports from dessert. So if there's any more comments from Masai? Yoshiteru Masai: Yes. Thank you. So as for dessert, on our part in Ajinomoto, as Ajinomoto Group, what produced in Japan has not been exported too much. But we had a sense of urgency now. So Ajinomoto and Frozen Food, AGF, this is a common issue. So as of October 1, export promotion department was established. And what is going to be the main points in this is frozen food dessert. And so these activities will be done and gyoza and dessert were pointed out by you, but I totally agree, and we would like to focus our resources on those. And for the question that was asked previously, so structural reforms may look a bit weak compared to others. And I'd like to just make more comments on that. So subsequently, what we found and thought was that the actions taken against competitors. And from that perspective, especially the competitors in Gyoza and Frozen Food are not just Japanese players. So Japanese structural reform is important, but we have to have more global perspective to compete. And so Japanese structural reform is necessary, but we have to make more investments in Asia, and that's what we're considering. So as we do structural reforms in Japan, at the same time, for Gyoza and Frozen Food, we are taking actions against competitors. So before structural reforms in Japan, we are also aiming for expansion in Asia. That's what we have begun to consider. Satoshi Fujiwara: Okay. Then -- so Karaage or fried chicken or Chahan or fried rice, you have those products. Would there be any change in the positioning of those products? Shigeo Nakamura: Well, as I said, we are revisiting our categories, especially Gyoza and dumping shumai and chicken and sweets. Those are the major segments. But Gyoza and dumping shumai and sweets, there's still room for growth. As for chicken, well, in the structural reform, we are narrowing down the items, and we are seeing increased profits as a result. So -- but we're not trying to grow this. And frozen rice is the biggest challenge. Osaka plant was closed to enhance efficiency, but there's still challenges to address. And so we have to review this more. So we are shifting towards complete meal, and that's what we're trying to do. And as for rice, you shouldn't just look at Japanese business. In overseas, the rice is more of a mainstay in U.S. and others. And all these are exported from Japan. So in total, there's profits that are generated. But what about -- what to do with rice business in Japan is something that we have to address. So we have to go beyond that. So like -- and by transitioning to complete meals and others. Operator: The next question, we would like to address the next question. In the interest of time, I would like to limit to only 2 more questioners for today. So the first will be for Furuta-san of SMBC Nikko. Tsukasa Furuta: This is Furuta from SMBC Nikko Securities. I have a question relating to the outlook for CDMO business in the second half. I'm looking at Page 19. You mentioned that the AJIPHASE shipment delay in Japan was a factor, but I think your performance in the first half was in line with the plan. As for the different initiatives in each region, can you give us some more color for the second half initiatives in this CDMO business? Shigeo Nakamura: Thank you very much, Furuta-san, for your question. So this will be answered by Otake-san because he's here today. Yasuyuki Otake: All right. I would like to address your question. Forge, as we explained during the presentation, Forge is enjoying favorable growth, especially towards 2026 and 2027, we are expecting to start the commercialization. We have decided to bring this forward. So with this year, we have incurred some consultation fee, and therefore, the EBITDA positive is quite challenging, but we are still working on this target. And also the sales has increased by 4x compared to the time of acquisition. So we are achieving a very steadfast growth here. As far as the Japanese business is concerned, AJIPHASE, we have a very big growth projection in the future. But compared to that plan, we are slightly behind the plan. But starting this fiscal year, Forge AJIPHASE salespeople are sent there so that with the Forge members and the Healthcare members in North America, we are working together in the sales activities together with them. With this, we have been able to cultivate new customers. So towards the 2030 Roadmap, we are going to make steadfast progress in our actions. For AJICAP and also last year, COYRNEX as well, we have made a press release regarding the collaborative efforts. And with AJICAP, AJICAP has been driving the growth of CDMO business. But in addition to that, AJIPHASE, AJICAP and COYRNEX and Forge. So these are the unique businesses of Ajinomoto, and they are going to be the pillar of our business in the future. So with these pillars, we believe we shall be able to achieve the growth of the company. So the prospects of future is becoming much brighter than before. Tsukasa Furuta: Okay. Then I have a follow-up question. AJICAP, on Page 21, customer expansion, you're talking about customer expansion, and you are talking about the new client in overseas and also Astellas. So I think -- can you comment on whether the speed of customer expansion is accelerating? Can you talk about that? Shigeo Nakamura: May I? I'll try to answer that. Yes. Okay. As it's written up here, in October, we have signed up new license agreement with Astellas and another company, 2 companies altogether. So the sales is expanding. In order to further accelerate the sales within Ajinomoto Group, we would like to leverage our internal network. OmniChem, for example, we would like to leverage that network. And in addition to that, the former [ Lonza ] business development chief, we have entered into an agent agreement, a consulting agreement with them. So we would like to leverage those external networks as well so that we can accelerate our customer cultivation efforts. CRO, CMO, we will promote collaboration with them so that we can further increase the number of licensing agreements after -- so that we can -- AJICAP can become a next driver for growth after AJIPHASE. And we believe we have been able to achieve a steadfast progress towards that direction. Operator: Last question from Nomura Securities, Morita-san, please. Makoto Morita: Morita from Nomura Securities. I'd like to ask about Seasonings and Food once again. In this presentation meeting, what has become one big theme is action taken against competitors. So from that perspective, why at this timing, the competitive risks have risen. So before the pandemic, getting back to the pre-pandemic level, the Americas, you have increased the profitability margin, and that has driven your profit in your business. But maybe your profitability level has risen too much. That is my concern. Of course, profitability level being higher is good, but this would reduce the entry barrier. So I think your profitability level has risen, especially in overseas. So maybe you're earning too much or it's not unsustainable business or profit level or you have an overhang. What is your thoughts on this possibility? Shigeo Nakamura: Thank you very much for your question. So profit level and pricing, it won't go up if you don't need the customer value. So you have to increase the customer value and profit margin. So [ Saji ] will explain more. Unknown Executive: So with regard to profit margin, well, I'd like to answer the question, including that. So with regard to actions taken to competitors, it is very important initiative. Honestly speaking, previously, in Ajinomoto Group, especially for home-use businesses, so we were quite strong. So we -- honestly speaking, we were a bit short in terms of actions taken against competitors. So as I said, in 2023, we had seen these signs. So we have established a competitor response team, several competitor response teams. And one of them is competitors in China. And also, there are some organizations that are taking actions against other types of competitors. So we are very serious in taking actions against competitors, even though we haven't disclosed this yet. And as for China, especially, honestly, it's not just food, but in all industries, the same is happening. So we're not an exception. So with the economic slowdown in China, maybe regardless of supply-demand balance, if I may so, they are taking actions. So we had expected the supply-demand balance to take effect, but actually, they are disregarding this. So we have to be ready and take action with that in mind. And with regard to profitability level or margin, it's not a straight answer to your question, but to Chinese competitors and Ajinomoto, we're looking at the price differences, especially. So what sort of price differences would be allowed for customers to buy our products. If this is too wide, then they will not buy our products. But if this is not too wide, then they will buy from us. So we have learned that from our experience, and we are taking pricing policies. And if that works well, we are defeating competitors in some countries. But in others, we haven't been able to do so. So we are taking more actions. It's not a straight answer to your question, but we're looking at price differences. And the pricing margin or pricing ratio comparison is what we are taking. Makoto Morita: So in the short term, you are increasing profits in the short term. But in the mid- to long term, that is going to be important. But just for clarification, so the price gap between Chinese players and your company, is it still higher than the optimal level? And maybe you have to make adjustments to match that optimum level. Is that correct understanding? Shigeo Nakamura: Well, different countries have different situations. For example, in Europe, euro is quite strong now. So with the euro being strong, Chinese players, when they export products at CIF, probably in dollars. So in Europe, there is the tendency that price gap will be widened. So you have to reduce our prices in there. But in Asia, regardless of foreign exchanges, I think things are settling down. So in some countries, we don't have to reduce prices. But in some others, we may have to reduce the prices. So with the collaboration promotion department being playing a central role, we are looking at that. Makoto Morita: Well, a different question from a different perspective. The food business is -- the consumption is very weak, not just in Japan, but around the world. I think the weakening is more than you are assuming. So with these changes in the business environment, what sort of actions you have to take in your thoughts? Shigeo Nakamura: Well, the first one, there is difference between Japan and other countries, but it depends on the country that you're talking about. What is -- what we are driving our business in ASEAN compared to the past 5 years and the next 5 years, probably growth rate will slow down. So in ASEAN countries, we have to find a new frontier to compete, and we have already have done that from the 5-star to Cambodia, Laos, Myanmar and Bangladesh, we're shifting our focus to those countries. And same goes for Latin America, like Brazil and Peru to adjacent countries. That transition is what we're taking as an action. And as for Japan, it's not just a Ajinomoto or food manufacturer carbon alone because of population decline, as I said, you have to strengthen exports. So what we produce in Japan is not just delivered to Japanese customers, but to customers around the world. And so that's why we have established export promotion department. So depending on regions and countries for the consumption decline, the actions that we have to take will be different. We have -- I have learned a lot. Operator: So with this, we would like to finish the Q&A session. So finally, Mr. Nakamura will have the final closing remarks. Shigeo Nakamura: Well, thank you, everyone, for staying with us for such a long hours. We always would like to maintain this sense of healthy urgency -- healthy sense of urgency, and we would like to drive the company on a continuous basis. We look forward to your continued support and patrons. Thank you very much indeed for today. Operator: With this, we would like to finish the earnings call for today. We thank you very much for your participation. This is the end of today's session. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Greetings, and welcome to the Coherent First Quarter Fiscal Year 2026 Earnings Call. It is now my pleasure to introduce your host, Mr. Paul Silverstein, Senior Vice President of Investor Relations for Coherent. Please go ahead. Paul Silverstein: Thank you, operator, and good afternoon, everyone. With me today are Jim Anderson, Coherent's CEO; and Sherri Luther, Coherent's CFO. During today's call, we will provide a financial and business review of the first quarter of fiscal 2026 and the business outlook for the second quarter of fiscal 2026. Our earnings press release can be found in the Investor Relations section of our company website at coherent.com. I would like to remind everyone that during our conference call today, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements or predictions based on information that is currently available and that actual results may differ materially. We refer you to the documents that the company files with the SEC, including our 10-Ks, 10-Qs and 8-Ks. These documents contain and identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. This call includes and constitutes the company's official guidance for the second quarter of fiscal 2026. If at any time after this call, we communicate any material changes to this guidance, we intend that such updates will be done using a public forum such as a press release or publicly announced conference call. Additionally, we will refer to both GAAP and non-GAAP financial measures during this call. By disclosing certain non-GAAP information, management intends to provide investors with additional information to permit further analysis of the company's performance and underlying trends. For historical periods, we provided reconciliations of these non-GAAP financial measures to GAAP financial measures in our earnings release and investor presentation that can be found on the Investor Relations section of our website at coherent.com. Let me now turn the call over to our CEO, Jim Anderson. James Anderson: Thank you, Paul, and thank you, everyone, for joining today's call. Coherent is the world's leading innovator and provider of photonic technology and solutions. Photonics is critical to growing applications in AI data center networks, communications and a wide range of industrial applications. We're well positioned for long-term growth across all these applications and especially in AI data centers where we're experiencing unprecedented demand for our optical networking products. In particular, we expect continued strong sequential revenue growth throughout this fiscal year given the record level of orders we are receiving from our customers and the continued expansion of our production capacity. In addition, we continue to streamline our portfolio and ensure that our investments are focused on the areas of greatest long-term growth and profitability for the company in order to drive sustained shareholder value creation. Turning to our Q1 operating results. Revenue increased by 6% sequentially and 19% year-over-year on a pro forma basis, which excludes revenue from our recently divested Aerospace and Defense business, a sale that enhanced our portfolio focus and accelerated deleveraging. Non-GAAP gross margin expanded by 70 basis points sequentially and 200 basis points year-over-year. The combination of revenue growth and gross margin expansion drove non-GAAP EPS growth of 16% sequentially and 73% year-over-year. I'll now provide some highlights from our 2 operating segments. We'll begin with our Datacenter and Communications segment, which is our largest and fastest-growing business, Q1 revenue grew by 7% sequentially and by 26% year-over-year driven by growth in both our Datacenter and Communications markets. In our Datacenter business, Q1 revenue grew 4% sequentially and 23% year-over-year. Our Datacenter growth in Q1 was constrained by the supply of indium phosphide lasers. However, we expect data center growth to accelerate to approximately 10% sequential growth in the current quarter followed by strong sequential growth through the balance of this fiscal year given very strong demand and improving supply. I'd like to provide some additional color on both the demand and supply picture within our Datacenter business. First, we are experiencing an exceptionally strong level of demand. In our fiscal Q1, we received direct bookings that represent a step function increase in already strong customer demand. We are seeing strong demand for both our 800 gig and 1.6T transceivers with broad adoption of our 800 gig transceivers and accelerated adoption of our 1.60T transceivers. A significant portion of the sequential growth we expect in the current quarter is driven by 1.6T adoption. As a reminder, earlier this year at OFC, we were the only company to demonstrate 3 different types of 1.6T transceivers based on 3 different types of laser sources; silicon photonics, EML and VCSEL. Our 1.6T transceivers based on silicon photonics and EMLs are ramping first, and we expect our 1.6T transceivers based on our 200-gig VCSELs to ramp next calendar year. We see strong demand for 1.6T transceivers across multiple customers and expect both 800-gig and 1.6T to grow significantly in calendar 2026. Our deep portfolio of optical networking technology, combined with our vertical integration and diversified supply chain, are key competitive advantages with our customers and uniquely position coherent within the industry. On the supply side, given the strong demand growth we are seeing, we are continuing to expand our production capacity for transceiver modules and the key optical components used in those modules. For example, one of the key constraints across the industry is indium phosphide laser capacity. Over the course of Q1, we saw improving EML supply, and we expect both internal and external EML supply to improve significantly in the current quarter and throughout the balance of this fiscal year. In particular, we continue to expand our internal indium phosphide production capacity. We are aggressively ramping 6-inch capacity because a 6-inch wafer compared to a 3-inch wafer will produce more than 4x as many chips at less than half the cost. This will provide increasing benefit to our gross margin as we continue to ramp production. Our 6-inch indium phosphide line in Sherman, Texas, which is the world's first 6-inch indium phosphide production line began production last quarter and continues to ramp well. I am very pleased to share that our initial 6-inch indium phosphide production yields are actually higher than our current 3-inch indium phosphide yields. This is an outstanding accomplishment by our production team and also a testament to the tremendous experience that we've gained over the past 5 years, producing almost 2 billion VCSEL devices on our 6-inch gallium arsenide technology. Given the healthy yields we are seeing with 6-inch production, we began production of 6-inch indium phosphide at a second site in Jarfalla, Sweden, ramping at 2 sites in parallel will significantly accelerate our production capacity ramp. Additionally, we are in production on 3 different types of key transceiver components on 6-inch indium phosphide, EMLs, CW lasers and photodiodes. With the ramp of 6-inch production at 2 sites in parallel, we expect to roughly double our total internal production capacity of indium phosphide over the next year. We also expect to continue to supplement our internal indium phosphide capacity with sourcing from external suppliers. We expect our external supply of EMLs to increase sequentially this quarter and next calendar year through continued partnership with our key external suppliers. In addition to critical laser production capacity, we are also expanding transceiver module assembly capacity. While we continue to expand production at our existing site in Ipoh, Malaysia, we will now be expanding production capacity in parallel at a new transceiver production facility that we recently opened in Penang, Malaysia. In addition, we will be adding transceiver production capacity at our existing site in Vietnam, which already produces transceiver components. This additional production capacity allows us to continue to rapidly ramp module capacity to support the demand growth in front of us. I'd like to pivot to some technology developments that we expect to further benefit our data center business over the long term. We continue to make progress on LPO, LRO, CPO and [ NPO ] related products and technologies with strong engagements across a wide range of customers. For example, we've shipped both LPO and LRO 800-gig and 1.6T transceivers to customers. Also in September, we announced that we have commenced sampling of our 400-milliwatt CW lasers designed for CPO and silicon photonics applications. We expect to address a broad range of CPO form factors for both scale-out and scale-up data center applications with this new product. We also continue to see significant customer engagement around our 200-gig VCSEL-based solutions for NPO applications. Multiple customer engagements on integrated optics applications reinforce our view that the incremental market opportunity for optical solutions in the scale-up portion of the AI data center networks will be very compelling, and we believe Coherent is well positioned to address these applications using both CW and VCSEL-based solutions. We continue to expect to see initial CPO deployments in calendar 2026, with growth continuing in the following years, while pluggable form factor continues to grow in the scale out portion of the network. Another area of new growth is our optical circuit switch platform, which continues to progress well with expanding customer engagement. We believe this product line adds over $2 billion of addressable market opportunity over the coming years. Both the breadth of customers and the range of applications are wider than our initial expectations. The underlying technology in our OCS system is a nonmechanical field-proven liquid crystal technology which has been successfully deployed for many years in demanding telecom applications and has a significant competitive advantage over other solutions. To date, we've shipped systems to 7 customers and expect that number to continue to expand this quarter. Shipments have included both 64x64 and 320x320 system sizes. Both revenue and backlog for OCS grew sequentially in our fiscal Q1 and and we expect it to grow again in the current quarter. Our current backlog includes both 64x64 and 320x320 systems with the majority of the backlog weighted toward the larger system size. Given the strong customer demand and backlog, we are aggressively ramping production for both small and large capacity systems, and we expect revenue to ramp throughout calendar 2026. Given the multiple growth vectors across pluggable transceivers, CPO and OCS, we are very excited about the opportunities ahead of our Datacenter business. Turning to our communications market. In Q1, revenue grew 11% sequentially and 55% year-over-year. Growth was driven by products for data center interconnect, but we also saw strong growth in traditional telecom applications. We expect our communications business to grow sequentially again in the current quarter and throughout the balance of this fiscal year. In hyperscale DCI, we continue to see strong growth in customer demand for our ZR/ZR+ DCI-focused products. Our product lineup, which includes 100 gig, 400 gig and 800 gig ZR/ZR+ Coherent transceivers is growing quickly, and we expect these products to continue to ramp throughout the course of this fiscal year. We also continue to see steady recovery in our telecom business. In addition to market recovery, we've introduced multiple new industry-leading telecom platforms for which we are seeing significant customer interest and expect strong future revenue contribution such as our new award-winning Multi-Rail technology platform. This platform is a breakthrough solution that amplifies multiple fiber pairs while cooperating within the physical and electrical constraints of existing infrastructure. Customer engagement on this new platform is very strong, and we see this as one of many growth vectors for our Communications business in both the near and long term. Turning now to our Industrial segment. Revenue grew 2% quarter-over-quarter and 4% year-over-year on a pro forma basis, excluding revenue from the recently divested Aerospace and Defense business. While we maintain a cautious outlook on near-term demand, given the macroeconomic backdrop and ongoing tariff and regulatory uncertainty, we were pleased to see growth in our first fiscal quarter and we expect the Industrial business to be stable to slightly up sequentially in our current quarter on a pro forma basis. Within our Industrial segment, there are several key growth areas. For example, we expect ongoing strong demand in display capital equipment, driven by OLED screen adoption expanding to larger format devices like tablets and laptops. We also expect growth over the long term in our semicap equipment market, given the industry-wide expansion in semiconductor production. Another promising growth opportunity that I'd like to highlight is our advanced materials for thermal management and cooling. Traditionally, these materials are used in a wide range of applications in our industrial markets. However, the rapid expansion of AI data centers has created a significant growth opportunity. We see potential widespread adoption of these materials to address the thermal and power challenges posed by ever larger AI data centers. For example, our proprietary [ Thermodyne ] material moves heat twice as effectively as copper which is a tremendous advantage in data center cooling applications. We're engaged with multiple hyperscaler customers on this new emerging application of our materials technology. Lastly, I'd like to give an update on our portfolio optimization initiative. As a reminder, we are focused on streamlining our portfolio and concentrating our investments in the areas of greatest long-term growth and profitability. We are shifting investment from noncore areas in realigning our footprint to drive better asset composition and utilization efficiency across the organization. We completed the sale of our Aerospace and Defense business at the beginning of September. The proceeds of the sale were used to pay down debt and the sale is immediately accretive to both gross margin and EPS. In addition, we recently announced the sale of our product division based in Munich, Germany that makes tools for materials processing and as part of our Industrial segment. We made the decision to sell this product division because it was not aligned to our long-term strategic focus areas, and it did not support our long-term financial goals. This transaction is expected to close in our fiscal Q3. The proceeds of this transaction will be used to reduce debt and the sale is expected to be immediately accretive to both gross margin and EPS. In addition to streamlining the product portfolio, we are also continuing to streamline our physical footprint. Since the beginning of our last fiscal year, roughly 5 quarters ago, we have sold or exited 23 sites and we plan to continue to streamline our footprint and exit additional underutilized or unnecessary sites over the coming quarters. While I'm pleased with the progress we've made streamlining our portfolio, we still have more work to do. I view portfolio optimization as an evergreen process, and we will continue to reevaluate our asset portfolio to streamline and focus on the areas of greatest profit growth and ensure we are optimizing our return on invested capital. In summary, we delivered strong revenue and EPS growth in Q1 and are on track for strong sequential growth over the coming quarters, driven by exceptionally strong demand in our Datacenter and Communication segment, along with continued expansion in our production capacity. I want to thank the Coherent team for all their hard work and dedication. I'll now turn the call over to our CFO, Sherri Luther. Sherri Luther: Thank you, Jim. We are pleased with our first quarter 2026 results and execution. We continue to drive strong double-digit year-over-year revenue growth, gross margin improvement and enhanced profitability. We significantly paid down our debt, reducing our interest expense and further strengthening our balance sheet. At the end of the quarter, we successfully completed our debt refinancing, lowering our cost of capital and improving our financial flexibility. I will now provide a summary of our Q1 results. First quarter revenue was a record $1.58 billion, up 3% sequentially from the fourth quarter and up 17% year-over-year, driven by growth in AI data center and communications demand. In our Q4 25 earnings call, we announced an agreement to sell our Aerospace and Defense business. As expected, this transaction closed in Q1 '26. On a pro forma basis, excluding $33 million of Aerospace and Defense revenue for Q1, revenue increased 6% sequentially and 19% year-over-year. Our Q1 non-GAAP gross margin was 38.7%, a 70 basis point improvement compared to the prior quarter and a 200 basis point improvement as compared to the year ago quarter. I am especially pleased with the progress we have made on gross margin expansion, driven by the cost reduction and pricing optimization initiatives that we continue to focus on as we drive to our target model of greater than 42%. The sequential and year-over-year increases in gross margin were driven by cost reductions and product input costs as well as yield improvements primarily in our Datacenter and Communications segment. Pricing optimization contributed meaningfully in both the Industrial segment and the Datacenter and Communications segment. First quarter non-GAAP operating expenses were $304 million compared to $307 million in the prior quarter and $278 million in the year ago quarter. Operating expenses as a percentage of revenue declined to 19.2% as compared to 20.1% in the prior quarter and 20.6% in the year ago quarter. The reduction in operating expenses as a percentage of revenue is due to the continued focus on driving efficiencies and greater leverage in SG&A. We have made good progress on these initiatives with the benefits expected to kick in at various points in time. The year-over-year increases in R&D were primarily in the Datacenter and Communications segment as we continue to focus on investments with the highest ROI that drive the future growth of the company. The sequential decline in R&D was driven by the timing of these investments, which can fluctuate on a quarterly basis. Our first quarter non-GAAP operating margin was 19.5% compared to 18% in the prior quarter and 16.1% in the year ago quarter. First quarter non-GAAP earnings per diluted share was $1.16 compared to $1 in the prior quarter and $0.67 in the year ago quarter. From a capital allocation perspective, we paid down $400 million in debt, significantly reducing our debt leverage ratio to 1.7x, down from 2.4x in the year ago quarter. As mentioned in our Q4 '25 earnings call, we used the proceeds from the sale of the Aerospace and Defense business to make this debt payment. We also completed the refinancing of our debt at the end of the first quarter reducing our interest rate by 60 basis points and doubling the amount of our revolving credit facility to $700 million. We will use the revolving credit facility to increase liquidity and provide greater flexibility. As Jim noted, we plan to use the proceeds from the sale of our product division in Munich, Germany to further reduce our interest expense by paying down additional debt, which will be immediately accretive to our gross margin and EPS. For reference, over the past 4 quarters, this business contributed average quarterly revenue of $25 million with a gross margin well below Coherent's corporate gross margin. The sale will reduce our employee headcount by approximately 425 employees. I will now turn to our guidance for the second quarter of fiscal 2026. We expect revenue to be between $1.56 billion and $1.7 billion. We expect non-GAAP gross margin to be between 38% and 40%. We expect total operating expenses of between $300 million and $320 million on a non-GAAP basis. We expect the tax rate for the quarter to be between 18% and 20% on a non-GAAP basis. We expect EPS of between $1.10 and $1.30 on a non-GAAP basis. In summary, I'm very pleased with the solid progress we made in Q1. Looking ahead, we're seeing exceptionally strong demand in our Datacenter and Communications segment. To meet this robust momentum, we are ramping capacity and investing strategically in the business. We remain focused on disciplined execution against our long-term financial target model. These dynamics reinforce our confidence in driving long-term growth and durable value creation for our shareholders. That concludes my formal comments. Operator, please open the call for Q&A. Operator: [Operator Instructions] Our first question comes from Samik Chatterjee with JPMorgan Chase. Samik Chatterjee: Jim, maybe if I can start on the demand side. You do mention the strong demand you're seeing as well as record orders in some cases. Maybe if you can flesh that out a bit more, like how broad-based is this and what are you seeing in terms of or hearing from customers in terms of demand drivers and how broad-based across the portfolio is the demand across your Communications portfolio? And I have a follow-up. James Anderson: Yes. Thanks, Samik. Yes, I would call it very broad-based. So very strong demand across both Datacenter and Communications. When I look back at our fiscal Q1, really saw a record level of bookings in that quarter. And bookings not just for near-term quarters, but bookings further out in time than we normally would see. So bookings leading out, in some cases, over a year from now, right? So we see that as a very good sign. That's customers placing orders well ahead of time. That gives us great visibility, really allows us to really good mix -- planning and product mix and capacity planning. But also, as I said, broad-based, definitely saw strong orders for data center, strong orders, in particular, for 800 gig and 1.6T transceivers. We're seeing the adoption of 1.6T transceivers accelerate. And so we're seeing certainly strong orders there. But also on the communications part of our business, very strong orders in DCI, the data center interconnect portion. This is our ZR/ZR+ product lineup of transceivers. And then also really pleased to see strong orders in what I call kind of traditional telecom as well. And so in particular, in that Communications segment, we've seen now 5 quarters of sequential growth in that segment, really good grower last quarter of 11% sequential and 55% year-over-year, but we've seen now 5 sequential quarters of growth in not just DCI, but also in traditional telecom. And we're expecting that Communications segment to grow sequentially this quarter and through the balance of this fiscal year. Samik Chatterjee: Got it. Got it. Indium phosphide capacity, I mean that's been quite a talking point this quarter for you guys. You outlined you're doubling the capacity over the next 12 months. But maybe if you can just flesh out for investors what are the milestones to watch on that front? And how to think about the road map beyond even a 12-month horizon? And where would that leave you from an EML mix perspective in relation to sort of internal versus external? James Anderson: Sure. Thanks, Samik. So first of all, I just want to thank the Coherent team for the outstanding job they've done in getting 6-inch indium phosphide up and running. This is something when I joined the company that I asked the team to significantly accelerate their time line. And I just want to take the opportunity to thank the team for the outstanding job they've done. We started production of 6-inch indium phosphide in the September quarter and started it at our Sherman, Texas facility and really pleased with that ramp. As I mentioned in the prepared remarks, one of the big milestones that we achieved is the initial yields of that 6-inch indium phosphide are actually higher than our 3-inch indium phosphide lines. And keep in mind that those 3-inch lines are very mature full production lines. So that's a very positive milestone and positive signal for us on yields of 6-inch. And that's exactly why we decided to double down on the ramp of 6-inch and begin 6-inch ramp at a second facility -- one of our second our other indium phosphide facilities, which is in Jarfalla, Sweden. And so now we're ramping at 2 sites in parallel. And so that's what really allows us to hit that 2x capacity goal about a year from now. And I think milestones along the way will certainly be -- we'll certainly share our progress along the way. But beyond the next 12 months, we expect to continue to expand capacity even beyond that 12-month goal. The demand that we're seeing from our customers is, I would call it, extremely strong. And with some of our big customers, they're showing now their forecast out through calendar 2028. And given that demand signal that we're seeing, not just for next calendar year, but now for '27 and '28, our plan is to continue to ramp indium phosphide capacity beyond the next 12 months as well. And certainly, we'll share more thoughts on the rate and pace of that ramp over the next 12 months. Samik Chatterjee: Got it. And I'll just squeeze one quick one in. You're guiding data com 10% quarter-over-quarter growth. Just wondering what's sort of supply-demand gap that you see? How supply -- what could that number be if you were sort of more flexible on supply or had more supply available relative to sort of the constraints on that front? James Anderson: Yes. We were certainly -- when I look back at the prior quarter, data center grew about 4% sequentially. That was certainly constrained by indium phosphide laser supply. And what we saw is the unmet backlog that we had in Q1 rolled into Q2. So that backlog is now in Q2, and we're servicing that in Q2. But on top of that, we had record bookings on top of that for, as I mentioned, 800 -- primarily 800 gig and 1.6T transceiver. And so the demand continues to grow. Now one of the really good things as we move into the current quarter is we're seeing indium phosphide supply, both internal and external grow sequentially from prior quarter to current quarter, and we're expecting both external and internal supply to grow again from this quarter into the -- into our fiscal Q3 as well. So we're seeing kind of steady good improvement in indium phosphide capacity. And again, that's a combination of external, but especially internal capacity expansion as well. Operator: Our next question comes from Simon Leopold with Raymond James. Simon Leopold: I wanted to follow up on your discussion around the OCS, optical circuit switches. There was quite a buzz at the ECOC show about this, and you certainly sounded upbeat tonight. I guess, what I'm looking for a little bit more help is understanding how to think about maybe, let's call it, calendar 2026, where one of your peers also participating in the market has sort of laid out a trajectory to get to $100 million a quarter. How do you think about your trajectory and your place in the OCS market? James Anderson: Yes. Thanks, Simon. So first of all, we feel really good about our place in the market. It starts with, of course, the technology. We feel really good about the technology differentiation that we have. We have a nonmechanical -- our OCS is based on a nonmechanical liquid crystal technology that has really superior reliability performance and our customers recognize that. And I would say that we continue to see the opportunity around OCS, the total available market continue to be bigger than what we may have originally thought. Just the number of customers is broader than we thought that are interested in the technology, but also the number of applications that they're considering deploying it in. And so as I mentioned in the prepared remarks, we've now shipped systems to 7 different customers. And we -- if I look at last quarter, both our revenue and our backlog grew last quarter. We expect revenue and backlog to grow again this quarter. But I think a more meaningful revenue contribution will come in next calendar year. Probably we'll see a steady ramp of revenue throughout calendar year. So it will be certainly more weighted towards the second half of calendar year. But we feel really good about the progress, the backlog that we have and the revenue ramp in front of us. And we'll -- as we get into next calendar year, I think we'll share more details about kind of the rate and pace of revenue that we see ahead of us. Simon Leopold: And then you talked a lot about the progress you've shown on the indium phosphide. I've been fielding investor questions that I find a bit puzzling, but maybe you could help us shake this out in that there's been sort of this narrative that the indium phosphide is producing photodiodes and hasn't helped you with laser production. But your outlook, your commentary on 800 gig, 1.6T, certainly suggests that you're producing more lasers, both CW and EML. Can you explain maybe how people might have been confused or whether I'm confused? Can you give us some clarification on this debate? James Anderson: Yes. Thanks, Simon. I'll try to unconfuse. I don't know where the confusion is coming from. But I'll just kind of reiterate what I said in the prepared remarks. So as I said, we're ramping production now in 2 sites, Sherman, Texas and Jarfalla, Sweden. And across those 2 sites, we're ramping production of 3 different types of products based on indium phosphide, right? So the EML lasers, certainly, CW lasers as well and then photodiodes. And all 3 of those are very critical, as you know, Simon, very critical components to our transceivers. And so really pleased to be ramping production of all 3 of those devices across those 2 facilities. Operator: Our next question comes from George Notter with Wolfe Research. George Notter: I'm just curious on -- interesting to hear your remarks on sort of the manufacturing moves and then the real estate footprint, really, really great to see that. I guess, I'm just curious on how much more opportunity is there? I know you're standing up capacity. I think in Penang, you said. Are there more moves for you to make in manufacturing, perhaps in industrial lasers? Is there more real estate consolidation left? Any more you could say would be great. James Anderson: Yes. Thanks, George. So I would say definitely, a lot of activity that we have going there. And it's kind of interesting because it's -- on one hand, we're increasing capacity and expanding. And on the other hand, what we're trying to do is consolidate and reduce footprint in certain areas. And so we're -- and both of those activities are happening in parallel. So if I start with the consolidation, if we look at over the last roughly 5 quarters since the beginning of our fiscal '25, we've either sold or exited 23 sites. And I think that's great progress. We're really pleased with that, but we definitely have more work to do. I think both Sherri and I are focused on making sure we maximize return on invested capital, and we're driving efficiency and productivity across our physical footprint. And so we both believe there's significant opportunity to continue to consolidate. And so we'll continue to exit and downsize any site that we view as unnecessary or underutilized. And so definitely more work to do there, and I would say stay tuned on that. And then on the increase side, certainly, especially for Datacenter and Communications, we're certainly increasing capacity. We talked a little bit already about indium phosphide capacity. But if we talk about module capacity, so this is transceiver module capacity. We're expanding capacity at our existing facility, our primary facility in Malaysia, which is in Ipoh, Malaysia. But now in parallel, we're expanding capacity at a new transceiver facility that we've recently opened, which is already in production on transceivers. We're going to be expanding and accelerating capacity at that Penang facility. And then what we're also doing is adding transceiver module capacity at our Vietnam site. So the great thing is our Vietnam site already exists, and it's already building components for transceivers, and we have capacity and room there to add now transceiver production in addition to component production, and we're excited about that, too. And -- so all of those capacity expansions we're driving in parallel. And that's really to support the strong demand that we see ahead of us for both data center and communications that based on the customer, not just ordering that we're seeing, but the forecast that we're getting. George Notter: Got it. Any manufacturing moves on the Industrial side of the business? James Anderson: Yes. There are a number of the consolidations that we've done. The 23 sites of sales exits. Those have -- some of those have been on Datacenter and Communications side, but many of those have been on the industrial side. And so I think we still see opportunity for consolidation on, I would say, both Datacenter and Comms and Industrial. But there are places within the Industrial segment where we are investing and expanding in facilities as well. But it's all about trying to make sure that the footprint is optimal in terms of driving the maximum productivity and efficiency of the facility. Operator: Our next question comes from Blayne Curtis with Jefferies. Blayne Curtis: I wanted to go back to the datacenter guide plus 10%. Is there a way to think about how much that is still capacity constrained? And is there anything beyond EMLs that is constrained in that? James Anderson: No. Blayne, I would say the primary constraint we've hit, for instance, last quarter is, as I said, it's indium phosphide capacity that specifically EMLs, that was what was constraining us. A significant improvement from prior quarter into the current quarter, as I said, in terms of both external and internal supply. I would say there's still -- we still are constrained to some degree even in the current quarter, but we also expect indium phosphide laser supply to increase again from current quarter into next quarter and really to continue to -- the supply to continue to improve throughout -- sequentially throughout the next calendar year, given external capacity that we've secured, but especially the internal capacity ramp that I talked about earlier. Blayne Curtis: Exactly that, maybe I'll follow up on that. I'm curious, you're doubling capacity, but it takes time to get your lasers in and qualified. So -- is there a way to think about the timing? And is there any difference between EMLs and CWs in terms of the timing of recognizing revenue from the lasers throughout the fleet? James Anderson: Yes, I would say not a big difference between EML and CW on the timing to get into production and fully qualified. By the way, you mentioned recognized revenue, just to clarify, all of our EMLs and CWs are made for internal consumption, right? So we don't sell indium phosphide in the open market. The reason for that is it's -- all of our capacity is 100% consumed by our own transceiver needs. I just want to make sure I clarified that. But within transceiver, what I would say is that once a laser is qualified within -- or photodiode within a facility, expanding capacity on a parallel line or on an existing line is a pretty normal occurrence, right? No special qualification required or at least the qualification very straightforward, right? So I think now that we're in production across multiple products, across multiple facilities. Look, that production capacity is going to be as we expanded over the course of the next year is going to be incredibly valuable. And certainly, our customers are very motivated to help make sure we get anything qualified into production as quick as possible. Operator: Thank you. The next question comes from Tom O'Malley with Barclays. Thomas O'Malley: First one is a little more short term. So you gave the sequential into December on data com up 10%. Could you maybe help us understand what was the driver in the September quarter? I think you called out datacom as maybe being a little bit more of a driver, but any color on the telecom side or the relative vectors of both? And then into the December quarter, what are you seeing from the telecom business? James Anderson: Yes. And maybe I'll just recap the prior quarter first. So on the prior quarter, data center, we saw grow 4% sequentially, 23% year-over-year. Communications, which is telecom and DCI in the prior quarter, it was 11% sequential growth and 55% year-over-year. And into the current -- into the December quarter, we expect the data center growth to accelerate from that 4% prior quarter to about 10% sequential growth in the current quarter. And then comms, again, up sequentially. I would expect it to be a little bit less than what it was in the prior quarter. Comms would be up sequentially in the single digits. And then just to round it out and give you the full picture on the industrial part of our business, we expect that in the current quarter for that to be sequentially stable, maybe slightly up. Thomas O'Malley: Helpful. And then just a longer-term question, just on the 6-inch production sort of a couple of questions on it here. But is there a way for us to tie production coming out of that 6-inch facility with margin improvement over the -- it sounds like things are accelerating pretty materially on the capacity expansion side in the first half. I think you had previously kind of talked about first kind of guys moving into modules in late calendar year 2025. But as that kind of progress, like you look at what gross margins have done, you would imagine that accelerate a bit. Any way for us to link the percent of production, the amount of production to how much gross margin expansion you see? James Anderson: Yes. Maybe I'll kick it off and at least talk about it qualitatively and then if Sherri wants to add anything to it. I think given that we just started production in the prior quarter, actually, this quarter will be our first quarter -- our first full quarter of production. We started production last quarter, kind of mid-quarter. The actual impact to gross margin in the current quarter is pretty minimal. But as we move into next calendar year, that's where we'll start to see the benefits of the 6-inch production moving into our gross margin. And as you would expect, as we ramp production, the impact to gross margin is more meaningful as we move throughout the calendar year. And so you should expect it to be more meaningful as we move through each sequential quarter. And Sherri, would you -- is there anything you'd add to that or. Sherri Luther: Yes, I'd just add that when you look at these -- the 6-inch indium phosphide and the fact that it's less than half the cost of 3-inch that will be beneficial to gross margin over time. And it's sort of looking at a cost structure, right? It's improving the cost structure, the 6-inch indium phosphide is. And other examples of that would be with new products, right, like 1.6T, that's going to be beneficial to gross margin as well as when we ramp capacity, those types of things will help improve the gross margin over time. James Anderson: So we're certainly focused on 6-inch is -- I guess, I'd recap it by saying 6-inch is one of the gross margin tailwinds. But there's certainly a wide range of other things we're focused on across the company to drive towards Sherri's 42% gross margin target that she gave us. There's a number of other -- I'd just highlight in the Industrial business, although the growth is relatively stable, we're not seeing a tremendous amount of growth in the Industrial business at this time. We're certainly focused on driving gross margin expansion within that business. And so that's another area that we expect gross margin to continue to improve for the company. Operator: Our next question comes from Papa Sylla with Citigroup. Papa Sylla: Congrats on the very strong result. Jim, I was hoping you can double click a little bit on the uptake you expect in the December quarter coming from 1.6T. I understand you are quite flexible between EML [indiscernible] or even VCSEL, but in terms of kind of percentage or even qualitatively, where are you seeing perhaps the larger demand between those 3? And do you expect that to change in 2026? James Anderson: Yes. Thanks for the question. So -- yes, as I mentioned in the prepared remarks, the sequential growth in datacenter, a good chunk of that is driven by 1.6T revenue. And then within that, that early wave or first wave of 1.6T revenue, it's really a combination of -- we expect a combination of silicon photonics which uses obviously CW lasers, but also EML-based 1.6T transceivers. So the first adoption in that first wave of -- or the beginning of the ramp of 1.6T, that will primarily be driven by a mix of silicon photonics and EML. And then later, we'll start to see, we believe, adoption of VCSEL-based 1.6T transceivers. So those use our 200-gig VCSEL technology, which we demonstrated at, I believe, OFC earlier this year. We would expect that to begin to go into production. I would say, mid-calendar 2026, so it would start to generate revenue in kind of the second half of calendar '26. So definitely, the early ramp or the first part of the ramp is driven by a combination of EML and silicon photonics. Papa Sylla: Got it. That's very clear. And for my follow-up, Jim, I'm curious on how you are thinking about allocation of your indium phosphide capacity between EML, CW and photodiode. I guess, how far ahead do you need to make that decision and perhaps what are the factors that go into that decision? Is the priority mainly kind of feeding where demand is strongest? Or is there a profitability angle as well? James Anderson: Yes. It's a good question. Let me talk about the trade-off between, first of all, EML and CW. I would say there's no -- from our perspective, there's no significant profitability trade-off between those two. Really, what drives the mix of -- our production mix of EML versus CW is purely the demand from our customers, right? So if it's more silicon photonics-based transceivers, then we'll allocate more capacity to CW lasers. If it's more EML, we'll allocate it to EML. And I think in general, we can make those choices certainly 6 months ahead of time. Even -- we can even make those choices even 4 months ahead of time. So I would say somewhere to the kind of 4 to 6 months ahead of time, we have to do the capacity planning between EML and CW. And the good thing about the indium phosphide capacity is it's fungible. We can move the capacity to either EML or CW. And then for photodiode, that's just the receiver for the laser, right? So we just build the number of photodiodes that are needed to receive the laser signal. So that's a pretty straightforward calculation, right? So that's kind of how we do the capacity planning. Ultimately, it's really driven by the mix that our customers want in terms of EML versus silicon photonics transceivers. And we have both. So we're happy to support the customers in whichever version that they need for their application. Operator: The next question comes from Michael Mani many with Bank of America. Michael Mani: This is Michael Mani on Vivek Arya. As you look out over the next year, what's your confidence level in your ability to expand your share in 1.6T over 800 gig? And could you also talk about the 1.6T ramp from a customer breadth perspective? Is this a ramp that's very concentrated with a few customers? Or are you seeing more of a balanced ramp into next year? James Anderson: Yes. Thanks, Michael. Maybe I'll ask -- answer the second part first and come back to the first part of the question. On the second part of the question, we are seeing 1.6T across -- ramp across multiple customers. So we have multiple customers that are engaged in 1.6T, and we expect to ramp with multiple in parallel. And I would say that the other color I would add is that a number of customers are accelerating their time and their ramp on 1.6T. And we view that all as a good thing, right? We view that as positive. We have really proud of the lineup of 1.6T transceivers that we have. Just as a reminder, at OFC earlier this year, we were the only company that demonstrated 1.6T transceivers using 3 different technologies, silicon photonics, EML and VCSEL. So I think we have a great product lineup. We have good customer position. We're seeing acceleration of 1.6T, and we feel like we're certainly well positioned for that. So, I guess, to the first part of your question, yes, we feel really well positioned on 1.6T. I think as we enter the calendar 2026, we expect both -- on a year-over-year basis, we expect 800 gig will still grow on a year-over-year basis. We're seeing very strong demand on 800 gig. But on top of that, we expect 1.6T to ramp at a very healthy pace. Michael Mani: Great. And for my follow-up, I just wanted to ask about your progress on portfolio optimization and specifically pricing. So it seems like there's been a good amount of progress there in the last couple of quarters, but how much left is there in terms of these pricing tailwinds you can recognize, whether it's from the core data com side or industrial? And maybe more specifically as well, just what are you seeing from a pricing perspective for transceivers? Just if you could talk about that environment. James Anderson: Maybe I'll answer the last part of the question on transceivers, but I'll let Sherri also comment on pricing as it relates to gross margin. I would say on pricing of transceivers, pricing dynamic very much as we would expect. So I don't think we're seeing anything unexpected with respect to pricing. And then, of course, in a more supply-constrained market in general, that's certainly always a positive dynamic for pricing. And then kind of in the first part of your question, just sort of pricing optimization in general and how it relates to gross margin, I'll ask Sherri to answer that part. Sherri Luther: Sure. Thanks, Michael. So from a pricing optimization perspective, I was really pleased to see that during the quarter, we -- part of the improvement in gross margin, the 70 basis points improvement sequentially and a 200 basis points year-over-year, part of that was due to pricing optimization. Pricing optimization in our -- where we saw benefits in the Industrial side of our business as well as in the Datacenter and Communications part of our business. So pricing is an area where we tend to expect that the greater magnitude would come from the Industrial part of our business, but we do see benefits as well in the Datacenter and Communications part of our business. And pricing is really pricing our products for the value they provide. And in the Industrial part of our business, that's the part of our business where, in many cases, we are the only provider of those products. And so our customers are -- certainly value the products that we provide to them and how we help them differentiate. So that's one key part of the improvement that we saw during the quarter. But the other part, just to round out the commentary on the gross margin, we also saw improvements from cost reductions. And so that was an area where we saw benefits in yield, which, if you recall, for the past so many quarters, we've been talking about yield improvements. We continue to focus on that, and we saw those benefits in Datacenter and the Communications part of our business as well as lower product input costs. So those are 2 main levers that we're really focused on to drive to our long-term target model of over 42%. So I was really pleased to see those results. Operator: Our next question comes from Meta Marshall with Morgan Stanley Investment Management. Meta Marshall: A couple of questions. Sherri, last quarter, you called out kind of FX headwinds to gross margins. And just -- given some of those currencies have remained stronger, just wanted to kind of get some context of whether there was additional kind of headwinds this quarter on gross margins? And then second, noted that you guys are ramping the ZR kind of capacity. But just how you guys are thinking about kind of intersecting some of the scale across demand that we're seeing, whether that will kind of -- the ZR will layer into that or just how you guys are kind of ramping capacity there? Sherri Luther: Yes. So Meta, on the first part of your question regarding FX and the impact to gross margin, did we have any headwinds during the quarter? So nothing material. Certainly no incremental headwinds in terms of a negative impact from the prior quarter, but nothing significant during the quarter to note on FX. Meta Marshall: And on the second part of the question on the scale across demand, yes, I would characterize this demand is exceptionally strong. And obviously, that's driven by -- these are the optical connections between the data centers where we're seeing these AI workloads that are spanning multiple data centers, and that's driving the need for an expansion in high-speed optical networking between these data centers. And our portfolio of products, our ZR/ZR+ portfolio of products is just a really great match for this application. So we're seeing very good demand there. And we have 100 gig, 400-gig and 800-gig ZR/ZR+ transceivers. So we're certainly ramping capacity as quickly as we can on those transceivers. The other way we participate in that market, though, is we're a module vendor for ZR/ZR+, but we also sell components into all sorts of DCI equipment and applications. And I would say there, again, the demand on the components right now is extremely strong. And we are also ramping capacity for all of the components that go into DCI applications and any related telecom applications. So we're seeing just as one example, the pump lasers that we produce, we're seeing just very strong demand on those pump lasers. Operator: Our next question comes from Ruben Roy with Stifel. Ruben Roy: Jim, maybe a follow-up on the OCS commentary with the shipments to 7 different customers, great to see the diversification of customers there. In terms of applications, you talked about sort of getting -- you're talking through engagements on a broader number of applications. How would you characterize the kind of the wins that you have today? Are those -- and I think the industry has been talking about redundancy, use of OCS for redundancy and maybe even packet switch replacement. Should we think about those as being sort of the initial applications? Are you starting to see a broadening today of some of the other applications that you can address? And are there technical advantages of using a nonmechanical in some of these new applications that you guys are talking about? James Anderson: Yes. Thanks, Ruben. Great question. No, I would say that the initial adoption in terms of like the backlog and initial production ramp adoption is very much the way you summarized it in redundancy applications or spine switch applications and more of what we've seen historically as traditional applications for OCS. I think further out, though, what we've been surprised about is if you look beyond just kind of the near-term demand as we've engaged with a broader set of customers is there's applications beyond that, that customers are talking about and engaging with us on all the way from some customers were talking about even using an OCS switch in a scale-up network, right, a scale-up network where the optical -- where the connections are now optical and there's an OCS switch within that. And then on the other end of the spectrum, customers talking about using OCS switch even within DCI networks. So we've been surprised as we've engaged with customers by the real broadening of potential applications that they're exploring. And I would say that's a little further out in time, but we view that as a great indicator that the TAM may be significantly larger than what we first thought. Ruben Roy: Perfect. And a really quick question, I hope, for Sherri.And apologies if I missed this, Sherri, but with the Aerospace and Defense divestiture and the leverage coming down below 2, which is great to see, is there an update on the way you're thinking about debt on the balance sheet or capital allocation? Sherri Luther: Yes. So Ruben, really pleased that we were able to reduce our debt leverage down to 1.7x for the quarter after the $400 million debt paydown that you referenced from the sale of the A&D business. So I'm really pleased with that. And then we also mentioned that with the Munich division, product division that we announced that we would take the proceeds from the sale of that to pay off debt as well. That's expected to close a little bit later. And so once we do that, we'll take the proceeds from that as well. So certainly, debt reduction is a priority. But I would say the #1 priority now is -- continues to be making sure that we're investing for the long term in the business from an R&D perspective, from a CapEx perspective and making sure that we're really driving -- investing for the long-term growth. So that's the #1 priority. And then certainly, debt reduction, we'll continue to focus on that, but a close second priority. Paul Silverstein: Operator, we'll take one more question. Operator: Our next question comes from Karl Ackerman with BNP Paribas Asset Management. Karl Ackerman: Just one from me. Jim, you spoke of record transceiver module bookings in datacom, but what about transceiver components for telecom? And as you address that, can you quantify the level of order visibility with your customers, maybe in terms of quarters as you and your peers seek to add both later and transceiver capacity and fulfill customer demand. James Anderson: Thanks, Karl. Yes, we definitely saw a very strong record bookings on transceivers. But yes, I'm glad you asked about for components going into a number of our communications applications, DCI and telecom, I would say same story, record level of bookings there, too. I mean just tremendous bookings across both data center and communications. And on the second part of your question around visibility. So what we're seeing is in those bookings is the normal bookings of booking out in kind of the near term, but we're also seeing customers on top of that book further out in time where they're ordering -- they're putting orders in place in a year plus in advance. And I think that's really about -- they're seeing such strong increases in their demand and their supply needs that they want to get those bookings in place to get the supply coverage. And then the other very good trend from our perspective is, as I mentioned earlier in the call, our -- a number of our large customers now giving us very good forecast visibility, not just next year or the following year, but out into 2028. So very large customers providing us with visibility 3 years out, which is which is very, very helpful for our business. Operator: Ladies and gentlemen, as we have come to the conclusion of the allotted time for today's call. I will now turn the floor back to Coherent's CEO, Mr. Jim Anderson, for closing comments. James Anderson: Yes. First, thanks, everybody, for being on the call today. I feel like we're off to a very strong start for our fiscal year with almost 20% pro forma revenue growth and over 70% EPS growth in Q1 on a year-over-year basis, off to a really strong start. And again, we expect this fiscal year to be a really strong growth year for the company. I'd like to -- once again, I just want to thank all of my Coherent teammates for all of their great hard work, their dedication. Thank you very much. And thanks, everyone, for your support. Operator, that concludes our call. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Simon Roberts: Good morning, everyone, and welcome to our '25/'26 interim results presentation. Thank you for joining us today. I'm going to start with a brief introduction before handing over to Blathnaid to cover the financials. I will then share some more detail on our strategic progress over the first half of this year. You may remember this slide from our primary results in April. This is the plan that we set out to you then with a commitment to accelerate into the year with a clear set of balanced choices, but with a priority above all else to sustain the strong competitive position we've built over the last 5 years. We have delivered on this priority in the first half, focused and effective investment in our customer proposition has consistently delivered on our winning combination of great value, trusted quality and leading service. And that has resulted in more and more customers choosing us for their big weekly shop, driving continued volume growth and market share gains. Now we came into this year with great momentum. We planned for a strong summer and we really delivered through playing to Sainsbury's strengths. We invested where it mattered most to customers, extending our Aldi Price Match to even more everyday essentials and building on our market-leading personalization capabilities, making personalized Your Nectar Prices available to all supermarket customers. And our product innovation continues to really set us apart. With more than 600 new products this summer, we focused on units on summer sharing products and outdoor eating. Alongside outstanding fresh food availability, this allowed us to fully capture the benefit of the weather when demand was at its highest. And Argos delivered a good seasonal performance, grew market share and improved profitability. Our entire team stepped up again and really delivered for customers. I want to take a moment here to thank all our colleagues, partners, farmers and suppliers for their hard work, their dedication and their care which really helped us to deliver this strong summer performance. So we started the year with strong momentum and a clear plan. We set ourselves up for success over the summer, and we delivered. Our offer has never been stronger. And you can see here how that comes through in our overall customer satisfaction, which continues to lead against our full choice competitors, but also in terms of our position in the market, reflecting a fifth year of outperformance. We are now at our highest H1 market share in 5 years. As you know, our key focus over the first 3 to 4 years of Food First was resetting our value proposition investing over GBP 1 billion through this period. We learned how to invest in the most focused and effective way, selectively investing where it matters most to customers. And we have found a winning value formula that really works for our customers with the combination of Aldi Price Match, Nectar Prices and Your Nectar Prices. And so in a year where competitive intensity has stepped up, and where as an industry, we are facing into higher employment and regulatory costs, we have made balanced choices to keep price inflation behind the wider market and to ease cost of living pressures for customers. Customers are responding to the value we've consistently been delivering on the items that they buy most often. And this is why at a time when inflation is very much back in the headlines we are the only grocer improving value perception with customers year-on-year. We are balancing our investment in value whilst driving forward our focus on innovation and quality. Customers have always trusted and expected Sainsbury to deliver a leading quality, and we are further extending our reputation here through the continued growth of our premium Taste the Difference ranges. As we continue to drive innovation and with a real focus on fresh food, more and more customers are choosing Taste the Difference. We achieved 18% growth in Taste the Difference fresh sales over the first half. And as you can see here, customer perceptions of our quality continue to be significantly ahead of competitors. Through the strength of our value proposition with our passion and reputation for quality and innovation, and the consistent availability and customer service we're now achieving, we are delivering the winning combination. As a result, we have almost 1 million more loyal primary customers those who are doing the bulk of their grocery shopping with us week in, week out. And the strength of our grocery proposition is clear. 65% of customers shop both Aldi Price Match and Taste the Difference products in the same basket during the first half. This is a clear demonstration of the way customers are now shopping with us across the full spectrum of our offer. Now we know that the strength of our own brand assortment is the reason many customers choose to shop with us and delivering the breadth and quality of our own brand products is only possible through the support of our suppliers and a commitment to long-term partnership. We continue to work collaboratively with our farmers and suppliers to face into food industry challenges. Long-term agreements enable suppliers to invest for the long term and in outcomes that are great for customers and positive for the environment. And these commitments to resilience extend further than the U.K. Our partnership with Fair Trade is a great example of the work we're doing to strengthen our supply chains around the world and support the communities from which we source. Having switched all our by Sainsbury's black tea to Fairtrade in July, we are now the biggest U.K. grocery retailer of Fairtrade tea. Now everything we do comes back to our purpose to make good food, joyful, accessible and affordable for everyone every day. And our partnership with Comic Relief supports us here through a shared vision of a future where everyone has access to good food. Our Nourish the Nation program is helping fund meals and holiday club places for families that need them most. We will work with charities such as FareShare, City Harvest and the Felix Project to distribute over 5 million meals this winter. So as we reflect on where we are halfway through the 3-year Sainsbury's Next Level plan, I'm pleased with the progress we're making against our commitments through making balanced choices, we have delivered sustained strong momentum. We have invested where it matters most. And as a result, more customers are trusting us to deliver great value, trusted quality and leading service. And it's this winning combination that has driven grocery volume growth ahead of the market for a fifth consecutive year, and helped deliver a profit performance ahead of our expectations in the first half. And we head into this festive season with great momentum and confidence in the strength of our Christmas offer. We have the most important part of the year still ahead of us. And while we are strengthening our profit guidance today for the full year, we are deliberately giving ourselves the capacity to sustain the strength of our competitive position through continuing to make the right balanced choices. With that, I will now hand over to Blathnaid to cover the financials. Blathnaid Bergin: Good morning, and thank you, Simon. I will now cover the financial highlights for the 28 weeks to the 13th of September. Starting first with a reminder of our financial framework. This lays out the factors that underpin our commitments to deliver profit leverage from sales growth, strong sustained cash flows, higher returns on capital employed and enhanced shareholder returns. We made good progress on delivering profit leverage in the first year of the Next Level strategy. But this year, we have significant incremental cost pressures through higher National Insurance contributions and an EPR charge. Our priority is sustaining our strong competitive position. And so we're unlikely to move forward on profit leverage again this year despite our continued delivery of food volume growth ahead of the market. As outlined previously, we continue to invest in our business for future growth while maintaining our cash commitments. We are also delivering on our commitment to enhance shareholder returns, and we expect to return more than GBP 800 million to shareholders this year through dividends and buybacks. Turning now to our sales performance for the first half. Sales in Sainsbury's grew by 5.2% with consistent volume growth through the quarter despite higher inflation. Argos sales grew by 2.3%, helped by a good summer weather and offsetting a Q2 comparative, which was boosted by significant strategic stock clearance activity last year. Together, this delivered total retail sales growth of 4.8%, excluding fuel and 2.7% growth, including fuel. Retail underlying operating profit was broadly in line with last year's at GBP 504 million, which was ahead of our expectations. Sainsbury's profits were down slightly year-on-year, with volume growth and cost saving delivery, enabling focused investment in value, customer service and quality and partially offsetting higher employment and regulatory costs and elevated disruption from our space reallocation activity. Improved profitability in Argos year-on-year primarily reflected a stronger trading margin performance versus last year's clearance activity. We announced in January last year a phased withdrawal from core banking, that is loans, credit cards and deposits and a move to a model where financial services that are complementary to the retail offer will be provided by third parties. We've made excellent progress with this over the last 6 months. We completed the sale of loans and credit cards and savings to NatWest and transferred the Argos Financial Services book to NewDay. We additionally signed agreements on our home and car insurance back books with Allianz and completed deals on ATMs with NoteMachine and on Travel Money with Fexco. Alongside the strong execution in partnership with NatWest and NewDay, these deals have contributed to the extra cash proceeds that we announced today. We are now expecting net proceeds of more than GBP 400 million, significantly higher than our original guidance, and we will return GBP 400 million of cash to shareholders via special dividend and share buybacks. We have also established forward arrangements with these financial services partners that will give us strong ongoing commission income. In the short term, the ATM and Travel Money disposals mean that we now expect the Financial Services underlying profit contribution to be broadly breakeven this year, lower than our previous guidance as the income from these businesses drop into the discontinued line until the deals are completed and a new revenue arrangements in place. This is reflected in the restated financial services numbers. This is just a transitionary impact, and we continue to expect the underlying operating profit contribution from Financial Services products of at least GBP 40 million in the financial year to March 2028. This comprises of income from the NewDay partnership together with the commission's income from insurance, Travel Money, care and ATMs. Total underlying operating profit increased by 7%. And driven by this year's financial services profit against last year's restated loss, while underlying EPS increased 12%, reflecting a reduced share count as a consequence of share buybacks. In December, we will pay an interim dividend of 4.1p, up 5% year-on-year, in line with our policy of paying an interim dividend of 30% of the prior year's full year dividend and we will pay a special dividend of 11p also in December. The next slide lays out items excluded from underlying results. We incurred GBP 95 million of nonunderlying costs in the half with the largest item relating to retail restructuring costs of GBP 58 million. The largest element of these relate to the costs ahead of our full reopening of our distribution center at Daventry. Cash costs were around GBP 55 million, with the majority relating to redundancy payments associated with the head office restructuring that we completed and booked in the P&L last year. We continue to expect retail restructuring cash costs of around GBP 100 million in the full year and Next Level Sainsbury's strategy implementation cash costs of around GBP 150 million over the 3 years of the program. Turning to our cash flow metrics. Retail free cash flow of GBP 310 million was down year-on-year, mainly due to lower working capital inflows and CapEx phasing leaning more to H1 year-on-year. Net debt was broadly unchanged year-on-year but GBP 231 million lower versus the year-end position, primarily relating to the timing of a net GBP 250 million cash inflow from the bank that will be paid out as dividend to shareholders in the second half. This table shows the key elements of cash flow and the movements in net debt this year and last. A lower working capital inflow was primarily driven by timing and a strong benefit from inventory reduction last year. Cash contributions to the pension scheme were down year-on-year, in line with our guidance of around GBP 26 million in the full year. CapEx was higher year-on-year, primarily reflecting the phasing of work on our new store openings and store refit activity. We continue to expect capital expenditure of between GBP 800 million and GBP 850 million versus GBP 825 million last year. As mentioned earlier, we received a GBP 300 million dividend from the bank, partially offset by a GBP 50 million payment relating to the withdrawal from core banking. We expect to receive the majority of the remaining bank proceeds in the second half of this year, which will be used to fund the additional buyback activity this year and next. The movement in other is primarily driven by higher additions of lease liabilities last year, reflecting the Homebase stores acquisition and our new London office. We continue to expect to deliver retail free cash flow of at least GBP 500 million in the full year. Net debt to EBITDA is broadly unchanged year-on-year, benefiting from the bank cash inflow. On shareholder returns, we will now return GBP 400 million of bank proceeds to shareholders through a GBP 250 million special dividend and GBP 150 million addition to the share buyback. We will add GBP 50 million to this year's buyback to make the total buyback GBP 250 million, and we will add GBP 100 million to next year's core buyback. As you know, we will specify the level of next year's core buyback with our preliminary results next April, but to be clear, this GBP 100 million will be in addition to the core level. In this financial year through paying ordinary dividends of more than GBP 300 million and a GBP 250 million special dividend as well as a GBP 250 million share buyback we will return more than GBP 800 million to shareholders. In summary, we have traded strongly in the first half of the year. Together with cost savings, this has allowed us to make focus and effective investment in the customer proposition and additionally offset higher costs to deliver a retail operating profit ahead of our expectations. Strong execution in our Financial Services phased withdrawal strategy has produced higher-than-expected proceeds and this will be reflected in enhanced cash returns to shareholders. We now expect to generate a retail underlying operating profit of more than GBP 1 billion in the full year, reflecting the strength of our H1 performance, but allowing us to continue to make balanced choices to sustain the strength of our competitive position. We continue to expect to generate retail free cash flow of at least GBP 500 million. Thank you for your time. I'll now hand back to Simon. Simon Roberts: Thank you, Blathnaid. Now as I said, we're at the halfway point of the 3-year plan that we set out in February 2024. And I'll now run through each of the strategic outcomes that we put in place to define this next phase of our growth. Starting with our plan to be First choice for food. We are bringing more of our food range to more customers in more locations attracting more bigger basket primary shoppers and delivering further grocery volume share gains. We've built really strong foundations over the last 4 years, providing great momentum, and we've built on those with investment in areas that really matter most to our customers on value, on quality and freshness, on availability and on range. And this is reflected in customer satisfaction metrics across the board, where we've taken a big step forward, as you can see. But what really stands out for me is the progress we've made on value perception in every channel in supermarkets, in convenience and in online. We're making sure customers have access to great prices, however they want to shop with us. And so at a time when customers are much more sensitive to rising prices and inflation is top of mind, the consistency and focus on our pricing investments is really resonating. We've shown you before the significant improvement we've made on value versus our competitors since the launch of Food First back in 2020. And now building on this, you can see on this slide, we've made focused and effective investments in the first half of this year, and that has further improved our price position against all competitors. We have the biggest Aldi Price Match in the market, having extended the number of everyday essentials included in April and Nectar Price is now on around 10,000 products. Both of these key value platforms are included in the value index you can see here. But beyond this, we're offering more value to more customers through Your Nectar Prices with personalized offers and up to 10 items each and every week that are tailored to each customer based on their shopping habits. We are leading the way in personalization across U.K. grocery, having first launched this capability back in 2021. And we've gone even further this half, fully scaling Your Nectar Prices across all supermarket tills, enabling many more customers to access this really meaningful personalized value. And it's worth highlighting here that if we did include Your Nectar Prices within the value index, this would further strengthen our position against every competitor. Now the consequence is that more customers are choosing Sainsbury's for their main grocery shop. We also did something quite different with our marketing investment and focus in the first half cutting through a much noisier market. Through the peak summer weeks, we've dialed up our marketing across Aldi Price Match and at the same time, Taste the Difference, and we delivered a campaign focused on everyday trade-ups. This helped drive the strongest brand consideration for Sainsbury's since 2013. Now our reputation for food quality, range and innovation sets us apart. Working closely with suppliers, we delivered more than 600 new summer products with the result that we were the go to for customers' key summer occasions. And from an already strong position, the strength of our Taste the Difference momentum delivered the biggest premium own label market share gains. And we can see great opportunity here. The potential for gaining more in-home dining occasions is clear from the chart on the left. And we've taken a further step forward in the last month with the launch of Taste the Difference discovery, a range of restaurant-quality meal solutions and premium specialty products and ingredients. The response from customers has already been really strong with premium dining sales growing 40% since launch. Now these new ranges really lean into the core strengths of our brand and customer demographic and we're really excited about how far we can take this. Now a key part of the strategy we laid out in February last year was to build on the renewed strength of the Sainsbury's grocery proposition and to bring it to more customers in more locations. What we didn't know then was that we would be presented with an opportunity to achieve some of that through new supermarket openings, filling in a number of key target locations through the acquisition of stores from both Homebase and the Co-op. We've now opened 4 of these stores, 2 of each in the first half, and we're delighted with the results. Collectively, the 6 new supermarkets and 12 new convenience store openings we achieved in H1 are trading around 20% ahead of budget. And specifically on the Homebase stores, we're particularly pleased with the look and feel we've been able to deliver in these stores, but on a much lower than standard fit out cost. While the feedback from colleagues and customers on the transformation of the former Co-op stores, has been exceptional. Now subject to final planning consents, we plan to open another 6 supermarkets in the second half, including 3 Homebase conversions and up to 12 more supermarkets next year. In total, we expect our new store opening program and the growth of food space in existing supermarkets to have added more than 1 million square feet of grocery space by the end of next year, an increase of around 6% over the 3 years. And we remain excited about the opportunity we have to reach new customers in new key target locations, and we expect this to be a strong driver of market share gains over time, particularly as the new stores mature and the disruption from refit activity reduces. Now alongside new store openings, we have been continuing to invest selectively in our existing supermarkets through our More for More plan, reallocating space to provide more food range. And there's no cookie-cutter approach to our store refit program with the level of capital spend, change and space reallocation adapted to fit the trading profile and potential of different supermarkets. We're learning as we go, and we're rolling out rapidly the most successful elements. So in particular, we have improved the prominence of Nectar Prices and the look and feel of our center aisles. We have extended range and enhanced presentation in beers, wines and spirits, also often relocating the department within the store, delivering a sales uplift. Our free from hubs combining fresh, frozen and ambient products in 1 aisle are contributing to a growth of 14% in free from across the business. That's a 7% market outperformance. And we've made our Food to Go fixtures more compelling and easier to shop with new formats delivering double-digit sales outperformance. So in those stores where we have come through the disruption, we're really pleased with progress with the stores delivering higher food sales, higher trading intensity and a good customer response to the range improvements. So in two, the work we've been doing over the last year to improve the customer offer is really delivering. We've been investing in leadership and enhanced capabilities across our clothing business. And as a result, we're now seeing improvements in ranges, product design and in our operational performance, too. Our combination of great value and quality design is driving stronger customer perception metrics, and we've also significantly improved availability. We delivered sales growth of 7.8% in the first half, with higher full price sales, and we've achieved our fifth consecutive quarter of market outperformance. So turning next to Loyalty everyone loves. We continue to believe that our well-invested loyalty in retail media capability is a fundamental requirement for success in grocery retail. And Nectar is at the leading edge here in the U.K. and globally in terms of enabling personalized rewards for customers and in delivering leading retail media capabilities. As a result, Nectar continues to generate very strong returns. A reminder here of the 2 sides of Nectar. On the left-hand side, our customer-facing Nectar loyalty scheme, which is how we deliver value to customers through points earned inside Sainsbury's and with coalition partners as well as through Nectar Prices and increasingly through personalized Your Nectar Prices. On the right-hand side is our Nectar360 Retail Media business. We help our suppliers and other clients understand how customers shop and help them talk directly to the millions who visit our stores and our websites every week, either directly through our media in-store and online or using our targeting capabilities to address customers on third-party media. Retail Media continues to grow its share of total media spend in the U.K., driven by the high return on investment it delivers, and we're at the forefront of making it easier and more effective for clients and agencies to tailor the effectiveness of their digital media investments. Nectar Prices continues to deliver outstanding value for customers, supported by suppliers, Nectar Prices were available on up to 10,000 products in the first half delivering customers an average GBP 14 saving on an GBP 80 weekly shop. We also extended the availability of Your Nectar personalized prices. Previously, this was only available to customers shopping online or through using SmartShop in stores. We have now extended this to be available for all our customers in our supermarkets. As a consequence, more and more customers are now accessing individual and personalized value, which is even more meaningful and accessed every week through the Nectar app. And an important reminder here on how much customers can earn through collecting Nectar points in Sainsbury's and also through our coalition partners, particularly given the growing number of customers who now use the Nectar app. Now at a time when value for money is much more on customers' minds and there's a lot of noise out there in the market, it's been important to increase visibility here on the extra value benefits Nectar customers are seeing. These benefits are getting stronger and stronger and becoming increasingly valued by Nectar customers, and this is reflected in the value perception scores we have presented today. We talked in July about the launch of Nectar360 Pollen. This is a bespoke platform built in-house that helps clients assemble tailored omnichannel retail media campaigns. Now we're just starting to roll it out to clients now, and the feedback has been every bit as good as the response we got when we first announced it. We think this will be a game changer for clients' return on investment and another driver of significant growth for us. We're also getting really good returns on our investment across the connected digital media screens in store, particularly where we're rolling these out to our center aisles. All in, we're comfortably ahead of our profit plan. So turning to Argos. We're making good progress with our More Argos, more Often strategy. Our focus is on building a more profitable business through improving the customer proposition, investing in product range and the digital customer experience. We're building on our reputation for convenience and value and continuing to optimize the efficiency of our fulfillment network. We're making progress on the key customer metrics outlined here on value for money and promotions, but also on quality and range. This is driving higher online traffic and an increase in both volume growth and basket size in a deflationary market. Our digital performance is where we are really starting to make a key difference, most notably through investing in the Argos app, with strong results, as you can see from the chart on the right. But also through investing to make sure that customers find Argos as a solution more often and more easily, driving greater engagement through social channels and launching our own podcasts as well as scaling the use of AI and personalization in our digital channels. With an improving conversion by making the customer journey easier once customers find us from search tools and personalized recommendations to enhance product pages all the way through to payment. This is how we will build a more sustainable, profitable sales base and the move we made earlier this year to put in place a dedicated leadership team for Argos is really making a difference to the focus and the effectiveness of our strategic actions and operational delivery. Range wise, alongside the sharpening of our own brand ranges, we're building deeper partnerships with key brands and bringing new brands and ranges into the offer through supplier direct fulfillment. We're also now giving the customers the option of Click & Collect on these SDF ranges. Customer familiarity with our Big Red promotional events is building too as reflected in the promotional and value perception scores shown earlier. And we're trialing a delivery subscription offer, Argos Plus for the first time. We're continuing to refine and reset the store operating model, investing in the store network and in technology. This improves colleague productivity and the customer experience, particularly through easier collection and returns processes. Now turning to Save and invest to win. The strength of our cost-saving program is a key differentiator. And at the time of higher-than-normal operating cost inflation, it means that we can offset more of that incremental cost than our competitors. It's not just about finding ways to save money, it's about delivering sustained cost savings through structural efficiency gains, particularly through capital investment in improved technology and infrastructure. We have a well-developed program with a good pipeline of initiatives and some of the big capital investments are starting to generate savings, which will build over multiple years. And we continue to be encouraged by progress in driving end-to-end productivity and efficiency benefits. Now having delivered around GBP 350 million of savings last year, we're well on track to deliver to our plan this year and GBP 1 billion of savings over the 3 years to March '27. Our investment in the replatforming of our general merchandise logistics network will deliver savings of around GBP 70 million when the program is complete and we're just going live in our Daventry warehouse. This is centralizing Argos and general merchandise stock in fewer locations, bringing more automation and improving productivity and capacity. And we're building on the strength of the machine learning forecasting platform. This has already significantly improved our forecasting and our stock accuracy and we're now extending the benefits further down the supply chain by giving suppliers greater visibility and self-serve functionality. As you can see on the right-hand side of this chart, our use of video analytics technology to reduce shrink at self-checkout locations has significantly exceeded expectations, and we're now rolling this out rapidly to more stores. As a reminder, these are the commitments that we made at our Capital Markets Day in February 2024 with the launch of the 3-year Next Level Sainsbury's plan. We're now halfway through our Next Level plan. And in a year like this, where competitive intensity has stepped up, making the right balanced choices has never been more important. So while we have very clearly prioritized sustaining the strength of our competitive position this year, we remain on track to deliver these commitments over the 3 years of the plan. We are continuing to drive forward progress against our Next Level plans, and we are strengthening our capabilities for the future. We're consistently delivering for customers and more and more are trusting Sainsbury's for their weekly shop. And as you will have seen in the latest Kantar reads, this momentum has been sustained into the third quarter despite some tough comparatives to the same period last year. We expect Christmas to be very competitive, and hence, we're giving ourselves the capacity to make the right balanced choices with really strong plans for Christmas across value, innovation and quality, and by making sure that our service is at its best, both in store and online. Our whole team and I are really excited about what we can deliver this Christmas, and we look forward to updating you on that in January. Now before Blathnaid and I take your questions, we wanted to share our Christmas ad, which went live just a couple of days ago. [Presentation] Operator: Hello, and welcome to Sainsbury's 2025-'26 Interim Results Announcement Analyst Q&A Call. On the call this morning is Simon Roberts, Chief Executive; and Blathnaid Bergin, Chief Financial Officer. We'll now go to the Q&A. Operator: [Operator Instructions] Our first question is from Freddie Wild from Jefferies. Frederick Wild: Congratulations on a very strong set of results. So my 3 questions. First, if you could give us a bit of help on the consumer outlook into Christmas. You've obviously just made some really quite encouraging comments. But how do you see the sort of Grocery business into Christmas? And how do you see Argos into Christmas as well? Then second, Simon, you were very impressively accurate on your food inflation outlook when we talked at the full year. So I wondered if you could give us an update on where you see food inflation going from here? And finally, obviously, you've now over delivered a bit into half 1. Could you help us understand the half 1 versus half 2 phasing dynamics for retail EBIT? Simon Roberts: Freddie, thank you. Okay. So let me -- let's take those in turn. Look, I think for obvious reasons, the consumer is very focused on the cost of living. And that's why as you can see in our first half, we set a very clear priority back in April, and that priority was to sustain the strength of our competitive position given all we've done over the last 5 years. And what I think we can see is value for money is absolutely, of course, at the center of how households up and down the country are thinking, a lot of uncertainty out there. And so what we've been able to do is give customers real confidence and the fact they can trust value at Sainsbury's. We extended our Aldi Price Match in the half, the biggest Aldi Price Match in the market, 10,000 products now in Nectar Prices. And so what you can see, I think, is customers are going to be very focused on value, and our offer is really matching that expectation. That will continue, to your question right into Christmas. We have a very strong plan for this Christmas. And also, I think, importantly, particularly at this time of year, at this point about celebrating without compromise, and that's where Taste the Difference and trading up into Taste the Difference is playing a very important role for us. We always said, didn't we? If we could get value at Sainsbury's really working for customers and our reputation for quality would come alongside that. And we're now really rolling forward both on quality and value and service, and the combination of all those things is giving customers the reason to do more of their big shop with us. And I make the point that we shared in the presentation, which is we've seen value perceptions in Sainsbury's customers improve year-on-year. We're the only grocer in the U.K. where that's happened, and you can see the impact on our volume share. In terms of your question on inflation, look, I think what can we see? We can see that actually the industry has largely solved for the higher costs that have come through this year. There's still more inflation, I would say, to get through. But when we think about the impacts of National Insurance, EPR, the higher costs, both in retailers but also as they've come through in the cost of COGS, we can see how the industry has responded to that. We also know, and we said this in April, didn't we? It's intensely competitive out there. This is an intensely competitive industry. Competition has stepped up. There's a lot of noise out there in the market. And so we've got both this inflation passing through, but also very clearly at a higher level of competition, and that's the reason we set such a clear priority for us to make sure that we sustained our competitive position in the first half, and you can see how that's played through for us. Look, I think as we look ahead, clearly, cost pressures are going to continue to be there in terms of the increases to living wage and other costs as well. And so very importantly, for us, our Save and invest to win strategy is super important. We have a very mature efficiency and cost program now. We've committed to save GBP 1 billion over the 3 years. In fact, at the end of this financial year, since we started our Food First, we'll deliver close on GBP 2 billion for the cost savings in the first 5 years. And that's really important given the obvious continued cost pressures that are out there. And then on your last question on the balance of the half, look, I think -- we're encouraged with the first half. We've seen that focus on value and quality and service with customers really play through into our results. Actually, as you've seen profits a little bit down at Sainsbury's in the half, improved a bit year-on-year and Argos in the half. And so therefore, we were able to deliver a profit outcome a bit ahead of our expectations actually for the first half. We inflated a bit behind the market in the half. That was all about the fact we wanted to make sure our value position was right. And so we come into the second half, actually with really strong momentum. You'll have seen the recent market reads. And we're very deliberately giving ourselves the capacity to continue to make balanced choices. There's a lot of customer expectations on value out there, there's some uncertainty out there. I think probably a bit of caution in the GM market. Let's see how that plays through in the second half, given nondiscretionary spend will be more cautious. So for all those reasons and giving ourselves that capacity through the second half, Freddie. Operator: Our next question is from Sreedhar Mahamkali from UBS. Sreedhar Mahamkali: Maybe just a couple of questions on Argos and on the buyback, please. And I guess the first one is, clearly, you went through a process with JD.com. Can you discuss a little bit more the context for this and why you terminated the talks and how we should think about any potential future conversations? And I guess second one from an investor's point of view, something that I get fairly regularly these days is like JD.com progressed, which means there was a clear ability to separate Argos growth and its financial performance. I guess why shouldn't investors get the same level of visibility of Argos profits in the segmental disclosure. And I guess the third one, maybe just on the buyback. I think you talked about a core buyback. Given the cash flow outlook already for next year as part of the plan, is it reasonable to think that will carry on at the GBP 200 million sort of run rate into next year. And then we add GBP 100 million so taking the total to GBP 300 million. Does that sound reasonable at this point of the year? Simon Roberts: Sreedhar, thank you. Well, why don't I take the first question and then Blathnaid, maybe on your second and third question. Okay. So yes, just to recap. And as we said early September, look, of course, our obvious and key question is to make sure we continue to secure the strongest and most successful feature for Argos. And as we said early September, we've been in a process of discussions over a number of months to explore the discussion around acquisition of Argos. And look, I think as we said very clearly, early September, those discussions had reached a relatively advanced stage, but then given there was a substantial representation of the terms of those discussions, it was clearly in the interest of shareholders actually and our wider stakeholders as well that we stop those discussions and we pulled away from that. And look, clearly, we're very focused on delivering the best outcome for shareholders. And we have a very clear More Argos, more often plan. You can see in the half, we grew sales, we improved profitability year-on-year. We grew market share in Argos. And I think this is beginning to show the first encouraging signs of the work the team are doing to really focus on what we need to do in Argos. And that's about making sure for customers, we deliver exactly the range and assortment that customers want to be able to access through Argos. We know customers love Argos. They love the convenience it brings. So we're extending our ranges, as you've seen in the presentation this morning, making sure we're absolutely on our A game at Argos on value, and also improving the digital experience. You saw in the presentation the big step-up in online search that we're able to now achieve. And so all of our focus is on delivering More Argos, more often. Of course, the market out there is highly competitive. We've got to make sure that we really deliver that plan well. And as part of that, you remember, we put a dedicated leadership team in place earlier this year, totally focused on the Argos business. And that's beginning to drive some of the improvements that we're seeing as the team really gets around the things that we need to do. And so clearly, a period of time through the summer. I'd make the point that while these discussions were going on, I think one of the things that we can draw from today's results is we weren't distracted at all by that. The team were very focused on delivering the plan and a smaller team, a much smaller team working on these conversations whilst they continued. They stopped early September and now we're completely focused on what we need to do. Blathnaid? Blathnaid Bergin: Great. So Sreedhar look segmental reporting is very much on our minds at the moment and a live discussion in the business today, particularly as we exit Financial Services, so we'll update you on that in the prelims at the moment, but something we are looking at. And on the buyback, look, we are really pleased today to be able to announce the addition of the incremental bank proceeds taking our buyback this year to GBP 250 million. That's core of GBP 200 million and GBP 50 million of additional coming from the bank proceeds. We've committed an additional GBP 100 million from the bank proceeds next year. And if you look at our capital allocation policy, we have committed to at least GBP 500 million retail free cash flow. If you assume GBP 300 million goes back in dividend we don't have a better use for shareholders' money, we'll return that to shareholders. So I think that's a reasonable working assumption for your model for next year. Simon Roberts: Thanks, Blathnaid. Maybe just one last point to your question as we wrap all that together. Look, I think the other important point to make is we learned a lot to the process that we went through in the summer. We learned how we can make Argos even better. We also learned that Argos is separable. It's not something that's wholly straightforward immediately, but it's something that we identified a read through. So we learned a lot through this process, which is also very helpful to us, too. Sreedhar Mahamkali: Maybe just a very short follow-up. Just on that slide where you present the Argos and Grocery, Sainsbury's EBIT. You show Argos as preconcessional rents. Is that the way you look at it in the business? Or is there further granularity that we probably could expect in time? Blathnaid Bergin: It is the way we look at it in the business today because it was one of the synergies we took when we acquired Argos. That's one of the discussions that's on our mind as we head into sort of prelims on that, and we'll give more visibility as we complete those discussions. Operator: Our next question is from Lizzie Moore from Citi. Elizabeth Moore: So firstly, I was just wondering around Nectar360 Pollen. Obviously, it's quite early, but really interested to hear any more detail around the early momentum you've seen there. And then related to that, you mentioned you're tracking ahead of your target for GBP 100 million of incremental Retail Media EBIT by March '27. Just wondering if you could give us a sense of how much we might expect you to be able to exceed that target by. And then second question -- sorry. Simon Roberts: No, it's okay. Next question, yes. Elizabeth Moore: Yes. Just ahead of the budget. I was wondering if you could give us some color around the latest discussions you've had on potential increases to business rates on properties over GBP 500,000. And if you could just share how you're thinking about the potential headwind from that in fiscal '27. Simon Roberts: Okay. Got it. Thanks, Lizzie. All right. So let's start with Nectar -- well Nectar and Nectar360 to your question that we're very energized and encouraged with the progress we're making across Nectar actually as a platform to really deliver for customers and really create value in our business. And look, I said in the presentation, I think as we think about the strategic capabilities that are necessary to really win in this industry, having a leading loyalty program, having personalized value and having the retail media platform that we're building out are absolutely essential. And you can see more and more now how that strategic capability is making such a difference for what we can deliver for customers, but also what we can deliver clearly for shareholders and in value terms, too. Nectar360 Pollen, clearly something we built earlier this year. We're actually going live right now. We had our first series of client conversations this week. The feedback is exceptional. Because clearly, what we're doing here is building a capability that's dynamic, is agile and gives clients and brand partners and suppliers the ability to build their campaigns using the platform, getting live quickly in a very dynamic way in what is a first-to-market solution. So obviously, over the coming months, that will scale out. It's going to really revolutionize how brands and agencies can work with us. And we think it's going to create both a lot of connectivity and a lot of value as we do that. In terms of your question on our ambitions financially for Nectar, look, we're really encouraged with progress here. You heard in the presentation today how both sides of Nectar are really powering the business forward. We'll talk some more about this at the year-end. Clearly, we see the launch of Pollen is very important in the progress we're making, and we continue to build momentum on Nectar ahead of what we expected. So really, really good news. Yes. I think turning to more nearer-term questions in terms of the budget. Look, I think as you'd expect, we have had, as an industry, actually, a series of discussions at the most senior level of government on the topic of business rates. We've been given the opportunity to present our case really clearly as to why there shouldn't be any further impacts on retail cost through business rates. Everyone on this call is very well aware of the scale of costs that have come to the industry this year on National Insurance, EPR and hence, the reason why we've made our case very clearly, particularly important, as you say, for large retail stores, not least given the importance of the role those stores play, but also a huge number of people that we employ as large retailers. And so clearly, we need to hope and expect our politicians now to make the decisions based on the very strong case we've made, and we'll see that at the end of the month. And I guess the broader point here, no one wants to see inflation go up further. We're doing a lot through our internal efficiency and cost saving programs to contain the effects of inflation. As I said, we actually inflated a bit behind the market in the first half. That was to make sure we were almost competitive. We clearly don't want to see any impact on business rates adding further cost to the system. Operator: Our next question is from Rob Joyce from BNP Paribas. Robert Joyce: So firstly, just on the Sainsbury's core business. I guess we look at last year, second half, you kind of grew profits there, double the rate you did in the first half. So 2 questions, I guess. First one, do we think we can grow profits in the second half of this year to come? Or should we expect it to be down again? And then looking into next year, in a more normalized cost environment, do you think the business should be back to kind of that mid- to high single-digit sort of growth or EBIT growth next year? And the second one, just on Argos. I think this year -- this time last year, you gave us a bit of an update on how you're trading in the first 6 weeks of the quarter or so. Wonder if you could give us an update on how Argos is trading thus far in the quarter? And are we expecting it to be sort of in growth over the next couple of periods? Or do you think we're sort of back to a more normalized sort of flat to down Argos position? Simon Roberts: Thanks, Rob. Well, let's talk first to your question on the half and how we think about the second half of the year. Look, I think first point I would make here is -- and forgive me repeating this, we set out our plan for this year very clearly with that priority of sustaining the strength of our competitive position. And as you can see in today's results, we made very focused and effective investments in our value proposition in that first half. And you can see how that's played through, both in improving our value perceptions year-on-year, the only grocer to have done that, but also the fact we've continued to grow our volume. And I'd make the point against some strong comps last year. So the strength of the Grocery performance in the first half really underscored by the strength of our competitive position. And as you've heard me say a number of times, making balanced choices, making sure we have the capacity to do what we need to do has been a very important part of our plan over a number of years. We set that out way back in 2020, 2021, and that continues to be very important for us. And so when we think about the first half, obviously, we invested a bit more in areas like Aldi Price Match. We invested more in areas like marketing. I talked about that in the presentation this morning. And we also had clearly the benefit of some very good weather in the first half, which was clearly helpful to both the Grocery business, but also the Argos business, too. So there are a number of tailwinds that came alongside how we thought the first half would go. And that's why we've performed a bit better than we expected in the first half. When we look to the second half, to your question, look, in the Grocery business, and you can see this in the recent market reads, our momentum continues. And we continue to deliver strong volume share growth against strong comps last year. We're carrying that momentum into the second half. But look, despite the fact it's the first week in November, and there are 7 very critical weeks to come. And until the end of the year, we want to make sure we just retain the capacity in our guidance to continue to make those balanced choices given the significance of the part of the year to come, and that's what we're doing today. We're going to sustain the strength of our competitive position, as I said at the start of the year, and we'll continue to make those balanced choices. And look, I'd say just to double underlying that, those balanced choices have always served us well and have served the outcome we've been able to achieve well. In terms of how we then think about Argos, look, probably not a lot to add to what I've said other than obviously to say the customer is going to be more cautious here given all of the uncertainty that's out there. And so as part of those balanced choices, we want to make sure we've got the capacity for probably a bit more of a cautious customer in GM, certainly until things are clear on the other side of the budget, likely to be a very competitive sector, I think, through the last few weeks of Christmas this year for all the obvious reasons. And as you say, we've got a very strong plan in Argos, but competition will be intensified. Customers will shop later. Customers will hold back a bit on spending for all the reasons that are out there. And those are the things that we've obviously factored into making sure we've got the capacity to make the choices we need to over the second half. Operator: Our next question is from Fran ois Digard from Kepler Cheuvreux. François Digard: Three questions, if I may. What were your expectations going into H1? Because you mentioned you exceeded your expectations, but could you quantify that excess -- what were you prepared to see your H1 underlying profit decline by how much? Second question is Argos' performance benefited partly from favorable weather. You have mentioned in the past wanting to make the business less volatile. How far along are you in that process? And what level of volatility should we expect going forward as normal? And third, on Retail Media, I understand you will share more details in final results. But could you help us to see how the market is evolving? You mentioned growth, but what is your share of it? Or at least what is the food retailers share versus players like Amazon right now? Simon Roberts: Fran ois, thank you. So why don't I pick up the questions on Argos and where we're getting to there and also Retail Media and maybe just to your question on our kind of expectations and how they played through in H1. Blathnaid, do you want to pick that up? Blathnaid Bergin: Yes. So look, we entered H1 cautiously. If you remember the backdrop as we entered H1, there was a few things that went on there. We exceeded our expectations largely because we had some really good weather and we known good weather because we're South-based. In food, we tend to outperform and take more market share and the same in Argos as well with those seasonal products. So if you think about the good weather, we got good sell-through in Argos, and we got an uplift in the food as well. So that's why we exceeded expectations in H1. Simon Roberts: Thanks, Blathnaid. And then just to the question on what is More Argos, more often all about, Fran ois, in terms of us building a really clear plan out in Argos such that we can deliver for customers, really inspiring choice that gives them confidence to make Argos their first choice, a digital experience that's friction-free and really easy to access and then trusted value given the obvious competition in the market. And so we are in the early phases of delivering that plan. I think what we saw in the first half was an encouraging performance given we grew share. Clearly, the weather helped us grow sales year-on-year. We know that Argos benefits seasonally when the weather is good. Last year, we had a particularly difficult year because the summer was so poor. That led us to a lot of clearance in the second quarter last year. And so the reason the sales were softer in Q2 compared to Q1 was we anniversaried that very significant clearance activity last year. And so in the second quarter, actually, sales were a bit up, but less than the first quarter, but actually profitability improved in the second quarter as we anniversaried what was a high level of clearance last year. And so when we look at what we're doing in the Argos business, we've said before, our priority here isn't a short-term profit outcome. It's to build the base of the Argos business in customer traffic, in loyalty, in value, in assortment, in the digital experience. And then, of course, in the efficiency programs we're delivering to make sure over time, we can improve the level of outcome that we can achieve. And as we come into the second half and also to Rob's earlier question, we've got stronger momentum in Argos, but it's a cautious customer and a cautious market out there. And so we're going to need to be a really strong position coming into this Christmas and really competitive, which we'll make sure we're able to do. Look, on Retail Media, I made the point just before to Lizzie's question, this is an essential capability to win in this industry. And our team across Nectar360 and Nectar more broadly are really leading out here in terms of the capabilities we've been investing in. We've really put a big focus on this key part of our business over the recent number of years. As we built out our Next Level strategy, we were very clear that Loyalty everyone loves was a core part of how we're going to power both our customer delivery, but also our value creation narrative. And we're clearly on track to deliver the GBP 100 million additional that we committed to over the life of this plan. And we are also very focused on making sure in Retail Media as we launched Nectar Pollen and the other work that we're doing that we continue to take a leading position here. I just would make the point that the launch of personalized Nectar value is so important in this because obviously, it's bringing more customers into our Nectar ecosystem. Thanks, Fran ois. Operator: Our next question is from William Woods from Bernstein. William Woods: In terms of -- you've shown some quite good data on your value and quality perception, growing or improving ahead of the market and Tesco with your volume market share gains have been softer than Tesco maybe even slightly in the last few months. Do you think there's a disconnect there between the value and quality perception improvements versus the market share gains? The second one is on Argos. Just trying to understand the underlying Argos performance here. How much do you think things like Switch and the iPhone contributed to growth in H1. And then the final one is just on your gold, silver, bronze store strategy. How are you seeing your gold stores preform? Are there any learnings or kind of further adaptations you're taking there? Simon Roberts: Thanks, William. We just about heard your question. The line wasn't great. But I think just where are we on value and the balance of the value market share gains and quality, the underlying Argos performance and then how we think about our store space program. So I'll take each of those in turn. Look, on the first one, we're really encouraged actually by our volume market share gains, as I said, year-over-year. And the reason I talk volume market share gains, we've always said from the start that we're focused on volume because that's clearly a very clear measure of customers choosing to trust Sainsbury's to put more items in their basket, and that's why we measure ourselves against volume market share. In the presentation today, you can see actually the growing evidence that customers are both trading down in the basket but also trading up in the basket. 65% of customers in the half both bought in the same basket Aldi Price Match line and a Taste the Difference line. And I think that's a very important example now of the fact that we're getting trusted at the entry price point, and we're getting trusted on the trade-up. 1 in 3 baskets can train Taste the Difference, 65% of baskets customers are buying in Aldi Price Match line and Taste the Difference line. And we set out a very clear plan, didn't we this year to make sure that we sustained our competitive position. We inflated a bit behind the market, and that's really played through. And the other final point I'd make to your question is that our value investment has been very anchored in the products that people buy most often. You remember going way back to the beginning, we talked about the importance of the center of the plate. If I look at a category level where we've seen the strongest performance, the key big fresh food categories are the ones we're winning against the market most, and that's because customers are trusting that center of the plate and then doing the rest of the shop and filling their full basket across the whole supermarket. In terms of the question on underlying Argos performance, look, as I've said, the weather definitely helped us in Argos. We saw the strength of seasonal products come through, particularly actually in the first quarter where the year-on-year comps of the weather were clearly much stronger. And so when the sun shone, Argos really came into its own. Look, I'd be really clear to say, look, we planned for a good summer, but we clearly sold a lot of our seasonal products in the first quarter. And look, I'm pleased we did that, right, because what we didn't have was any stock overhang going into the second part of the year. We did a very effective plan to max out the summer when it came. We sold through well, and that meant we could get ourselves on a really stable and good footing coming into Q3. Yes, of course, the Switch is an important part. Technology is an important part of the Argos overall performance, but seasonal really came through in the first quarter, and we really planned for that. And then on your question on our space, 2 key components to this. So you remember, we laid out a plan More for More, which is bringing more of Sainsbury's range to more customers in more locations. You remember, too, we've always said there are key target locations in the U.K. We'd like to have a Sainsbury's store, and we haven't got one today. That's why when the Homebase opportunity came to us, we really looked at that, and we're well on now with getting the Homebase conversions open. We've opened the first of those, trading ahead of expectations and really working actually. What are we seeing? We're seeing trading up, and we're seeing the ability to fit out those stores at a lower cost than we expected. Our property team are doing a brilliant job actually on the ground, making sure we get the Sainsbury's offer landed really well in some of these sites and customers are responding really well. And on the other side of our More for More program, this was about taking space from GM into food. And in this year, we'll land just over 50 schemes Obviously, we're constantly solving to make sure we get the best trading intensity outcome, improvement in volume, improvement in customer satisfaction and obviously, a good return on the capital that we're investing in these schemes. And you can see a lot of the stores out there now. What we can particularly see, as you saw in the presentation, is the areas of the shop we've really focused on Food to Go, our center aisles on Nectar, beers, wines and spirits, free from. These are the areas where we're really making sure that those elements of the store, we're getting the best returns, we're rolling them out as fast as we can. Operator: Our next question is from Benjamin Yokyong-Zoega from Deutsche Bank. Benjamin Yokyong-Zoega: Congratulations on the results. I just had a couple, one on Grocery and one on Argos. On the Grocery, I mean, it's great to see the volume outperformance and the inflation behind the market. Just wondering what impact, if any, you've seen from recent price cuts from competitors? And is it your intention to broadly maintain your value position over the rest of the year? And then on Argos, you've outlined the cautious near-term outlook for discretionary. But I just wanted to check how inventory levels are compared to last year? And if there's any color you could give on the deflationary market backdrop you mentioned and if this is more pronounced in certain categories? Simon Roberts: Benjamin, thank you. Well, why don't I pick up kind of the key grocery themes you've had. I know Blathnaid will want to comment on where we are in our stock position in Argos, and we can add to it from there. Look, I think at the risk of repeating myself, so forgive me for this, Benjamin, I think look, we set out a really clear plan to make sure this year we sustain the strength of our value position. I think we were clear in April to say there was a lot of noise in the market, and it was important, therefore, that the clarity of the Sainsbury's value quality and service message really cut through in that context, and that's exactly what we've done in the half. As you can see, we inflated a bit behind the market. You can see, as you indicated, our volume share improved year-on-year-on-year despite some strong comps. And that's because we invested a bit more, but in a very focused and effective way. We increased the Aldi Price Match on to more everyday essentials. We increased the number of products in the Nectar Prices range. And as I said in the update as well, we also did some more marketing this summer. And we, for the first time, ran a very bold marketing campaign on Aldi Price Match right alongside our focus on everyday trade-ups on Taste the Difference. And so we invested some more in marketing as well as sustaining the strength of our value position. And net-net, when we look at where that's brought us to over the half, we're really pleased with what that's meant because, as I said, we've seen value perceptions in Sainsbury's customers improve year-on-year, and we've been the only one in the market to do that. And we're going to carry that momentum into the second half, right, because it's absolutely a core part of our formula. And we've shown that by growing our volume, volume over fixed cost is what we said over the life of our plan. And when we look out over the 3 years of Next Level, we're very focused on growing volume market share and making sure that we can drive the right financial returns as we do that over time. Argos, Blathnaid. Blathnaid Bergin: Right. So what we're seeing in the Argos market is it's largely electricals and furniture that are a little bit deflationary. But just to sort of talk about working capital, we have a real discipline in the business around cash and around working capital. Last year, we ran a pretty big working capital program in Argos. We reduced inventory by just over GBP 90 million while improving availability. So it's really important to get the right balance on that, and we exited the year-end clean on inventory as well. As we came out the back end of this summer, you've seen in the numbers, we had a good sell-through on seasonals. And again, we exited the period clean. So inventory is reducing ever so slightly this year in Argos as we wrap up the end of that inventory working capital program, and we'll continue that discipline to make sure we're delivering our cash targets for the business. So pretty pleased with the position, particularly as the availability is improving. Simon Roberts: Thanks, Benjamin. Operator: Our next question is from Manjari Dhar from RBC Capital. Manjari Dhar: My first question is just on marketing spend. I know you mentioned that you've done a little bit more this summer. I was just wondering how you're thinking about your spend running into Christmas? And are you deploying that marketing spend any differently this year? And then my second question is just on Argos. I wondered if you could give us some more color on the economics of the Argos Plus trial. How does this work? And I guess, what do you need to see from this trial to pass that as a success? And then finally, I just had a question on the cost savings for this year. I just wondered if you could give us some color on sort of how that phases between H1, H2. How much have you seen so far? And how much should we expect still to come? Simon Roberts: Thanks, Manjari. Okay. Let's take those in turn, and if I take the first 2 and then Blathnaid can speak to where we are on our cost plans, both this year and as we look ahead. So look, I think right back to the start of the conversation, sustaining the strength of our competitive position was our clear priority this year. That's why balanced choices play such an important part. You can see, Manjari, to your question how that's played out in the first half. We invested more, as I've said, in Aldi Price Match. We extended Nectar Prices. That really converted with customers such that the value perception improved year-on-year as we've talked. Yes, and it was an important shift actually for us to run value and trade-up side by side through the summer. That was a very specific choice we made actually to test what we could see in terms of the returns on those campaigns. And we were really pleased with them actually. As I said in the upfront presentation, we saw the highest return in terms of brand consideration for Sainsbury's on the Taste the Difference campaign that we've seen in over a decade. And so that's given us real confidence in how our marketing is coming through, both digitally and in all above-the-line channels. Our marketing team have done actually a fantastic job over the last number of years, resetting how we think about Sainsbury's and more recently, Argos marketing, and we can see that cut through with customers. And look, when I talk about retaining the capacity for the second half, you've seen us go live with our Christmas campaign last weekend with the return of BFG. And as you would imagine, we have a very focused and very intentionally focused on value and quality as we come into this Christmas to make sure that our resonance with customers is where it needs to be. On Argos -- on the Argos Plus trial, look, I'd make the point, this is a trial. We're just testing how customers think about this, whether by paying an annual fee and getting delivery for free is something that customers would respond to. We're in the early phases of testing that. And obviously, we'll update you when we know some more. It really speaks to making sure that convenience at Argos is a standout reason that customers would choose to shop with us. And so obviously, we're doing lots of things in the More Argos, more often plan to make sure we're getting the proposition right. But importantly, we can deliver that proposition at the right cost and the right efficiency. So that will work through and we'll update in due course. Blathnaid Bergin: Great. Maybe then on cost savings, look, we're really pleased with the progress we're making against the GBP 1 billion target over the 3 years. We delivered GBP 349 million last year. We estimate it will be broadly split 1/3, 1/3, 1/3. And if you think about this year, you think about the phasing pretty flat across the 2 halves is the way to model it. So about half of it delivered and about half of it to come in the second half of the year. Simon Roberts: Yes. And just to reiterate, clearly, the GBP 1 billion cost saving target over the 3 years, which we remain on track for with a strong pipeline into next year as the maturity of this program continues to build out. Thanks, Manjari. Operator: Our next question is from James Anstead from Barclays. James Anstead: Two questions on Argos, if that's okay, please. You mentioned that you learned Argos is separable, which is an interesting lesson. But I guess that also during those discussions, you must have had a lot of time to think about some of the complexities in the relationship between Argos and Sainsbury that makes it harder to separate. So my question is when you think about the structure of Argos going forward and how it fits together with the core Sainsbury business, will you be deliberately chipping away at some of those relationship complexities, if you understand the question? And a much quicker second one, which is it looks like the Argos losses narrowed significantly in the first half. Is it fair to assume it would have been profitable without the EPR charge that was registered in 1H? Simon Roberts: Thanks, James. Okay. Why don't I speak to what we learned on your question separability and then Blathnaid can come back on the question of the first half and how the profit shaped up. Yes, without repeating myself, for obvious reasons, we really stared through this process of what it would take to separate Argos out to the fullest extent. I would make the point that back in February '24, when we laid out our Next Level plan, we were really clear at the time that we saw Argos and Sainsbury's in terms of what it needs to deliver for customers and the operating model of both businesses as being quite separate. And we made that statement clearly then. And that's one of the reasons why in our strategy, we were very clear about first choice of food and More Argos, more often as being 2 distinct elements of our Next Level plan. And as you've seen actually over the last period of time, one of the things the team and I have been really focused on is how do we make sure we set up Argos with what it needs and how similarly, do we make sure that the focus in the Grocery business and in Sainsbury's is what's needed there. And I think what we can see in these results is that approach continuing to build through and build momentum. And so in Argos, we have a dedicated management team now. Graham is the MD of the Argos business. That team is completely focused on making sure we land and deliver and drive through More Argos, more often plan. Obviously, there are elements of how we're organized where we still share resources across the group. Obviously, areas like how our technology operates. If we were to fully separate that, we would need to understand what's required there. And that's one of the things we've looked at quite closely. So we definitely learned what it would take to separate these 2 businesses. We've made progress in organizing ourselves to make sure that Argos has what it needs and Sainsbury's has what it needs. And so clearly, that's one of the things that we continue to drive through as we execute the strategy that we laid out. Blathnaid? Blathnaid Bergin: Very short answer, James, yes, it would have been breakeven if we hadn't had the charge. Simon Roberts: Thank you. Thanks, James. Operator: Our next question is from Clive Black from Shore Capital. Clive Black: Some short ones from me. You've mentioned the cost headwinds from the government policy in this current year. Could you just -- you might have done this before, so apologies, but could you just quantify what the EPR, NIC and National Living Wage elevated cost base was or is for FY '26, given you achieved flat profits in the first half? Simon Roberts: Sure. So thanks, Clive. Well, let me just recap on the key parts of this. So clearly, on NIC, that was GBP 140 million of cost for us. And we made that very clear at the time when we talked about the impact of National Insurance. We then did, obviously, our pay increase in January of this year. Now we've had a policy of living the market on colleague pay over a number of years now. And so our annual pay award was ahead of the National Living Wage. But clearly, that's an inflationary cost that we plan for through our Save and invest to win program. So I wouldn't classify our pay award for colleagues as something that we didn't plan for. We had that planned. And then on EPR, it's GBP 53 million to your question. So GBP 140 million on National Insurance and GBP 53 million on Extended Producer Responsibility. Clive Black: And I just wanted to look into next year. I'm not seeking any form of guidance, but just in terms of moving parts. Firstly, in the expectation that inflation -- food inflation will probably ease, although remain in the system. First, would you expect volumes to positively respond to that inflationary easing? And secondly, I just wonder how you feel about the balance of mix in terms of what are the drivers to either trade up or trade down going forward, given you have spoken about a strong value quotient, but equally your traditional traits around quality and innovation really coming through. Simon Roberts: Yes. Thanks, Clive. Look, I think as you say, look, clearly, we'll talk into next year at the end of this year. But I think, look, I mean, most importantly, in the latest read, good to see inflation stop going up. And look, I think there's clearly going to be ongoing cost pressure in the system. I think the fact that the industry is largely either solved or continues to solve for the inflation there. I'd make the point, there's still inflation to get through the pipe. The industry continues to behave, I think, broadly rationally. Cost pressures clearly exist across the board and everyone is working to retain their own competitive position and pass through inflation. I expect that to continue. We know, to your question on the link to volume. We know don't we were the kind of trigger point is for an impact in volume to start to become more pronounced. You've seen in our own performance, the fact we've been able to grow volume on volume, on volume share. So I think we've got that balance exactly right for us and for Sainsbury's customers actually, but it's something we pay a lot of attention to because our plan is based on winning and growing volume market share. And so the balance of our value position, how we pass through inflation in a way that makes sure our value position is strong is one of the things that is the sort of first priority of how we think about these things. And then look, I think we've learned a lot since 2020 about the power of the Sainsbury's grocery proposition when all the components of it really come together. And we knew back then that our reputation for quality was indisputable, but customers weren't really seeing it all because we were too expensive. And so 5 years later, we're now seeing value perceptions improve year-on-year again at Sainsbury's, a combination of all the things that we've done. And that's meaning that the strength of our quality, and I'd go further and say the strength of our assortment more broadly is becoming even stronger in terms of customers' consideration of where they shop. And that's what we're seeing these big trolley shops continue to grow with 1 million more customers shopping with us. And so when we look ahead, we feel very confident about the grocery proposition that we've been building as a team. We still think there's plenty in front of us to do. But our own brand assortment, the strength of Taste the Difference, what we've done in the entry price point, the fact now that 65% of customers in the first half, both traded down and traded up in the same basket, all this points to the importance of making sure we make these balanced choices to maintain the value position because when our value is as strong as it is, customers see so much more in Sainsbury's that they didn't see before. And so linking the 2 questions together, we're confident we'll continue to grow volume market share as we continue to strengthen and improve the combination of value, quality, service and availability, too, which has also really stepped up. Clive Black: And then just look, a quick last question for me. You've got a very strong balance sheet. I mean your fixed charge cover went up in the half. I noted once you distribute the Financial Services dividends and buyback, you're still going to be barely geared. I just wonder how you characterize your balance sheet from a capital discipline perspective. What ratios do you want to work to on an ongoing basis? Blathnaid Bergin: Good question, Clive. Look, we like to -- if you look at the capital allocation policy, we like to operate within 2.4 to 3x net debt-to-EBITDA. We'll continue to target to be in the middle of that range. As we travel over the next few years, we have great capability to invest in our business. If any opportunities come along, we'll be in a position to take advantage of those, but we'll continue to operate within that range of the capital allocation policy, and we'll make choices to keep us in that range. Operator: Our final question is from Sreedhar Mahamkali from UBS. Simon Roberts: Sreedhar, round 2. Sreedhar Mahamkali: I'm so sorry, I almost never do this, but I thought somebody would pick this up, but I think it's helpful to understand there. This is really about the VI, I think the slide -- there was a really interesting Slide 27, there it is. I just wanted to better understand this, please, and where you show 90 basis points improvement versus Asda in the first half. Please explain how you actually measure this, how narrow or broad-based this is? And then really kind of taking a big step back, what is the right price position for you on the Grocery side? Is it protecting where you've got to after 4 or 5 years of investing? Or do you proactively need to improve it further steadily each period? Simon Roberts: Sreedhar, thank you. So look, this is -- I mean, first of all, this is value reality. This is actual value measured at the beginning of the financial year in March versus where we are at the end of the half. And clearly, what this reflects is our actual value position when you take into -- include our Aldi Price Match and our Nectar Prices. What it doesn't include, which is an important distinction to make to your question, it doesn't include the added value of your Nectar Prices because obviously, they're unique to every customer that accesses them. And so when you think about this slide, this is on the value that's available to everybody and then personalized value comes on top of it. The key point clearly is that we set ourselves a very clear priority this year to sustain our competitive position. That meant we inflated a little bit behind the market this year. I've made the point before, our value investment goes into the products people buy most often and that's how our value perceptions have improved. That's at the core of building baskets and trolleys out. That's at the core of customers saving GBP 14 on an GBP 80 weekly shop, and that's before Your Nectar Prices, which is additive to that. You're on mute, Sreedhar. Blathnaid Bergin: You're still on mute. Sreedhar Mahamkali: You can hear me now? Simon Roberts: Yes. Sreedhar Mahamkali: Yes, sorry, I just wanted to understand how many SKUs, like how much of the basket is covered in this index? Or is it narrow? Simon Roberts: It's a very wide SKU count included in this. I mean this is the broadest context of the shop. Okay. Just to check any final questions. Operator: That was our final question. Simon Roberts: There is one final question, yes? Operator: No. That was our final question. I will hand it back to you for the final remarks. Simon Roberts: Okay. Great. Sreedhar round 2 was our last question. Okay. Well, thanks, everyone, for joining us this morning. I know it's a busy week. As you can see, we're really encouraged and pleased with our H1 performance, but importantly, the momentum in the business into this really important second half of the year. Plenty to navigate over the second half. But as you can see, we continue to make the right balanced choices, and we do that as we go into this Christmas with really strong plans both in Argos and in Sainsbury's. So plenty for us now as a team to get on and deliver for customers and deliver more broadly, and we look forward to talking with you again in early January. Thanks very much.
Operator: Ladies and gentlemen, welcome to the Warner Bros. Discovery Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Additionally, please be advised that today's conference call is being recorded. I would now like to hand the conference over to Mr. Andrew Slabin, Executive Vice President, Global Investor Strategy. Sir, you may now begin. Andrew Slabin: Good morning, and thank you for joining us for our Q3 earnings call. Joining me today from Warner Bros. Discovery's management is David Zaslav, President and Chief Executive Officer; Gunnar Wiedenfels, Chief Financial Officer; and JB Perrette, CEO and President, Global Streaming and Games. This morning, we issued our Q3 earnings release, shareholder letter and trending schedule, and these materials can be found on our website at www.wbd.com. Today's presentation will include forward-looking statements that we make pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements may include statements about the benefits of the separation transaction we announced in June, including future financial and operating results, the separate company's plans, objectives, expectations and intentions and other statements that are not historical facts. Such statements are based upon the current beliefs and expectations from Warner Bros. Discovery's management and are subject to significant risks and uncertainties outside of our control that could cause actual results to differ materially from our current expectations. For additional information on factors that could affect these expectations, please see the company's filings with the U.S. Securities and Exchange Commission, including, but not limited to the company's most recent annual report on Form 10-K, and its reports on Form 10-Q and Form 8-K. I will turn the call over to David for some brief remarks, after which we will take your questions. Though before doing so, I would kindly request that analysts limit their questions to topics related to our Q3 results and related business and financial topics. As noted in our shareholder letter, management will not be taking questions regarding our recent announcement of the Board's evaluation of strategic alternatives for Warner Bros. Discovery. And with that, I'll turn it over to David. David Zaslav: Good morning, everyone, and thank you for joining us. When we formed Warner Bros. Discovery in April of 2022, 3.5 years ago, our focus was on taking an incredible foundation of assets, world-class production capabilities, a century's worth of beloved storytelling franchises and IP and a roster of some of the most iconic brands in media and build them back up and transform Warner Bros. Discovery to thrive and win in the modern entertainment business. We built a creative culture that's attracting the best talent, and Warner Bros. Discovery is now where creatives want to be. Transforming and rebuilding Warner Bros. Discovery has been hard work. It has taken time and investment and the process has not been without setbacks. But as you could see from our third quarter results, we're delivering on our promise and Warner Bros. Discovery is back, global and stronger than ever. As we've said consistently, our transformation and rebuild has been guided by 3 principles: First, returning our studios to industry leadership. When we brought Warner Bros. Discovery together, our Motion Picture Group had half a dozen or fewer movies on its slate and was stuck in last place. We were determined to invest in the motion picture business and to rebuild and regain our place as the leading motion picture studio. 3.5 years later, we're there. Right now, we're leading the 2025 box office domestically, we're leading it internationally, and we're leading it globally. Not only are we in first place, but we are the only film studio to have crossed $4 billion in 2025 box office revenue thus far. And we've done it with a significant amount of original stories. That leadership was on full display in the third quarter. In Q3 alone, we successfully launched a new era for the DC Studios, Superman. We showed our exceptional horror genre expertise yet again, with Weapons and The Conjuring: Last Rites, which have together grossed more than $750 million in ticket sales. And we reinforced our commitment to producing great original works by great filmmakers with Paul Thomas Anderson's One Battle After Another. As we look ahead, '26 and '27 will be a robust and strong slate of motion pictures. I'm excited to announce that we are adding a new Gremlins film that will be released in theaters on November 19, 2027. Steven Spielberg returns to executive produce for Amblin Entertainment, and Chris Columbus is coming back to both direct and produce. We're also leading the industry in making television. Warner Bros. Television was recently recognized with 14 Emmy awards, including outstanding drama series for The Pitt, and 9 Emmy wins for The Penguin. And WBTV remains Hollywood's leading supplier of television to both streaming and network platforms. Based on our results to date, we expect our studios to meaningfully exceed $2.4 billion in EBITDA this year, and we are making strong progress towards our $3 billion EBITDA goal. Our second guiding principle has been to scale HBO Max globally. 4 years ago, HBO Max was a subscale streaming service that was primarily available in the U.S. We had a vision for HBO to be a global offering with broader and more local content, including sports in some regions, and that HBO could serve as a long-term profit engine. We are committed to that global vision. Today, HBO Max is available in more than 100 countries. We've added more than 30 million new streaming subscribers in 3 years. Our Streaming segment will contribute more than $1.3 billion in EBITDA to our bottom line this year versus losing $2.5 billion 3 years ago. And we still have launches in some of the biggest markets in the world, like Germany, Italy, the U.K. and Ireland coming in 2026. By the end of next year, we will have more than 150 million total streaming subscribers. We're delivering those results by investing hard and continuing to distinguish our offering through quality. I said in the beginning of this journey, it's not how much, it's how good. And that belief continues to guide everything we do. HBO really embodies that standard. And Casey and the team have done a superb job. Our successes earlier in the year with series like The Pitt, The White Lotus and The Last of Us, carried forward into Q3 with shows like Task and Gilded Age, both of which have averaged more than 10 million viewers per episode. HBO was recognized with 30 Emmy Awards this summer, tied for the most of any network or platform. Just recently, HBO debuted It: Welcome to Derry, to a resounding audience response. The series premiere was the third most watched in HBO history behind only The Last of Us and House of the Dragon and has been watched by almost 15 million viewers in its first week. This is further evidence that in its long history, HBO has never delivered a steadier, more consistent pipeline of titles that subscribers circle in their calendars to watch. In Q3, we also saw movies like Sinners, Final Destination: Bloodlines and Superman arrive on HBO Max and drive strong engagement. With Weapons now also available and The Conjuring: Last Rites and One Battle After Another on their way in Q4, we will end 2025 with more Warner Bros. pay-one movies in HBO Max's top 20 titles than ever before. After years of development, the balance of content we envision for HBO Max with Warner Bros. extensive TV library, HBO Original Series and Warner Bros. pay-one movies, a 1, 2, 3 combination that's very powerful. It has finally come into full form. The value proposition for subscribers is only growing stronger. Having rebuilt Warner Bros. to the #1 studio in the world is proving to be a big win, not just in the box office, but across HBO Max, where our great films are driving record engagement and growth globally well after its theatrical window. Finally, our third principle has been to optimize our linear networks. The headwinds facing the linear television business are well understood. But for all that's been said about the disruption confronting these businesses, not enough has been said about their resilience. Networks like TNT, TBS, CNN, Discovery, TLC, HGTV, Food Network and many others continue to be indispensable to tens of millions of subscribers worldwide, which is why our networks remain such a powerful cash flow contributor. As our Global Networks investment is extending their brands digitally, we see a long and profitable runway ahead. Through it all, we've also dramatically reduced our debt, with our net leverage ratio now down to 3.3x our EBITDA, including paying down $1 billion from our bridge loan facility in the third quarter. Thanks to the work we've done, we're on track to create 2 strong, well-capitalized businesses that can each create significant long-term shareholder value. The team is hard at work, both on the separation transaction and on following the Board's direction to evaluate strategic alternatives. You've all seen media reports as to potential interested parties, and I won't comment on anything specific. But it's fair to say that we have an active process underway. When you look at our films like Superman, Weapons and One Battle After Another, the global reach of HBO Max and the diversity of our networks offerings, we've managed to bring the best, most treasured traditions of Warner Bros. forward into a new era of entertainment and new media landscape. I'm thrilled with our progress in Q3, and welcome your questions. Operator: [Operator Instructions] Your first question comes from Jessica Reif Ehrlich of Bank of America Securities. Jessica Reif Cohen: Two questions, if it's okay. One on the library and one on sports. David, could you give us more color? You kind of alluded to the library, but you've grown organically and through -- also through multiple acquisitions over the last few decades. And you have quality -- you have quantity, but also obviously great quality. How do you think about mining the deep catalog? And can you give us some color on what's in Discovery Global Networks or the soon to be named Discovery Global Networks, like within Cartoon Network, Discovery, et cetera? And because you don't talk about that, that much. And then on sports, in the release talks about launching a stand-alone sports streaming app. Can you talk a little bit about how you feel about the sports portfolio today? Are there assets in there that you think are underappreciated? Are there opportunities to strengthen the portfolio? Gunnar Wiedenfels: Jessica, it's Gunnar. Let me take those 2 maybe with an eye towards Discovery Global going forward. So I'll start with the sports question. As you've heard from us, we feel very good about the composition of our sports portfolio right now. We're going to begin to see some real benefits from the transition off of the NBA towards a portfolio of other rights that we acquired as a replacement. You're going to see hundreds of millions of dollars of benefit next year from that transition. The team has done a phenomenal job restructuring our portfolio. That said, we're going to continue executing the same strategy as before. We're going to be disciplined in the space, but we also acknowledge that sports is going to be one key pillar of our strategy going forward. That is the case for Discovery Global as it was for Warner Bros. Discovery. And I do think there is going to be more opportunity -- opportunistically as we look ahead over the next 3 to 5 years. The important change that we're working on and making great progress is the development of our stand-alone sports streaming app. We will need that in the U.S. market as HBO Max stops the utilization of our streaming rights in the spin-off scenario. The team is making great progress, and that will put us in a position to have a compelling stand-alone offering, but also something that will allow us to partner and bundle with our own products and others in the market. David Zaslav: As we've stated before, it will be working differently in the U.S. and outside the U.S. Outside the U.S. that all of the sports content will be available to HBO Max, and we'll be offering it on HBO Max or as an add-on. There's some sports that will only be on HBO Max. And we have found that all of our movies and scripted series together with local content and local sport is a very compelling offering outside the U.S. and it's a driver of real growth, and it's quite differentiated. Here in the U.S., we didn't find that we were so robust in our storytelling that we didn't find that these sports were providing enough value for us in terms of incremental subs, which was -- we didn't get that many. There was some engagement. But the view is, for us, that HBO Max is much stronger as being a motion picture and storytelling product, not dependent on rental sports. And so I think it works out very well, and [indiscernible] we'll be able to take advantage of that with this new app. Gunnar Wiedenfels: Right. And then on the library, Jessica, you're right. I mean we're looking at tens of thousands of hours of beloved content that we're reaching more than 1 billion people with everywhere in the world. This is going to be one of the focus areas for the future Discovery Global leadership team to revitalize some of those content brands with different focus areas in different parts of the globe. We are adding thousands of hours every year to that library, a lot of which comes from our strong free-to-air presence outside of the U.S. And that is going to be one of the big strengths as we set sales with Discovery Global, and we will be fully focused on figuring out the best way to monetize not only the fresh content, but also the enormous library with less exclusivity for HBO Max... David Zaslav: JB, you should talk to -- you're going to be -- all the content that we -- that you thought was valuable domestically and around the world will be -- will continue. You should just speak to that. Jean-Briac Perrette: Yes. I mean we'll continue, Jessica, to have access on HBO Max to kind of what we call the best of the Discovery Global assets that continue to be a healthy engagement contributor to HBO Max. And so the good news is even in the separation, we'll continue to have access to that domestically. We'll have access to that internationally, including obviously, a lot of the free-to-air content that is bigger and broader, particularly in Europe from some of our free-to-air channels and networks across that market. So the good news is HBO Max will continue to have access to the content that it has seen, and our subscribers have seen to be valued even in the separation. David Zaslav: And that will be the case if, in fact, HBO Max goes ahead and splits as planned or if Warner is acquired as Warner. And obviously, if the company is acquired in whole, then they'll have access to everything. Operator: Your next question comes from Kannan Venkateshwar of Barclays. Kannan Venkateshwar: So maybe a couple of questions on the streaming side. So Gunnar, on the Discovery side, when you think about the CNN streaming app or the TNT Sports app, it feels like the process over the last few years has been for streaming apps to consolidate. And this feels a little bit of a reversal of that process where different genres are basically disintegrating it to different apps, which comes with its own operating costs and so on. So I just wanted to get the thought process behind that instead of maybe leaning more into licensing some of these rights and monetizing it in a more, I guess, cost-light manner. So some thoughts on that would be useful. And then on the linear side, the decline rate when it comes to linear distribution, seems to be a little different from your peers in the sense that your 2% affiliate increases are a little lower than what most of your peers seem to be talking about and the subscriber rate decline rates also seem to be higher. Is this because of some kind of a reset? And does this become a comp benefit as you go into next year and beyond, which starts to benefit you? David Zaslav: Let me start with CNN, and then Gunnar, why don't you take over the others. We've been very quietly. Mark Thompson has hired a whole team, including a big group from the New York Times when he was there, where he rebuilt the New York Times as a digital business. This CNN product is the -- it's the first of many, but it's quite compelling, and we see it as a stand-alone. That doesn't mean that it wouldn't be bundled with multiple other products. But we had it on Max and HBO Max and people look to the news, but this is a very compelling proposition that anywhere -- it's now here in the U.S., but very soon, it will be anywhere in the world you go, you can subscribe to CNN, where you could see CNN Live. So if anything is happening in the world, if you wake up and tanks are rolling in Russia and you want to know anywhere in the world what is going on, when those events happen, CNN is on in every President's office and every Prime Minister's office. And it's when -- because we're the only real global news operation, Mark and Alex have built a product around this idea that people everywhere in the world need to know from the most trusted source in news, what is really happening from journalists on the ground that they can trust. And so this will be -- if you have it, you'll see it. It's a terrific everyday product with robust opportunity to get nourished with all kinds of news other than the live feed or to have multiple live feeds. But in a world of AI and in a world of so many voices of what is really going on to be able to be anywhere in the world at any time and hear something is happening and be able to go to this, we're very bullish on this as an independent product that will be of real scale, but also really important for society that we have this and making use of everything that's been built at CNN. And again, that could be packaged with almost anybody, but it's off to a very good start. Gunnar Wiedenfels: And Kannan, the only thing I would add is don't think of it as sort of completely separate stand-alone products and technology stacks. JB and the team have built a phenomenal platform over the past few years. And to some extent, we're -- these are skins on essentially the same product platform. So there is very limited incremental operating cost. And also from a consumer perspective, think of it more as sort of modules that you could activate together. And what we've seen in virtually every market globally where we have experimented with news and sports, we've seen the greater commercial success by offering sports as a buy-through as opposed to making it available more broadly to an entire sort of completely bundled or completely integrated product. So that's the rationale behind this. On the distribution decline rates, it is true that in 2025, we're working through a transition period here. We have given greater flexibility in the recent round of renewals as others have as well to some extent across the industry. And I do believe that we're seeing some of those benefits come through already. If you look at how Charter has consistently reported their video subscribers with definitely a positive trend for the industry. So I do think we're doing the right thing here as an industry and as a company, and I certainly expect a slightly better trajectory in the near to midterm for us. Operator: Your next question comes from Robert Fishman of MoffettNathanson. Robert Fishman: Can you share more on your confidence to gain global scale with HBO Max ahead of your next wave of international launches? And any updated thoughts on how HBO Max's scale is able to best compete with the other larger SVOD platforms and how that will translate into streaming revenue growth maybe accelerating next year? And then shifting over just to your content spending and budgets as you think about next year. Can you just help us think about the right balance of investing in new IP versus leaning into your franchises? Where do you think you create the most amount of value, clearly seeing the momentum in the studio, thinking about DC Comics here versus new IP that you've created across the platforms? David Zaslav: Okay. Thanks. JB and Casey have really established a very unique product with the largest motion picture and TV library together with the robust original content together with Motion Picture. And as you go outside the U.S., local sport and local content, all adding up to a market position of highest quality streaming service, which is, as you go around the world, is in all of the surveys is how we are seeing. And we're starting to see that there's a real advantage in us having a differentiated view within the marketplace as being high quality. We think it gives us opportunity for real growth. It also gives us an opportunity over time with economics. And we're starting to be seen in a meaningful way and known with HBO Max as a brand, and that acceleration is beginning. JB, why don't you take them through what you're seeing on the ground? Jean-Briac Perrette: Yes, Robert, on the scaling point, what makes us -- partly makes us confident, a, is we've seen data points, obviously, with things like the Australian launch this year of markets where our content has been in market maybe through a license partner or distributor for years. And we know the success of the content in those markets. We've seen it. We have the data on the performance, and that's partly what gives us high confidence, particularly in these 3 big European markets, U.K., Germany and Italy, of what the content can do once it comes out of those license agreements and into our stand-alone HBO Max service, number one. Number two is all the product is the content. And at the end of the day, the slate that we have coming in '26, building into '27 and launching into a decade of Harry Potter, we feel better than ever about the quality, both in terms of the performance of that content as well as an increasing volume, both of U.S. originated content as well as some local OP, local original productions in select markets. And then as David said, look, no consumers anywhere in the world right now are asking for more content. Many consumers are sort of drowning in the more. We feel better and better about where we've landed over the last 12, 24 months in differentiating our proposition, all based on, as David said, quality. And it's really starting to resonate. And you see that from every hit that Casey and the team have been producing with the numbers growing not only in absolutes, but also week-to-week this year between The Pitt growing week-to-week, Last of Us, now we're starting to see that. We saw that with Task. And so our marketing content and product improvements give us a lot of confidence that we can continue to see great penetration and growth as we scale. And the total 150 million subs that David referenced earlier, a bunch of those we have through partnerships that we have locked in. And so we have good visibility towards both revenue and the scaling of subscribers in that time, and we can't wait to get after it. 2026 should be for us the biggest year of growth that we've seen in a long time for HBO Max. Operator: Next question comes from Ben Swinburne of Morgan Stanley. Benjamin Swinburne: I have 2 questions. David, when you look at how well Mike, Pam, Channing and the team have done over the last couple of years, but especially this year at the studio, it's obviously very encouraging. You have a $3 billion -- I believe, a $3 billion EBITDA ambition at the studio. I'm wondering if you could talk about the bridge from what we're seeing in 2025 to that level of profitability, which I don't think we've ever seen from the Warner Bros. business in the past. And then, Gunnar, I don't know if you want to answer this, but can you talk a little bit about any tax implications should you guys change the structure that you talked about in the strategic review press release, specifically selling Warner Bros. and spinning Discovery Global? And is there a point at which the process you're running puts -- the tax-free nature of the separation that is still Plan A at risk? It would be helpful for us to understand how that all works. Gunnar Wiedenfels: Ben, let me start with the second question. The answer is no, I don't want to provide any more color on that process. And David, do you want to start with the $3 billion ambition? David Zaslav: Yes, sure. And remember, the objective is get to the $3 billion and then get a real growth rate off of that, which we believe that we could do. And it started with really getting back to basics on the fact that we have such a huge advantage with all the known IP and the talent within this company, new line making horror films and for a price together with comedies that you'll start to see coming next year also for a price. On top of that, we have DC with James and Peter off to a great start with Superman. Supergirl has already been shot. Clayface has already been shot. The script for the next Superman has already been written. Batman 2 with Matt Reeves is terrific. And then we have Warner Animation with Bill Damaschke. Mike and Pam are doing really a terrific job in this 4-part strategy, where we really use tentpoles and then mini tentpoles, whether it's Lord of the Rings, Batman, Superman, Wonder Woman, that we use the tentpoles that we have that are known all around the world and then the mini tentpoles, which might be Gremlins and Goonies and Practical Magic and then original. And we -- with a lot of discipline, we think that's going to be and is very strong. And our content, I've been saying for a long time, has been underused. We haven't seen Superman for 13 years. You haven't seen Harry Potter for 14 years. You haven't seen Lord of the Rings for over a decade, and Peter Jackson has been working hard with us on that film that you'll see in '27. And so we're very excited about mining and the original together. We also have the biggest TV and motion picture library in the world, which generates a lot of the economics of the studio. And we've been very, I think, judicious about how we do that. We could be generating another $1 billion or $2 billion if we decided to sell a lot of the most important IP that we have. But you've seen that we've been very precious about selling content from HBO because we really believe that -- and it's starting to pay off now that if you want to see the highest quality content, if you want to see The Wire, if you want to see Game of Thrones, if you want to see series like Task or White Lotus, you don't get to see that anywhere else. And so that is working. Channing's team has never been stronger. We have the best writers and directors working for us, over 70. We have over 80 shows in production at a time when everyone else is declining because less money is being spent, where the studio is just -- has never been stronger. And we're just coming off of a load of Emmy nominations and a lot of Emmy wins. And so we -- that business is going very strong. We then have experiences where that's an area that we've been building by launching Harry Potter in Shanghai. And then we have a number of other Harry Potter facilities that we're going to be launching around the world, together with a whole team that is now working on monetizing the additional value through merchandising of our IP. And it's something that we haven't done particularly well. Disney has done really well. And so we've built a whole new team that's going after that. And so overall, we're very bullish. We have the #1 TV studio. The motion picture business is doing great. Richard Brenner at New Line had an unbelievable year for us, and we're excited about the next 2 years and what he has going. And we can't wait to launch Cat in the Hat with Bill Damaschke. But the real stability is our library, and Channing's ability to be -- the fact that she's distinguished herself as the quality producer in television. And we're using a lot more of her content now within our own company, which has provided real value to us. Gunnar Wiedenfels: And David, maybe just 2 more points on that last point because I think it's important for people to understand. We have pretty significantly shifted from external monetization of our library to internal monetization of our library. And that means that we have, over the past few years, pretty significantly eliminated intercompany profits. Those profits are sitting on the balance sheet or waiting to bleed back into the business. In other words, it's going to support our profitability going forward since we're now at a much more steady state across those roughly $5 billion of content licensing. The second point is Channing, I think, has also with her team, done a phenomenal job managing the transition from a broadcast-focused production system to an SVOD-focused system. It has an immediate short-term benefit of obviously sort of the cost-plus model has had the disadvantage of licensing terms being longer, but we're also on the backside of that. Over the next 3 to 5 years, a lot of those early streaming shows are going to come back and replenish the library and sort of reinvigorate that sales business as well. So Channing has done a phenomenal job and set us up, I think, for another big cycle of strong growth. Operator: Your next question comes from Steven Cahall of Wells Fargo. Steven Cahall: David, I was wondering if you could talk a little bit about HBO and its content process. You were just speaking a lot to Ben's question about the value of IP at Warner Bros. and how much value you've done in mining that. And I think what makes HBO unique is not mineable IP, but this ability to kind of reinvent with new originals all the time. So if we think about HBO either as something that you'll own or maybe someone else could own in the future, what is really unique to it that can't be found anywhere else and separates it from other streaming services from a content development standpoint? And then, Gunnar, just on sports. I mean, you talked about meeting some opportunity in sports over the next 3 to 5 years and how important it is to linear. Do you think that those opportunities will exist with rights that come available to market? Or do you think you may need to think somewhat inorganically as well about ensuring that, that business has sufficient sports rights? Unknown Executive: I'll take that last one right quick. I was primarily thinking about opportunities coming up in the market on an organic basis, Steve. David Zaslav: Well, let me talk to HBO because this business that we're in about telling stories and the magic of it is all about the best creatives behind the screen and in front of the screen. And we all know it starts with script, but it's also the ability to work with the best creatives to tell the best stories. And if you just look at the track record of Casey Bloys and Amy Gravitt and Franny and Sarah Aubrey, Nina Rosenstein and Nancy and Lisa and [ Docs ]. This team has been together for almost 15 or 20 years. They love what they do. They wake up every day and fight for the most compelling story and people love to work with them because there's a shared passion. There's also -- at HBO, when you're working with Casey and Amy and Franny and Sarah and that -- we get that series. We fight globally that everyone -- that everyone should see it, that we believe in it. And we'll -- this idea of community of putting that on every Sunday night or every Monday night or every Thursday night and having a real community conversation about story. It feels old-fashioned, but it's extremely powerful, whether it's Gilded Age or whether it's Task or whether it's White Lotus for the 8 weeks or 12 weeks or The Pitt, 15 weeks, it becomes something that we can all talk about. And in that process of selecting the most compelling stories and then fighting when we put it on HBO to have -- to really cherish these shows that it's also when people are thinking where they want to go, we get a lot of the best product for less money because they want to be on HBO and they want to be seen. And so I think it's all about Casey and Amy and Franny and Sarah. They're exceptional. Their teams are exceptional. And even the Docs, we get a huge viewership of our documentaries. And when we do research, a lot of times, people say, I didn't love Billy Joel, but it was an HBO documentary, so I watched it. And wow, was that great. And so this idea of fighting for real quality and telling the best stories is something that is best exemplified by HBO. And we added Channing and the whole team to it. When we got here, Warner Bros. did not produce for HBO. And the relationship between Casey and Channing and the fact that they're working together with JK on Harry Potter and they work together on The Pitt and they work together on The Penguin and it is -- just elevates us. We're the biggest and best producer of TV and motion pictures in the world, and we're much more efficient about making sure a lot of that great content gets to Casey and that it gets nourished before it goes on the air. Operator: Your next question comes from Rick Prentiss of Raymond James. Ric Prentiss: I want to look at ARPU trends in the streaming. There's been a lot of moving pieces there. But can you walk us through a little bit about how you see that playing out domestically and internationally? And then I want to circle back to the earlier question about the monetization of IP. I think last quarter, you mentioned moved up from $0.22 to $0.30 versus like Disney doing $1. Can you lay out some of the items that you think you can achieve there? Because that might be part of the valuation gap, if you will, as far as where the unseen increased value in Paramount or other people might be missing as far as what you can really achieve even on your own. So ARPU streaming and that monetization question. Jean-Briac Perrette: Yes. Rick, it's J.B. On the ARPU streaming side, obviously, in the near term, as we sort of disclosed on the second quarter call over the summer, on the U.S. ARPU trend, because of really 2 factors. One is the reset back to market rates of an affiliated party transaction that had happened starting in the back end of the second quarter this year flowing through to the second quarter of next year. We do see some pressure on ARPU in the U.S. for the next 3 quarters, but then have high confidence of returning back to ARPU growth starting in the back half of '26 in the U.S. The second component that is changing the dynamics of the ARPU a little bit, both internationally and in the U.S. is obviously, we're about 12 to 18 months into our rollout of our ad-supported SKU, which is particularly internationally, has been in the U.S. for a couple of years internationally, really only started rolling out in 2024. And in that build-out, naturally, you're going to see some ARPU pressure as that lower-priced distribution SKU ramps and rolls out and gains more share of our total subscriber base. And in the monetization, we're being -- on the ad piece of the monetization, we're being very judicious because we do see ourselves just like we talked about on the quality of content and storytelling side, we also see ourselves as a premium service and want to make sure we keep our premium rates in the marketplace. And so the opportunity and the good news there is we are seeing very good pricing across the globe, but we also are holding on and fighting for that premium pricing and not just throwing in the towel to drive volume. And so over time, as we increase fill rates, particularly internationally, we continue to see a good upward trajectory of ARPU internationally. Not to mention, obviously, that we are also continue to have a good cadence of price increases scheduled, both you saw one, obviously, in the U.S. recently. Internationally, the same will happen on a good regular cadence. And so the combination of better monetization on the ad sales side pricing increases and then continued enforcement on the password sharing side of the house, which both between the add-on member as well as generally just new subscriptions is going to drive further ARPU upside. And so a little noisy for the next couple of quarters because of those 2 points and then getting back to healthy growth in 2026. Gunnar Wiedenfels: And then, Rick, on franchise management and the opportunity there, I think the most important change is that for the first time now, we've had a team to oversee the coordination of everything -- every activity related to our content franchises across the company, not every franchise, but the most important ones and to make sure that we really leverage those brands and the content in the best way possible. We've got one phenomenal example. The company has always done a great job with Harry Potter. And you can see what's possible with the full coordination between licensing, consumer products, experiences, now soon a series, the films, et cetera. So that's always been a stronghold. But the team has now sort of worked actively and systematically to prioritize the next set of franchises. DC is one example that you already see in real life with Peter Safran and James Gunn taking a fundamentally different approach soup to nuts from an integrated cannon for the storytelling, coordinated approach to what stories become theatrical, what stories become serial, what stories become interactive in the gaming space. and they're embracing all forms of monetization from the get-go, thinking consumer products during production already. And the team is already looking towards what the next priority franchises could be with Game of Thrones, with Hanna-Barbera, Looney Tunes. It's just a fundamentally different approach than what the company has done historically. When we first came together as Warner Bros. Discovery, there was a complete disconnect and sometimes the consumer products team would read in the news about a release date changing for a film, which would throw a monkey wrench in their entire annual plan. So we've made a lot of process changes, brought in a new team, and I think this is going to pay dividends over many, many years to come. Operator: Thank you. Ladies and gentlemen, there are no further questions at this time. That concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to W&T Offshore's Third Quarter 2025 Conference Call. [Operator Instructions] This conference is being recorded, and a replay will be available on the company's website following the call. I would now like to turn the conference over to Al Petrie, Investor Relations Coordinator. Please go ahead. Al Petrie: Thank you, Alan. And on behalf of the management team, I would like to welcome all of you to today's conference call to review W&T Offshore's Third Quarter 2025 financial and operational results. Before we begin, I would like to remind you that our comments may include forward-looking statements. It should be noted that a variety of factors could cause W&T's actual results to differ materially from the anticipated results or expectations expressed in forward-looking statements. Today's call may also contain certain non-GAAP financial measures. Please refer to the earnings release that we issued yesterday for disclosures on forward-looking statements and reconciliations of non-GAAP measures. With that, I'd like to turn the call over to Tracy Krohn, our Chairman and CEO. Tracy Krohn: Thanks, Al. Good morning, everyone, and welcome to our third quarter conference call. With me today are William Williford, our Executive Vice President and Chief Operating Officer; Sameer Parasnis, our Executive Vice President and Chief Financial Officer; and Trey Hartman, our Vice President and Chief Accounting Officer. They're all available to answer questions later during the call. So throughout the first 9 months of 2025, we've delivered strong operational and financial results. As you'll hear throughout the call today, we are continuing to enhance shareholder value through operational excellence and maximizing production across our portfolio of assets. We've been able to increase production in every quarter in 2025, all while only spending about $42 million in capital and maintaining our LOE costs within guidance. Additionally, we paid a consistent quarterly dividend for the past 2 years. So quite simply, we're executing on our proven and successful strategy that is committed to profitability, operational execution, returning value to our stakeholders and ensuring the safety of our employees and contractors. Our ability to deliver production and EBITDA growth while seamlessly integrating accretive producing property acquisitions has helped W&T grow during our 40-year history. Some of our third quarter highlights include the following: we increased production by 6% quarter-over-quarter to 35,600 barrels of oil equivalent per day, near the high end of our guidance range, driven by the successful integration of former Cox assets and high-return workovers and recompletions. Compared to quarter 2 2025, LOE was reduced by 8% to around $23 per barrel oil equivalent with an absolute cost of $76.2 million, which was near the midpoint of guidance and reflects disciplined cost management and operational efficiencies. We grew adjusted EBITDA by 11% quarter-over-quarter to $39 million, despite commodity prices being lower over the same period. We also generated $26.5 million of cash from operating activities and grew our unrestricted cash to approximately $125 million while lowering our net debt to under $226 million. Thus far, in 2025, we've lowered our net debt by about $60 million, further strengthening our balance sheet. Our GAAP reported net loss this quarter primarily reflects a noncash increase to our valuation allowance on deferred tax assets. This is not a deterioration in our underlying business performance. The valuation allowance can be reversed in the future, which will allow W&T to regain the potential tax benefits of the deferred tax assets. We expect substantially all income taxes in 2025 to be deferred. We ended the quarter with around $125 million in unrestricted cash, an undrawn $50 million revolver and $83 million available on our ATM program, positioning us for future growth. So about $0.25 billion in liquidity. We accomplished all of this while returning value to our shareholders through our quarterly dividend. We paid 8 quarterly cash dividends since initiating the dividend policy in late 2023 and announced the fourth quarter 2025 payment that will occur later this month. So I'd like to go into a little more detail about the production results we've been able to deliver in 2025. Third quarter production is up 6% over quarter 2 in 2025 and up 15% over the same quarter in 2024. We've worked hard to increase the production associated with the former Cox assets we acquired in early 2024. By spending on high-return workovers and recompletes, we are efficiently increasing production of these assets as well as at Mobile Bay. In quarter 3, 2025, we performed 3 recompletions on former Cox assets that contributed to higher production during the quarter. Over the life of the company, we've consistently created significant value by methodically integrating producing property acquisitions, enhancing their capabilities and extracting additional value. The assets we acquired last year added meaningful reserves at a very attractive price. We are now seeing the production and cash flow benefits from the work executed by our team to get all those properties online and up to our operating standards and also identify additional production opportunities from these fields. We remain focused on enhancing and offsetting decline at our other properties. And in Q3 2025, we performed 3 workovers in Mobile Bay. This brings the total number of workovers performed in 2025 in Mobile Bay to 8, which has helped to increase production at this low decline, long-life asset, which is also our largest natural gas field. Overall, our production has continued this positive trajectory and averaged above 36,000 barrels oil equivalent per day in October. In the third quarter of 2025, our capital expenditures were $22.5 million, which was an increase over the first 2 quarters of 2025. This increase was driven by a recompletion and facility CapEx work to bring online and increased production of multiple fields related to the 2024 Cox acquisition. In addition, our asset retirement settlement costs totaled approximately $9 million for the quarter. For the full year 2025, we now expect our CapEx to be around $60 million, not including acquisitions. The forecasted increase in full year capital expenditures reflects our strategic investments in owned midstream infrastructure to lower third-party transportation costs and enhanced production and value for 3 fields from the Cox acquisition. This is accretive and will be accretive to cash flow, earnings and reserves. As you can see, operationally, we are performing well, which has allowed us to also focus on improving our balance sheet. Earlier this year, we had several transactions that strengthened and simplified our balance sheet adding material cash to the bottom line and improving our credit ratings from S&P Moody's. In January, we successfully closed a $350 million offering of new second lien notes that decreased our interest rate by 100 basis points and together with other transactions reduced our total debt by $39 million. We also entered into a new credit agreement for a $50 million revolving credit facility, which matures in July 2028 that is undrawn and replaces the previous $50 million credit facility provided by calculus lending. We also sold a noncore interest at Garden Banks, which included about 200 barrels of oil equivalent per day for $12 million, and we received $58 million in cash for an insurance settlement related to the Mobile Bay 78-1 well. All of these actions have allowed us to enhance liquidity and improve our financial flexibility. So thus far in 2025, we've increased cash by $15 million and reduced our net debt by $60 million. So our ability to execute our strategy has delivered favorable results thus far in 2025, including an improved balance sheet, enhanced liquidity, growing production and EBITDA, all of which has positioned us for success as we move into 2026. We believe we're well positioned to take advantage of opportunities like we have done in the past focusing on accretive low-risk acquisitions of producing properties rather than higher risk drilling in the certain -- in the current uncertain commodity price environment. These acquisitions must meet our stringent criteria of generating free cash flow, providing a solid base of proved reserves with upside potential and offer the ability for our experienced team to reduce costs. With our experience, strong balance sheet and track record of successfully maximizing acquisitions we're ready to add to our portfolio of assets. So yesterday, we provided our detailed guidance for the fourth quarter 2025 and for the full year. In the fourth quarter of 2025, we're expecting the midpoint of production to be around 36,000 barrels of oil equivalent per day. This is another increase in quarterly production, which is especially noteworthy considering that currently, we don't have any drilling operations. The fourth quarter guidance for our cash operating costs, which includes LOE, gathering, transportation and production taxes, and cash G&A costs is in line with the third quarter of 2025. With absolute costs remaining flat and production expected to increase, we believe that on a per BOE basis, we will see additional decreases. We also believe that there are more opportunities to reduce our operating costs and find synergies to drive costs lower in the long term. We're always working hard to reduce costs without impacting safety or deferring asset integrity work. So in conjunction with the pipeline related increase in 2025 capital expenditures, we lowered our gathering, transportation and production taxes guidance for full year 2025 to $24 million to $26 million, primarily due to less reliance on third-party midstream infrastructure. Also, we reduced full year DD&A guidance to $11.50 to $12.50 per barrel of oil equivalent and that represents a 15% decrease from prior guidance. So before we wrap up the call, I'd like to say how proud I am of all the people who helped make W&T a success since we founded the company in 1983. We've been an active operator in the Gulf of America and a staunch advocate for the offshore industry for over 40 years. Through drilling completions and acquisitions, we built a strong company with outstanding long-life assets. As the largest shareholder, I believe we're well positioned to continue to grow and add value in the remainder of 2025. We continue to grow production, EBITDA generation and increase our cash position. This allows us to continue to evaluate growth opportunities, both organically and inorganically. We have a long track record of successfully integrating assets into our portfolio, and we continue to believe that the Gulf of America is a world-class basin that supports value creation. We will maintain our focus on operational excellence and maximizing the cash flow potential of our asset base. So with that, operator, we can now open the lines for questions. Operator: [Operator Instructions] Our first question today comes from John Annis of Texas Capital. John Annis: For my first one, you're making a lot of infrastructure investments in the second half of this year to enhance production and lower costs. Once the new pipelines are fully online, could you help us frame how to think about operating costs and maintenance capital in the years ahead as you realize the benefits of these investments? Tracy Krohn: Sure. We'll first realize those investments in pipeline infrastructure also are accretive to earnings and cash flow and reserves going forward in existing reserves and reserves going forward. So that's the general plan of the company from day 1 is to make investments in reserve acquisitions, drilling and facility upgrades and workovers and recompletions that all enhance the short-term and long-term value of the corporation. So a very simple philosophy there, John. We work hard to make good acquisitions. We do look at what we can do to enhance the value with drill bit. We do a lot of workovers and recompletions and facility upgrades to enhance the production and reduce cost. So it's a lot of blocking and tackling as well that helps us continue to grow the company. That's why we've been here for over 40 years through all kinds of calamity and production upsets, price changes, wars, hurricanes everything you can think of and different administrations. So the formula works pretty good. It works better in sometimes than others, and that's usually a function of pricing. Prices are down right now, and the company is doing just fine. And I expect that we'll grow the company going forward. John Annis: Terrific. I appreciate the color. For my follow-up, with nearly $125 million in cash, could you help characterize the current M&A environment in the Gulf of America and how you are weighing potential deals against organic projects? Tracy Krohn: Well, I love it. The Gulf of America is open for business again. And we're happy to see it. It's always good to have liquidity and don't forget that not only do we have cash, we have a little bit of credit from you guys, too, I think Texas Capital, and we got that $83 million ATM available to us as well. So over $0.25 billion in liquidity, if something comes up that makes sense to us. Operator: [Operator Instructions] Our next question comes from Chris Degner of Water Tower Research. Christopher Degner: Congrats on an excellent quarter. I just wanted to chat a little bit about if you can give us any incremental color on the depth of recompletion and workover projects rolling into 2026 and how you think that could support the production base? Tracy Krohn: Well, you're fortunate. I also have our Chief Operating Officer, I think I'll turn it over to him and let him give you a little color. William Williford: Yes. So thank you for the question. Great question. If you look at what we've been able to do in 2025, a lot of the increase quarter-over-quarter, like Tracy mentioned before, we're able to increase our production without really adding any drilling wells during 2025. We have the same thought process going into 2026. Right now, we're working on our budget process right now. And we're feeling very, very good about the opportunities we have moving into 2026 and 2027. Tracy Krohn: Yes. In addition to that, I'm sure we'll have more to do at Mobile Bay and some of these former Cox properties as a function of budget process. It's a great question. We're just about a few weeks short of having all that sorted out with regard to our internal investigations about our budget. Christopher Degner: Your internal -- the natural budget cycle. Yes. Tracy Krohn: You bet. Christopher Degner: And then you mentioned you've been through hurricanes and all sorts of different calamities. Given the recent government shutdowns, has that had any -- have you guys seen any impact on permitting or any regulatory constraints that we should be aware of? Or does it look like kind of a... Tracy Krohn: There has been 0 impact. I think both have done a good job of maintaining the regulatory status and everybody seems to be at work. Christopher Degner: That's what it seems like. Tracy Krohn: Great. Thanks. Operator: Since there are no further questions, we will conclude the question-and-answer session at this time. I would like to turn the conference back over to Mr. Tracy Krohn, Chairman and CEO. Tracy Krohn: Well, that last question with regard to government shutdown was insightful. It really is nice to see that none of it has affected our operations. And to my knowledge, nobody else, the regulators really have done an excellent job of maintaining status quo throughout all this, and I think that's a tribute to them. And I look forward to working with them in the future as new opportunities arise from W&T and others in the Gulf of America so that we can continue to -- we can already continue to prosper and grow. So sometimes I get a little dismayed at pricing and everything, but that's just a natural part of it. We always managed to adjust during the pandemic, we were producing profitably at $30 a barrel and less. So we know we can adjust. And I always think, gee, what could be worse and there's always something that seems to be worse on the future, but we always manage to adjust, and that's what good companies do. They adjust. So thank you for your attention. We look forward to talking to you in the not-too-distant future. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Mizuho Shen: This call is a simultaneous translation of the original call held in Japanese, provided solely for the convenience of investors. Thank you for joining the Recruit Holdings FY 2025 Q2 Earnings Call. I'm Mizuho Shen, Manager of Investor Relations and Public Relations. Today, I will give a brief talk about our business, then Junichi Arai, Executive Vice President and Chief Financial Officer, will give a presentation on results and guidance, followed by a Q&A session. Please note that today's session, including the Q&A, will be posted on our IR website after the event. Starting this fiscal year, we have integrated HR Solutions from Matching & Solutions into HR Technology. Accordingly, the year-on-year comparison of segment results in this fiscal year's financial presentation is based on FY 2024 pro forma figures, which assume that this integration had been effective as of April 1, 2024. Unless otherwise stated, comparisons will be made year-over-year. Lastly, please note that all references to dollars in this presentation refer to U.S. dollars. We have 3 business segments. HR Technology features Indeed and Glassdoor, which together create a global 2-sided talent marketplace across more than 60 countries with a focus on the U.S. As the core of our simplifying strategy, Indeed uses its broad reach, AI-powered matching and tools for faster connections to make the hiring process more efficient for employers and help job seekers find jobs faster and more easily. This strategy is enhanced in Japan through the Indeed Plus job distribution platform and the integration of placement services, including recruit agent. Staffing consists of 2 major operations: Japan and Europe, U.S. and Australia. Between 2010 and 2016, we expanded to our current scale and structure through multiple global acquisitions of staffing companies. Marketing Matching Technologies, or MMT, consists of marketing solutions of the former Matching & Solutions. In Japan, MMT provides vertical matching platforms that connect individual users and business clients in areas like the lifestyle subsegment, which includes beauty, travel, dining and SaaS solutions as well as the housing and real estate subsegment and others. These platforms offer services, including information and online reserving and booking services. Now over to Arai-san. Junichi Arai: Thank you very much. We have a slightly longer presentation than usual, so I hope you could bear with me. I will discuss the following 4 highlights of the FY 2025 Q2 earnings presentation. One, in HR Technology, revenue in the U.S. for Q2 increased by 5.8% year-over-year to $1.33 billion. Two, we have upwardly revised the full year U.S. revenue outlook in HR Technology from 0.3% year-over-year increase, basically flat announced in May to a 5.6% increase. Three, the full year consolidated financial guidance has been revised upward. Consolidated EBITDA+S for this fiscal year has been revised upward from JPY 697 billion to JPY 733.5 billion. Four, net cash at the end of September 2025 was JPY 590.5 billion. We commenced a new share repurchase program of JPY 250 billion on October 17 (sic) October 16. This is in line with the policy we announced in May 2024 to reduce net cash to around JPY 600 billion by the end of FY 2025. After reviewing our consolidated results for Q2 and the first half, I will discuss the performance and outlook by segment, followed by our full year consolidated guidance and finally, our capital allocation policy. Regarding FY 2025 Q2 consolidated results. In HR Technology, our focused monetization efforts were the primary driver of revenue growth, successfully counteracting the impact of a softer job market in the U.S. Revenue in Marketing Matching Technologies or MMT increased and revenue in staffing remained flat. As a result, total consolidated revenue increased by 2% to JPY 914.7 billion. As a result of continued efforts across all segments to further enhance productivity, EBITDA+S margin was 22.7%, exceeding Q1 of this fiscal year, driven by margin expansion in HR Technology and MMT. EBITDA+S margin over gross profit was 38.2%, reflecting our underlying cash flow generating capability. Before adding back stock-based compensation expenses, EBITDA margin improved compared to the same period last year, reaching 21.3%. For the first half of FY 2025, revenue decreased 0.3% to JPY 1,793.5 billion. EBITDA+S margin continued to expand, reaching 22%. Now I will move on to the results and outlook by segment. I will start by the results for HR Technology. For Q2, segment revenue on a U.S. dollar basis increased by 4.5% year-on-year and the 2.1% quarter-over-quarter to $2.41 billion. On a Japanese yen basis, segment revenue increased by 2.9% year-over-year to JPY 355.7 billion. As for revenue by region, turning to our U.S. performance, despite an approximately 8% decline in job postings, U.S. revenue increased by 5.8% year-over-year and by 5.6% quarter-over-quarter to $1.33 billion, exceeding our initial expectations. This was driven by successful monetization development of paid job ads with a notable contribution from premium sponsored jobs. This solution enhances our paid job ads by incorporating key features and leverages Indeed advanced matching and targeting technology. Revenue in Europe and others increased by 14.7% year-over-year to $509 million. The U.K., Canada and Germany together accounted for about 2/3 of Indeed revenue for Europe and others on a U.S. dollar basis. The revenue growth was primarily driven by the U.K. and Canada, where monetization development led to revenue growth of approximately 8% year-over-year, respectively, on a local currency basis as well as by foreign exchange impacts. Starting this fiscal year, HR Technology Japan consists of job advertising services, placement services and other hiring-related services after integrating HR solutions of the former Matching & Solutions. Revenue in Japan decreased by 7.2% year-over-year to JPY 84 billion or declined by 5.7% year-over-year on a U.S. dollar basis. Our job advertising service, Indeed Plus, which launched in January 2024, is performing above initial expectations. However, our placement services fell short of the initial assumption. This shortfall occurred because we underestimated the business impact of the system migration processes that followed our recent organizational integration. Even excluding the impact of the difference between gross to net revenue recognition related to the transition to Indeed Plus, overall, Japanese revenue came in below our initial expectations. Segment EBITDA+S margin expanded to 37.9%, driven by improved productivity and enhanced operational efficiency in the U.S. and in Europe and others. Even in a business environment where the total number of U.S. job postings continued to decline, the successful combination of a monetization development and improvements in operational efficiency and productivity was clearly reflected in segment EBITDA margin, which increased by 6.6 percentage points from the same quarter last year to 34.7%. As a result, for the first half, on a U.S. dollar basis, segment revenue increased by 4.1% year-over-year to $4.77 billion and on a Japanese yen basis, decreased by 0.5% year-over-year to JPY 697.5 billion. As for revenue by region, in the U.S., revenue increased by 3.4% year-over-year to $2.59 billion. In Europe and others, revenue increased by 13.7% year-over-year to $985 million. In Japan, revenue decreased by 5.8% year-over-year to JPY 174.3 billion or decreased by 1.3% year-over-year to USD 1.19 billion. Although placement services revenue fell slightly short of our initial expectations, job advertising services revenue performed above expectations, resulting in total revenue in Japan coming in slightly above our initial projections. Segment EBITDA+S margin was 36.5%. For the first half, sales commission, promotion expenses and advertising expenses in total amounted to approximately 13% of segment revenue, while employee benefit expenses and service outsourcing expenses totaled approximately 46% of revenue, reflecting the impact of the workforce reduction announced in early July, which began to take effect in the latter half of the first half. Now I will look -- discuss the second half outlook. But before diving into the outlook, today, I am introducing a new key performance indicator to track our monetization progress and serve as an important indicator of the future evolution of HR technology in the U.S. The U.S. average revenue per job posting on Indeed or U.S. ARPJ growth rate. Hereafter, we refer to the U.S. average revenue per job posting as U.S. ARPJ. For clarity, the U.S. ARPJ is calculated by dividing HR Technology U.S. revenue by the total number of free and paid jobs in the U.S., including those posted directly to Indeed and those aggregated from the Internet. It represents the average revenue generated per job posting on Indeed in the U.S. The U.S. ARPJ is based not only on paid job ads, but the denominator includes all jobs listed on Indeed, regardless of whether they are paid or free. Its year-over-year growth rate is the U.S. ARPJ growth rate. The revenue increase of 5.8% in the U.S. during this Q2 was driven by the U.S. ARPJ growth rate coming in at approximately 15% increase year-over-year despite an approximately 8% decline in the total number of job postings. For the first half, the U.S. ARPJ growth rate was around 13% increase year-over-year, clearly demonstrating the progress and success of our monetization strategy. This chart shows the index trend in total number of U.S. job postings on Indeed from February 2020 to the present, represented here by the Indeed Hiring Lab U.S. job posting Index. This index is based on the total number of U.S. job postings used in calculating the U.S. APJ growth rate. It is important to understand that this index is based on both free and paid job postings on Indeed, which are sourced in 2 ways. Hosted jobs are posted directly on Indeed by business clients. Indexed jobs are aggregated by Indeed from employer websites and other sources across the Internet. Our CEO, Deko stated in May 2024 that we assume that hiring demand in the U.S. will hit the bottom after decreasing for another 18 or 24 months, i.e., this second half. and we will run our business based on that. Given the current U.S. business environment, we still expect hiring demand in the U.S. to be broadly in line with our assumption at the beginning of this fiscal year, which is to continue a modest year-over-year decline throughout the second half with the trend bottoming out in Q4. Based on our assumption, we have revised our U.S. revenue outlook for Q3 and Q4. This chart shows the quarterly trend of U.S. revenue in HR Technology since Q4 FY 2019, together with the index chart that I mentioned earlier. On the far right, we have added the HR Technologies assumed trend for the IHL Index in the second half and the revenue outlook for Q3 and Q4. Looking at these results through Q2, as you can see, through FY 2023, HR Technology U.S. quarterly revenue moved largely in line with this index. However, from the beginning of FY 2024 through the first half of the current fiscal year, meaning 6 quarters, HR Technology U.S. revenue has decoupled from the declining trend in job postings. This divergence is the direct result of ongoing developments in monetization, which we have been successfully executing since our CEO, Deko, announced the beginning of year 0 in May 2024, a period of strengthening our foundation and preparing for a recovery in the business environment following the downturn. To provide clear insight into this divergence, we will report the U.S. ARPJ” growth rate as a new KPI. This metric represents our continued progress in evolving our business, capturing the success of our entire product and monetization strategy built on Indeed's foundation as a 2-sided talent marketplace that connects job seekers and employers. Currently, paid job ads remain just under 1/4 of the total number of U.S. job postings on Indeed. As we increase this penetration and as more business clients adopt our other value-added subscription services, including sourcing, branding and new AI products, the U.S. ARPJ will rise and its growth rate will accelerate, further widening the divergence from the IHL Index growth rate. Now turning to our U.S. revenue outlook for Q3 and Q4 in U.S. dollars. Despite an anticipated year-over-year decline of around 7% in the total number of U.S. job postings in the second half, we expect the U.S. ARPJ” to continue growing year-over-year at around 16% for the second half. We expect revenue for Q3 to increase by 7.2% year-over-year and decrease by 4.8% quarter-over-quarter, reflecting the seasonality of the holiday period when both job seeking and hiring activities tend to slow down. For Q4, we expect revenue to increase by 8.6% year-over-year and by 1.6% Q-on-Q. Our second half outlook is based on exchange rate assumptions of JPY 145 to the U.S. dollar and JPY 172 to the euro. We expect segment revenue to increase by 7.8% year-over-year to $4.74 billion and to increase by 2.5% year-over-year to JPY 687.9 billion. By region, in the U.S., based on the quarterly revenue assumptions I discussed earlier, we expect revenue to increase by 7.9% year-over-year to $2.56 billion and to decrease by 1.4% compared to the first half, reflecting normal seasonality. In Europe and others, we expect revenue to increase by 21.5% year-over-year to $1.03 billion, reflecting ongoing developments and monetization. In Japan, revenue in placement services, as explained earlier, will continue to decline in the second half, and we expect revenue to decrease by 7.2% year-over-year to JPY 167 billion or by 2.4% year-over-year to $1.15 billion. As I stated in the earnings presentation in May, in Japan, we are prioritizing the stable operation of our newly reorganized structure following personnel reassignments to facilitate future growth in the coming years. Since April, we have focused on maintaining stable operations for the integrated organization while launching a range of initiatives to drive business evolution and enhance efficiency, including actively leveraging AI to support future growth. Some of these initiatives are already yielding results, while others have required us to make adjustments. For those that did not meet our initial expectations, we have identified the underlying causes and are working to rectify and improve them. We remain committed to pursuing innovation boldly without fear of failure. Although corrective measures have already been underway, placement services generally take more than 6 months from the time a job seeker is introduced to a position until a successful match is finalized and revenue is recognized. Therefore, we expect the impact of these corrective actions to begin contributing from the first half of next fiscal year. Segment EBITDA+S margin is expected to reach 35.1%, up 3.4 percentage points from 31.7% in the second half of last fiscal year as we aim to balance monetization developments with further improvements in operational efficiency and productivity even in a business environment where U.S. hiring demand continues to decline modestly year-over-year. Margin expansion in the U.S. and in Europe and others is expected to continue, driven by upward revisions of revenue and progress in efficiency improvements, including the workforce reduction implemented in July. In Japan, we expect lower revenue due to the performance of placement services to contribute to a lower EBITDA+S margin. However, we also plan to control advertising and other promotional expenses carefully, which will partially offset the negative impact on margins. Based on the results for the first half and the outlook for the second half, the full year outlook has been revised upward. We now expect segment revenue to increase by 5.9% year-over-year to $9.52 billion, up from the initial outlook of a 2.4% increase to $9.2 billion. On a Japanese yen basis, we have revised our outlook upward to JPY 1,385.5 billion, representing a 1.0% increase year-on-year from the initial outlook of a 2.8% decreased to JPY 1,334.4 billion. By region, in the U.S., we have revised our outlook upward from the initial assumption of a 0.3% year-on-year increase to an increase of 5.6%, reaching $5.15 billion. In Europe and others, we have revised our outlook upward from the initial expectation of an 8.1% year-on-year increase to a 17.6% increase, reaching $2.01 billion. In Japan, we have revised our outlook downward from the initial expectation of a 2.7% year-on-year decrease to a 6.5% decrease to JPY 341.3 billion and on a U.S. dollar basis to $2.34 billion, representing a 1.9% decrease year-on-year. Segment EBITDA process margin has been revised upward from the initial outlook of 34.5% to 35.8%, representing an increase of 2.8 percentage points from 33% in the last fiscal year. Segment EBITDA margin is expected to be 31.1%, representing an increase of 3.7 percentage points from 27.4% in the last fiscal year. As for Staffing, segment revenue in Q2 increased by 0.8% to JPY 421.3 billion. In Japan, revenue increased by 6.1% to JPY 209.4 billion, driven by stable demand for Staffing. In Europe, U.S. and Australia, revenue declined by 3.9% to JPY 211.8 billion. This represents an improvement from the first quarter, driven by increased orders from large business clients as well as the impact of the Japanese yen depreciation. Segment EBITDA+S margin was 6.6%. For the first half of the fiscal year, segment revenue decreased 1.3% to JPY 829.4 billion. Segment EBITDA+S margin was 6.6%. For the second half outlook, segment revenue is expected to increase 2.3% to JPY 846 billion. Segment EBITDA margin is expected to be 4.8%. For the full year outlook, we have revised segment revenue to JPY 1,675.4 billion and segment EBITDA+S margin to 5.7% with only minor changes from the figures disclosed on May 9th. Next, I will discuss Marketing Matching Technologies or MMT. Regarding Q2 results, segment revenue increased by 6.3% year-over-year to JPY 144.3 billion with revenue growth across all subsegments. Revenue in Lifestyle, which consists of beauty, travel, dining and SaaS solutions increased by 8.5% to JPY 76.9 billion, driven by the continued growth in new business clients in Beauty. Revenue in Housing and Real Estate increased by 4.3% to JPY 38.5 billion, driven by the growth in the number of contracts closed for custom homes through Sumo Counter, our face-to-face housing consultation service. Revenue in others, which includes car and bridal, increased by 3.5% to JPY 28.8 billion. Segment EBITDA+S margin expanded to 32.3%, driven by appropriate cost control, principally related to service outsourcing expenses. For the first half, segment revenue increased by 6.7% year-on-year to JPY 281.2 billion, and segment EBITDA+S margin was 31.9%. For the second half outlook, segment revenue is expected to increase by 3.7% to JPY 286 billion, driven by continued strong performance in Lifestyle, including growth in new business clients in beauty and dining and continued increases in the number of room nights and unit price in travel. Segment EBITDA+S margin is expected to be 22.2%. I will now explain the background behind the significant difference in EBITDA+S margins between the first half and the second half of MMT. The primary factor is the seasonality of advertising and sales promotion expenses in the Japanese market. When planning for the next fiscal year, MMT carefully prioritizes these expenses across its subsegments, consolidating proposals submitted by the respective business units. Based on the latest performance outlook during the fiscal year, MMT allocates funds intensively and effectively in line with these priorities when the number of actions by individual users on our matching platform increases. Our Q4 coincides with the timing when the number of actions taken by individual users increases the most within the fiscal year due to the start of the new fiscal year in Japan in April, particularly in housing and real estate. By concentrating our spending on these expenses during this period every fiscal year, MMT aims to maintain and increase the revenue recognized in Q4 and in Q1 of the following fiscal year. In the previous fiscal year, approximately 36% of total annual sales commission, promotion expenses and advertising expenses broadly defined as marketing-related expenses were recorded in Q4. And approximately 58% were recorded in the second half with an EBITDA+S plus margin of 28.6% for the first half and 22.4% for the second half. In this fiscal year, in addition to the concentration of usual seasonal expenses in the second half, we will increase sales promotion expenses exceeding initial projections to support new growth initiatives across multiple areas aimed at realizing increased revenue in fiscal year 2026 and beyond. As a result, we expect approximately 60% of the annual marketing-related expenses to be recognized in the second half of this fiscal year. Moreover, we have a onetime impact from a planned update to MMT's accounting system at the end of the fiscal year. This upgrade will refine our revenue recognition policy, moving from a previous pro rata monthly allocation method to a daily basis recognition. This onetime transition means approximately JPY 5 billion in revenue and associated profit, which we had expected to book in March will not be recognized within the current fiscal year. Taking this into account, we expect EBITDA+S margin for the second half to be 22.2% compared with 31.9% in the first half. The full year segment revenue outlook is largely unchanged with an expected increase of 5.1% year-over-year to JPY 567.2 billion compared to the initial outlook of plus 5.1% year-over-year to JPY 567 billion, even after reflecting the one-off impact from the revenue recognition refinement that I mentioned earlier. Due to the one-off profit impact, segment EBITDA+S margin has been revised downward from the initial outlook of 27.5% to 27.0%. Regarding our segment EBITDA+S margin, our future targets remain unchanged. MMT aims to reach segment EBITDA+S margin of 30% in fiscal year 2026 and approximately 35% by FY 2028. We plan to share specific details about initiatives to drive revenue growth in the next fiscal year soon. Now based on the segment outlook, let me turn to our consolidated outlook for the second half. For the second half, we assume exchange rates of JPY 145 per U.S. dollar and JPY 172 per euro. As for the consolidated outlook for the second half of the fiscal year, revenue is expected to be JPY 1,805 billion. EBITDA+S is expected to be JPY 339 billion with the EBITDA+S margin to be 18.8%. We have revised the full year consolidated guidance, reflecting the first half results and the second half outlook of -- for each segment. Revenue guidance has been revised from JPY 3,520 billion, minus 1.1% year-over-year to JPY 3,598.5 billion, plus 1.2% year-over-year. EBITDA+S has been revised from JPY 697 billion, plus 2.7% year-over-year to JPY 733.5 billion, plus 8.1% year-over-year. EBITDA+S margin is expected to be 20.4% with EBITDA+S margin over gross profit assumed to be 34.5%. Profit attributable to owners of the parent has been revised to JPY 448.3 billion, representing an increase of 9.8% from the last fiscal year, and basic EPS is revised to JPY 313, up 15.3% year-over-year, reflecting the impact of share repurchases. Consolidated full year results will be expected to reach new record highs. Our capital allocation measures, I would like to cover this topic last. During the first half, we repurchased approximately 53 million shares for JPY 423.7 billion. Consolidated net cash and cash equivalents as of the end of September was JPY 590.5 billion. A new share repurchase program with an upper limit of JPY 250 billion started on October 17, and the market repurchase is currently being conducted through an appointed securities dealer with transaction discretion. The repurchase period is scheduled to continue until April 30, 2026, at the latest. We note that following the commencement of the share repurchase program, we may consider and execute strategic M&A transactions. The Board of Directors resolved today to pay an interim dividend of JPY 12.5 per share. The total per share dividend amount is expected to be JPY 25.0. We retired treasury stock in March of both fiscal year 2023 and fiscal year 2024 using shares acquired during the respective fiscal years. We will also consider retiring the treasury stock to be acquired through our share repurchase programs in fiscal year 2025 at the end of the fiscal year, taking into account market and business conditions. Finally, regarding the total payout ratio for the fiscal year, if we assume the currently ongoing JPY 250 billion share repurchase program is completed within the current fiscal year, in addition to the share repurchase results up to September 30 of this year, the total amount of shares repurchased this fiscal year will be JPY 677.9 billion. Additionally, taking into account the expected dividend for this fiscal year, the total payout ratio is expected to be approximately 159% based on our full year consolidated earnings forecast announced today. This concludes my presentation. Now we'd like to proceed to the Q&A session. Mizuho Shen: [Operator Instructions] So first, Nomura Securities, Oum,san please. Jiyong Oum: This is Oum from Nomura Securities. So my first question. U.S. ARPJ” second half plan, 16% increase, you said. Majority of that is premium sponsored ad contribution. Is that correct? Are there non-premium factors? Junichi Arai: Of course, premium contribution is expected. But it's not only that. There are various factors that will contribute to this number. We have incorporated other factors. As I mentioned earlier, subscription sales have partially started. And according to what we experienced now, it seems like we -- this is gaining traction. It is received positively. And as I mentioned earlier, market will continue mildly expanding. So we want to harvest and exert this monetization impact. So whether you think this is questionable or aggressive or we can do more, I hope you could take a good guess. So there are existing ones and the newly developed ones, newly launched ones. So when we announced our Q3 results, we will share with you what contributed to the results. Jiyong Oum: And my follow-up question is the current status of premium, if you could elaborate on that. I know it is difficult to disclose, but the breakdown between standard and premium, for example, what is the percentage of premium? And the number of countries or regions that you have deployed this, where you stand. So if you could give us a hint on penetration, it would be helpful. So today, we focused on the U.S. So how impactful premium is in the U.S. market and how things look like in Europe. Junichi Arai: I hope we can use different parameters to explain going forward. But today, we are focusing on the U.S. And when we disclose these numbers, then what is the revenue breakdown or hosted or indexed. All these breakdown will continue. So for today, we'd like to refrain from giving you the breakdown. But the number of users using this is increasing as we speak. Jiyong Oum: Thank you. Understood. I already use my right for one follow-up question. But in the premium, there are many functions. What is received well particularly? Junichi Arai: So the biggest reason from migration from standard to premium merchant hiring or Deko says, what we newly add on premium is what we often discuss. And any new things we can launch in the nonpremium. So what we include in the package, what we exclude from the package and the combination thereof and how we deliver this, offer this to our users. And have received the payment. There are so many things, factors that we consider. So of course, we may add new functions to raise the price of premium package in some case or do something else. So I think that the combination is diverse. So we may add some new functions to increase the unit price or take another option, and that all determines the final result. So we may share with you Q3, Q4 results on that. I hope you could look forward to it. So the candidate and the targeting function. There are industries that like that and not so well in other industries. So for the industries where this is popular, the numbers are showing. So I cannot say this across the board. It's difficult to make a general comment, market is large and the needs differ from client to client. Mizuho Shen: Next, Munakata-san from Goldman Sachs Securities. Minami Munakata: Hello. I'm Munakata from Goldman Sachs. Regarding the second quarter, U.S. Indeed growth is quite strong, which is reassuring listening to your presentation. And in addition, the -- you've also disclosed the average revenue per job posting a growth rate, which is very helpful. And here's my question. Comparing -- you have the bar graph showing the index and the revenue overlapping. The divergence between the index and the revenue with more monetization developments, you mentioned that this would increase. But currently, the assumption for the growth rate is 16% for the second half, which is at a high level. So from next fiscal year onwards, should we expect that this growth rate, the U.S. ARPJ growth rate will be maintained or even be higher -- is that realistic? And also more recently, Indeed, Talent Scout and other services have been announced and monetization of these new services, I don't think will come in, in this fiscal year, but more so for the next fiscal year, is that something we should expect? Junichi Arai: For the second quarter, the results -- perhaps this is not something I should mention much to external parties, but I think the results have some of the Deko effects. Currently, Deko is on the ground leading various efforts, monetization developments and perhaps there will be questions about this later from someone else, but we are also working on increasing efficiency of the business at such high speed, we are working on both of these efforts in parallel. Today, in my presentation, I talked about revenue outlook for the third and fourth quarters and also our interpretation of the index, our expectation of the index. This is the latest information, latest data that we are sharing at least for the third and the fourth quarters, we believe this is the level of impact of the monetization developments that we should expect. That is the pace that we are observing. For the next fiscal year, we've said that there will be many different things that will be introduced on a subscription basis, there will be an AI tool to be offered, things that are new that we have not done before will be introduced in the next fiscal year. So for these new services to be translated into value and how we should monetize in tandem, these are some of the things that we are currently considering. As for the market condition for fiscal year or calendar year 2026, we are making assumptions. And based on those assumptions, we are considering what should be the U.S. results that we can achieve for the next fiscal year. So it's not simply based on what we currently have. There will be new things that we will be stopping and by combination of these various different pieces, we are thinking about how we can increase our KPI and to reach the numbers that we've disclosed. I consider these KPIs to be quite challenging, tough KPIs with the market recovery with an increase in the number of jobs, even if we achieve the same level of growth, the growth rate itself does not increase. Therefore, we have to always overachieve in order for the growth rate to increase. So irrespective of the market recovery, we have to consider, what are some of the pieces we need to introduce in order to increase and increase revenues that we receive from our clients. So for next year, what will happen of course, will be something we will be talking about in February and May, but the fact that we've disclosed this time shows our unwavering resolve and determination for this. Minami Munakata: Thank you. I think I personally felt that determination through your presentation. As a follow-up, in my recent conversation with investors on our side, generative AI services have become more common. And some investors have said that things like ChatGPT, these are generative AI services provided by others, perhaps Indeed services may be replaced by the services offered by other companies. So that's a concern voiced by some investors. Could you elaborate once again on the strength of Indeed? Junichi Arai: For the past several months, when I met with investors, I myself have received the same questions from them. And what I said, how I responded to those questions at the time was that when a job seeker uses things like ChatGPT asking whether there is any good job out there. The ChatGPT says, what about this? And it also offers to write nice resume, I think that's a very plausible scenario. But then what would happen? So those are some of the questions that I actually received from the investors. And at the time, what I said was that job seekers, if that were to happen, they would be able to apply to more jobs since it's now easier. I think that's something that we can expect to happen. And if that is the case, how can we provide high-quality matching service and to address both job seekers and business clients to help them reach high-quality jobs for high-reach candidates. So I think that's one direction that will certainly be important. Job seekers may be sending in hundreds of applications, but they are not getting any reply because this puts a lot of burden on the business client side, the employer side. So Deko has said this from before, when matching becomes more difficult, how can we support the process is important. It's not simply placing advertisement or rather, how can we help business clients discover high-quality candidates? How can we help them select a better competitive candidates? I think these are the kind of services that will be in demand. So in that sense, as I said, we have a 2-sided marketplace. The fact that we have such a talent marketplace helps us increase the efficiency of matching. So that's how I responded to the questions from investors whether it's Yahoo!, Google or Facebook, there are already excellent platforms for jobs and technologies available for jobs. Other services have been in place and maybe if it was 10 years ago, people thought that they already had these platforms, and we would be no match. But if we look at the reality, the story is different. Maybe some companies started and they were not successful. For e-commerce, rather than booking or e-commerce, there are things out there that are mass produced as long as you pay for them, you can acquire. But jobs are different. There is only one job and selecting the right candidates, this is determined solely by the employers who are looking to hire people. So this is where we are different from EC and booking. In other words, it's always 2-way, two-sided. And I believe the fact that we have the 2-sided talent marketplace, this will continue to be appreciated by the 2 parties and to continue to be used by both sides. I think that's the nature of our business. My answer might not have been concise, but I often talk about things like this whenever I receive those questions. Minami Munakata: I understand the concept well now. Thank you. So how should I say what can we offer to business clients, simplifying hiring or helping clients determine whether a candidate is qualified or not, whether this candidate is these are real human person or not? Junichi Arai: I think in the future, there will need to be various aspects that need to be addressed. So by strengthening these pieces, I believe we will be able to differentiate ourselves. That's what Deko said. Mizuho Shen: Next, SMBC Nikko Securities, Maeda-san, please. Eiji Maeda: SMBC Nikko Securities, Maeda is my name. Thank you. So you have this proprietary original investment improvement and generating results, it's great. So the market model does not need to be worried, but every time we see the statistics, like you said, the job, we think will hit the bottom in Q4, as the stock market is having a more difficult view. And maybe that is reflected in your share price. But once again, you think that the job trend will bottom out, will show signs of bottoming out in Q4. Any changes in your forecast? And are there any risks? Junichi Arai: So when we say bottom, it is an image of ticking and turning upward. We tend to think of bottoming out that way. But even when there is a bottom, it does not necessarily mean a rapid recovery. And at the same time, it may not be overall trend. Industries may show different trends. We are starting to see many industries stopping their decline. So the U.S. labor market is impacted positively. So the decline in the labor supply in the U.S. is already impacting the market. So we do not think it will continue declining sharply going forward. That said, it may not show a V-shaped recovery right away. So to repeat my message, how we show our KPI U.S. ARPJ, how we raise our U.S. ARPJ, our important KPI, this is our focus. Eiji Maeda: Thank you. My follow-up question. So if things go as expected. Top line is growing as expected. But at one point in the future, you may shift gears to M&A. You are reducing cost through efficiencies. So once the projection changes, your cost will start rising again from Q4 to next fiscal year, what is your basic thinking of investment in this business? Junichi Arai: As we've been mentioning from the past, we do not think of doing M&A to increase our revenue. Even if we do that, it is for the future. As we received questions earlier, how we improve our U.S. ARPJ. In the future, will be the end goal. So for that purpose, we may do M&A. We will not do M&A for a short-term increase in the revenue or improve the margin by reducing the headcount. We are not thinking of that at all. So M&A will not have an impact in the short term, but will be impactful in the long run. So it will not impact in the performance in the short term. We will continue thinking on how we improve U.S. ARPJ growth rate. The same thing in the U.S. and further improvement in Japan. Once we see that, revenue will rise and costs can go down. So I think that combination is to steadily pursue this organically. Mizuho Shen: Yamamura-san from JPMorgan Securities. Junko Yamamura: This is Yamamura from JPMorgan. Can you hear me? Junichi Arai: Yes. Junko Yamamura: I just have 1 question. For me, regarding the outlook for the job postings, there may be 2 questions actually. I have a question around that. In the second half, you're expecting moderate recovery. There may not be a V-shaped recovery, but there should be a bottoming out in the Q4, which is, I think, a good thing. As Maeda-san pointed out, it is true the common debate, common discussion, there are 2 aspects. One is in the North America there has been restrictions on immigration. And if there is continued shortage of labor, it would put a lot of stress on recruit. And with the introduction of AI, of course, this would also impact the recruits business. So these are the 2 points often raised whenever we discuss this. So I would like to hear your views on these with even more shortage of labor, perhaps business clients are more motivated to hire. With the introduction of AI, maybe some companies or some jobs will no longer require human labor, but for higher quality talent that companies are willing to pay for, I think there is a huge or even a bigger demand for such talent. So with the efforts that you are currently implementing the monetization developments, perhaps will positively mesh with these developments in the market. So what is your view on the future state of your business? Junichi Arai: Well, this is what Deko says. The U.S. market is becoming closer and more similar to the Japanese market. So that's one thing. That's what he is saying over the past decades. Japan -- the Japanese market has experienced tightness, labor population declining, the population aging and others. So we are seeing similar things in the U.S. market, and he's saying the market in the U.S. is becoming more similar to the Japanese market. So as Yamamura-san said, things are happening in the market. What is happening today, what has happened? Perhaps if you trace them back to what has already happened in the Japanese market, you can certainly see a similar trend in the -- the number of job postings is actually increasing. And Deko today said this in one meeting. He, of course, looks at various stats and he tries to explain them to us. He looked at past examples of the U.S. market and from the latter half of the 1990s to 2010s over a 15-year period, the number of workers in factories in the U.S. decreased from 17 million to 11 million. However, the production output actually increased over the same period. So the white collar in the U.S. is said to be 30 million. So with AI introduction, I think this is a segment of labor that would be most impacted by AI. So we may see some decrease, but as I said, things that happened in the factory workers could happen. The unemployment rate as a result of these things did not actually increase rather workers were redistributed to other jobs -- other types of jobs. I say, oh, that's -- is that right? So the job market is huge. It's not specific to certain industries. It covers all industries. Therefore, the job market itself is enormous. I don't know what will be the analogies we would use as Japanese, maybe we would compare it to Lake Biwa, but if you consider a huge lake and a small pond, so just because AI is being introduced, it doesn't mean everyone will lose their job. I don't think that would happen. I don't think that's realistic. Maybe it will be the reality in certain areas. But if you look at the entire pool, there may be more people working in other industries, people earning more in other industries. Perhaps those are the results that we can expect. So if you consider all these things, in the U.S., the labor industry or where we operate, are becoming more similar to Japan. If you look at what is in high demand in Japan, where business clients are paying to higher talent. If you look at the Japanese market, I think we should reference that and consider them for what we are trying to do in the U.S. markets going forward. So with AI, I don't think there should be any immediate impact, but rather gradually, things will start to change with AI. So let's say, unemployment rate becoming 10%. If that were to happen, that's an extraordinary thing to happen, that's totally an extraordinary thing. And I don't think that will happen, at least that's what we are saying internally. We are not trying to make any excuses here, but let's say, the unemployment rate becomes 10%. And that is something beyond our control. That's not something we can address. It's for the government for the State to address. Of course, having said that, we want to help with no inflow of immigrants with the AI and so on. Of course, there are various factors, but they are localized and you ask us questions about recruits business being affected by these different pieces. I fully understand what you're saying, but we need to look at the entire pie, the number of jobs, the number of industries that exist, then I become skeptical with just these factors, would they bring a super huge impact on our business. It's like reducing the water in Lake Biwa by 10% or changing the color of the lake, what would it take? I think that's the kind of discussion that you are raising here. So there may be people who say that the business is quite challenging. It may be difficult. I fully respect their opinions. But I don't fully agree. I don't think that's the extent of the impact that we should expect. Going back to the question from earlier, should we expect a V-shaped recovery? No. And even without such a v-shaped recovery through efforts, I think we can go on. We want to go on. That's what I feel. Perhaps mobility will increase the type of talent. Business clients want to hire may change. They need to change. People want to work where they are needed. And I think that's the happiest situation for any worker. And of course, this is clients who are looking to hire such people. I'm sure there are clients out there who are willing to hire people who want to work with them. And we want to help support these job seekers and business clients and what are the services that we need to offer to reach and realize those goals. You go to a restaurant in the U.S., you go some places, and they are experiencing shortage of worker -- labor shortage is a serious issue. Junko Yamamura: I see. Junichi Arai: Whenever I have this -- I talk with you, Yamamura-san, we end up having conversations like this, very casual chat. Mizuho, are we already over the time? Mizuho Shen: It's already been 1 hour, but I see more hands up. So maybe we can stay on until quarter 2. So we'll go on to the next question. Morgan Stanley Securities, Tsusakan-san please. Tetsuro Tsusaka: Tsusaka speaking. Can you hear me? Junichi Arai: Yes. Tetsuro Tsusaka: So I have a simple or maybe a complex question. So Arai-san, you talked about Deko impact in one word. So for Indeed, as an organization, Deko's leadership is now incorporated and that resulted in a better growth than expected, better pricing increase than expected. So what is happening? So did the organization change or product change? I think all these factors are intertwined, but what -- in what way did things happen, if you could elaborate, please? Junichi Arai: Well, I don't want to praise him so much so that he blushes, but -- and I did not hear directly from him, but when I talk with Indeed headquarter people or the key office people I understand that he is quick. When we work with Deko, it's quick. He knows what we want and when things need to be decided, he decides right away. So what we want to do is clearly communicated. So it's easy to work with him, people say. So from the perspective of people working with him, I don't know, for a lack of a better word, it is rewarding. It motivates you, gives you a sense of fulfillment. That's what I hear from people, especially the people in products and sales. They do very detailed meetings with Deko. So if we make this kind of product, this is not good. This is what we want. Sales, please do this, very detailed requests come and concrete answers come for questions and consultations. So for sales increase and cost reduction, we can work on both sides in a very concrete terms. So the non-value-added products will not be focused. Focus is on where they are good results. Understand. So this is the recruit way. Tetsuro Tsusaka: I understand. Thank you very much. Junichi Arai: Of course, job seekers are very important. So how we offer value to job seekers comes first and foremost. That is the priority. But at the same time, how we can be appreciated by our clients so that they use more money. Deko is the businessman. So how we can bring smile on client's faces. That is all he thinks about every day, day in and day out. Please ask him directly too. Tetsuro Tsusaka: If there's an opportunity, I will. Mizuho Shen: Next will be the last question. Nagao-san from BofA. Yoshitaka Nagao: Nagao-san. I don't know if it's a question or comment. The ARPJ that you've disclosed, I have a question around that towards the second half. The ARPJ is going to increase, but looking at the formula, this is price-driven. If it is a price-driven increase, then that's good. Algorithm has been improved. Product unit prices increased and the profitability is enhanced. But if a number of job postings is decreasing or free advertising, free jobs are increasing. And still, we should see that this would contribute to the increase in the ARPJ as a residual effect. So how should we interpret this for the second half? Arai-san, are you intending for this to be price-driven increase? Junichi Arai: So far, we've had the Indeed model and if you continue to have a very strong impression of the past Indeed model, then if you look at the results 6 months from now or 1 year from now, you may think that the things are quite different from the expectations. I talked about subscription audio. For Indeed, this is a fairly new thing. So we need to consider everything, including all these new things divided by the number of jobs. We should increase, we should see an increase in the ARPJ. So as I said before, jobs that were not monetized in the past will bring in revenue and the paid jobs in the past should enjoy higher efficiency if clients are looking to reach better, more efficiently, then the clients can pay more. So the changes of how the jobs change irrespective of that, if we have more clients who value and are willing to pay for these things, then the ARPJ should increase. Just because the number of jobs decreased, it doesn't mean the growth rate increase is guaranteed. That is not the case. So as I said before, this KPI is a quite challenging, tough KPI for us. The reason I say this is because we look at the revenue for all jobs. So it includes jobs that we are not currently involved in at all. It is included in the denominator. So it requires us to consider how we can start to monetize these jobs. So that KPI includes all these things. So that's why I say this is a very tough KPI. AI tools like screening clients that are quite famous, they don't need to advertise. They already get enough applications. They have too many candidates applying. So those are clients that did not pay for our services. But going forward, this is something we can offer and sell to these clients. These are clients that we were not able to do business with in the past. But if we start to acquire these clients then, going back to Nagao-san's rather doubtful question, by doing things like this, we can increase -- we can see an increase in the ARPJ. Perhaps I did not answer that question. Yoshitaka Nagao: No, I get it. With the economic downturn, the number of job postings decrease, but there are still clients who are struggling to hire clients, who are determined to hire people, they will use the company's services and the paid advertisements or ARPJ, I don't know if it's going to be through subscription. In any case, the ARPJ will increase. Even in the economic downturn, the more clients paying for your products and services, you can see a higher ARPJ. That's certainly a realistic scenario. So as a KPI, I understand that this is a very difficult, challenging KPI that you've increased the hurdle rate yourselves, you're trying to take on this challenge yourself. I certainly see your determination, your resolve. So it's not that I've been doubtful. Junichi Arai: Sorry, because it's you Nagao-san, I was half joking when I said your question, I was doubting our intentions. Going after new clients as part of our recent initiatives. So we are starting to see positive results. That's what we are discussing with the business side. Deko also wants to maintain this momentum and do even more. Well, since Deko is saying that we can do this, I think we can. At least that's what I choose to believe. Mizuho Shen: Thank you very much for staying for a long time. So with that, we will close the Recruit Holdings FY 2025 Q2 Earnings Call. Thank you very much for late in the evening. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Welcome to the Eurazeo 9 Months 2025 Trading Update Presentation. Today's conference will be hosted by William Kadouch-Chassaing, Co-CEO. [Operator Instructions] Now I will hand the conference over to the speaker. Please go ahead. William Kadouch-Chassaing: Thank you very much. Good morning. Thank you all for joining this call. I'm pleased to welcome you to our trading update for the first 9 months of 2025. To remind everyone, for the trading update, we don't update the NAV that will be done at the end of the year, but I'm, of course, ready for questions you may have on the topic. In a nutshell, Eurazeo continues to gain market share in asset management. We had another quarter of dynamic fundraising and AUM growth outperforming the market. Second, we continue to outperform the market in realizations and distributions, which is, as you know, a key differentiating factor in the current market environment. And third, the quality of our balance sheet portfolio remains strong with healthy operational metrics across the board and realizations confirming our ability to monetize our balance sheet above its carrying value. Let me start with fundraising. We raised EUR 3.2 billion from our clients in the first 9 months of 2025, which is 4% above last year and well above market as global fundraising is estimated to be down this year at about 10% according to PitchBook, you may find as well other sources that will go in the same direction. This confirms our ability to gain market share in a more and more competitive and polarized market. This also highlights the quality of our investment franchises, the relevance of Eurazeo positioning as a focused European mid-market investment platform as well as the strength of our distribution capacities. Indeed, we make progress both with institutional and with individual clients. In terms of asset classes, whilst private debt continues to perform strongly, our private equity franchises have connected well. Private equity fundraising in Q3 was fueled by our secondaries and mandates franchise on top of our earlier successes in H1 in buyout, growth and impact. Our PE fundraising is up 38% year-to-date. Private debt, as I said, had a very good quarter with EUR 800 million raised in Q3 alone, mainly in direct funding. Our flagship EPD VII has already raised around EUR 3 billion in total. On wealth solutions, we raised close to EUR 700 million in the first 9 months, which is 7% more than last year. We just announced that we have received the regulatory approval from the launch of our new evergreen funds in the prime line, EPIC in private debt and EPSO in secondaries. They will support our growth ambitions in Europe. Given our current momentum and pipeline for the rest of the year, we are confident, I should say, very confident that fundraising in 2025 will exceed EUR 4 billion. We continue to expand and internationalize our client franchise, which is a key strategic objective that we had articulated in our Capital Market Day back in November 2023. We added 29 new institutional clients since the beginning of the year on a base of 440. This is a significant number. 74% of inflows came from international LPs in the first 9 months of the year, a share that continues to grow year after year, as you can see on the chart, with notable successes in Asia, Middle East and the rest of Europe. Our wealth solutions franchise also continues to grow at a steady pace with new distribution partners onboarded and already close to 10% of flows outside of our home market for the first 9 months of 2025. Overall, AUM growth and particularly fee-paying AUM growth illustrate the dynamism of our asset management business. Total assets under management were up 5% in the first 9 months, reaching EUR 37.4 billion. Third-party AUM only, which is a key focus of our strategic plan are up 11%. Fee-paying AUM were up 7% at nearly EUR 28 billion with third-party fee-paying AUM growing at also 11%. Let me stress that we believe this is above market growth. The decrease in balance sheet-related AUM reflects the successful implementation of our capital allocation strategy. Management fees stood at EUR 316 million for the first 9 months. Fees from third parties are up 5% overall, excluding catch-up fees and ForEx impact and fees from the balance sheet are down 3% year-to-date due to recent exits and reduced commitments in the funds as per the plan. On private market, we experienced strong inflows, which I just referred to, as shown by the rise in fee-paying AUM. It was partly offset by planned rate step-downs in older vintages that have been venture growth and buyouts. We also have a slight mix effect with strong fundraising from private debt and secondary and mandates in recent quarters, which carry a lower yet healthy fee level. IM Global Partners fees are up 4% at constant ForEx. Management fees from the balance sheet are logically down year-on-year, they are down 3% due to exits and reduced commitments in the fund as said. Let me now turn to deployments and realizations. As a group, Eurazeo deployments reached EUR 3.9 billion over 9 months, which is up 20% from the same period of last year, with transactions reflecting an expanding pan-European investment approach and our focus on structurally growing sectors. We deployed EUR 800 million in Q3 in private equity to support category leaders such as OMMAX, a digital and AI strategy consulting firm in Berlin based in Germany; Filigran, an AI-based cybersecurity firm; and Dexory, a U.K. leader in logistics, robotics and growth. Adcytherix, a developer of innovative oncology treatments and Proteor, a leader in orthotics and prosthetics in healthcare. And in real assets, we invested with MPC OSE in offshore wind farm servicing. Private debt continues to be very active with EUR 900 million deployed in Q3 in a dynamic lower mid-market segment. We are well placed to continue to grasp opportunities with EUR 7.2 billion of firepower, of which EUR 7.2 billion of third-party dry power powder. Realizations for the first 9 months stood at EUR 2.2 billion. Over the third quarter, we notably announced 2 important exits in buyouts. We sold CPK, a European champion in sugar and chocolate confectionery to Fera County Group, a leading U.S. confectionery linked to the Ferrero Group. The transaction returned around EUR 200 million of additional cash to our balance sheet and was concluded at a price above NAV. We also divested from Ultra Premium Direct, France leading direct-to-consumer pet food brand for approximately EUR 140 million, generating a 2.1x gross cash-on-cash return for the balance sheet. These transactions announced this summer have been closed in October. We also stepped-up realizations across the venture and growth funds with 2 important new exits, the German company, Cognigy and ImCheck. Finally, in private debt realization stood at EUR 600 million for the first 9 months. Several deals are expected to unfold in Q4. Together, these transactions illustrate the quality of our investments and our continued focus on generating liquidity and value for our investors and shareholders. At a time when the main focus of the industry, as you know, revolves around distributions, this is, we see a key competitive advantage for future fundraising. So let me illustrate that point, starting with buyouts. As you can see on the chart, the pace of distribution to LPs in the market has markedly slowed down in the past 5 years in a challenging and volatile macro environment. This is a topic for the industry. In this context, Eurazeo private equity buyout franchises have been outperforming clearly. Year-to-date, in 2025, Eurazeo's buyout franchise have already returned 10% of the NAV compared to around 5% for the broader market in H1 according to industry estimates. Looking at the '21, '24-time horizon, you'll find that the pace of Eurazeo rotation was 5 points above market and even 7 points focusing on the balance sheet portfolio only. As you know, the balance sheet, I'll come back to that, has already returned 14% of its NAV. Another positive catalyst, and we think this is a very important catalyst for future performance and the growth of our asset management activity is our proven ability to complete successful exits across the biotech, venture and growth franchises. After 3 landmark deals in 2024 Onfido, Lumapps and Amolyt asset, we've completed 2 important exits in Q3 2025 in excellent conditions. In growth, Cognigy, a German AI-based customer management provider was sold to NiCE, an Israeli American listed company for nearly EUR 1 billion, representing a 2.1% cash-on-cash return in a year our EGF IV fund. This is a remarkable outcome, which brings EGF IV, which has only completed its first closing already at 25% of DPI and 1.15x TVPI or MOIC. That's quite exceptional in the industry where DPI tends to be low. In biotech, our Kurma team sold ImCheck to IPSEN for up to EUR 1 billion if certain milestones are met. The transaction should generate between 3 and 7x cash-on-cash returns and created substantial value for our BioFund vintages, which bodes well for the future fundraising. Let me highlight that we now added the performance of the biotech funds in -- together with the performance of the rest of the fund. Pro forma this transaction, the DPI of Kurma BioFund III now stands at 75%. Let's focus more specifically on our balance sheet rotation. As you know, this is an essential part of our strategy to build an asset-light business model and execute on our promise to return more capital to our shareholders. With CPK and UPD, which closed in October, our balance sheet has realized EUR 1.1 billion of disposals year-to-date or 14% of last year's net portfolio value, already ahead of the total for the full year 2024 and as I said before, much above market pace of rotation. Since the beginning of 2024, we have sold around EUR 2.2 billion of balance sheet assets, i.e., since the beginning of the plan. This is around 27% of the net portfolio value at the end of 2023. We sold these assets at an average premium of 8% on our latest mark and a gross cash-on-cash multiple of 2.1x. Several processes are ongoing and should lead to transactions announced and realized through the end of the year. As you can see, all the exits we've announced and completed in 2025, including the most recent transactions, they are on the green in the bar charts, demonstrate again our ability to sell assets at or above NAV. Let me stress again that we believe this is the best proof point to assess the quality of our portfolio valuation approach and processes. Let me stress also, and this is a very important thing for us, that portfolio valuations only make sense if they are associated with a proven capability to generate liquidity. When you compare Eurazeo, always keep in mind that our DPIs are higher than the average market. Operational metrics of the companies in which our balance sheet is invested through the funds continue to be healthy. The average growth of our buyout companies was plus 6% over 9 months, continuing the trend seen in H1 in spite of a still sluggish and volatile economic environment. In growth, activity remains solid across the portfolio with 15% top line growth on average. Doctolib, the largest investment in this strategy, continues to grow strongly and announced it has already reached profitability in Q3 2025. The most recent investment in Eurazeo Growth Fund IV recorded an average revenue growth of around 37% over the first 9 months of the year, confirming their strong momentum together with the DPI of 25% and value creation in the fund, this bodes well for future fundraising. After years of strong growth, hospitality revenues logically have been stable in the first 9 months, while our infrastructure businesses continued to grow at a double-digit pace. Finally, before we open the floor to questions, a word on shareholder remuneration. This is a key commitment we've made to shareholders again in the plan '24-'27. By the end of 2025, we will have given back close to EUR 1 billion to our shareholders, approximately EUR 400 million in dividends and approximately EUR 600 million in share buyback, the equivalent of roughly 12% of Eurazeo share capital. As a remember, we had bought back EUR 200 million of shares in 2024 and doubled our program to EUR 400 million in 2025. With the acceleration of the program this summer, we have already bought back EUR 300 million, and we'll buy the remaining EUR 100 million before the end of the year. Thank you very much for listening to this call. We can now open to Q&A questions. Operator: [Operator Instructions] The next question comes from Oliver Carruthers from Goldman Sachs. Oliver Carruthers: I've got 3 questions. The first question on the realization rate. Just would you be able to help us just get a sense of what hurdles you have to clear to get to around that 20% realization rate this year? It seems from the press release, you're in late-stage negotiations for a number of assets. Is there any sense you could give on this would be great. Just really just trying to get a read on how sensitive this number could be to external factors, regulatory approval, financing, et cetera. So that's the first question. The second question, at the half year, you said neutral to slightly negative value creation for the full year with the first half obviously being slightly negative. I know there's no formal revaluation updates today, but can you give us a sense of how the balance sheet investment portfolio is tracking relative to expectations from the summer? And if you can, is it reasonable to assume 2H at this stage is tracking to be at least flat? That's the second question. And then the final question on fundraising. It looks like a good update today and noted the more than EUR 4 billion commentary for the full year. It looks like more and more of your fundraising is coming from non-European investors that stepped up quite a bit this year and even in 3Q. And any color that you can give on what's attracting non-European investors to the Eurazeo platform? Is it a broader theme of capital allocation to Europe? Or are there some other things at play would be very helpful. William Kadouch-Chassaing: Thank you very much, Oliver, for your questions. On realizations, we have several processes pertaining to different type of asset classes. So again, we are confident that we are able to trend towards our historical average. Now as you point out, there may be cases where there may be some delays between signing and realization. So, it's too early for me to tell you, given the fact that sometimes it requires some regulatory processes like CPK, we have to, of course, look through the hurdles of antitrust that was logical. And then we concluded in October. But expect that we will at least announce further deals through the end of the year and some of them will lead to realization soon after signing. Some of them may be realized slightly later. The portfolio, no, we don't reevaluate the portfolio every quarter, yet we do valuations of our funds on a quarterly basis for our clients. And we also have operational metrics, and we look at multiples and as they evolve. So, we have a sense of where it goes based on what we know, of course, we're missing -- we missed the last quarter of data points, but we already have a sense. So, we can confirm very firmly the guidance that we will be between 0 and slightly negative for the value of the on-balance sheet portfolio at the end of the year and which may lead to a neutral to slightly positive on the share count on the share basis given the share buyback. Fundraising, as you have seen, we reiterate the more than EUR 4 billion. We have good momentum across different asset classes. Your question pertains to our ability to grow internationally. Yes, there is a case that there is more LPs across the globe, not only in Asia, but in Asia, particularly in countries such as South Korea, Japan, Singapore, also China to Europe. This is also the case -- this is why I said it's not only Asia, in Canada, for example. But we, as you know, also have potential to expand in areas where we are already present, but not -- but have a potential to do more like in Middle East and in certain countries in Europe outside of our core home markets, if I may say so. We have France and generally Benelux, particularly Belgium and Luxembourg. So, there is a trend towards allocating more towards Europe. But I wouldn't say that Europe is just -- that Eurazeo is just suffering on the trend I think the main topic is that we have been able to position the company with a very differentiated value proposition. If you think about it, and you know very well the market of listed and non-listed companies, there is scarcity of platforms focused on mid-markets. And there is uniqueness in being a platform focused on European mid-market. At a time when the market is more and more polarized in the mindset of LPs, with LPs preferring to deal either with platform or some extremely differentiated monoliners with the rest of the industry being a bit more -- less attractive to LPs. We benefit from this. We benefit from being a platform with a unique positioning as a European mid-market/growth and impact-focused approach. And that's really what helps us in the marketing. People are confident with the stability and sustainability of the platform and what it can bring. And they understand very well that you can generate alpha and sometimes better alpha than in other regions in the world in European mid-market. Operator: The next question comes from Alexander Gerard from CIC Market Solutions. Alexandre Gérard: I have 2. My first question is related to the private debt fundraising year-to-date, which is down. How do you see the future regarding that asset class? And do you think that what happened in the U.S. with first brand and colors could more generally speaking, slow down the rate of fundraising in that asset class. So that's my first question. And the second question is regarding the gearing of the group. At the end of 2023, the gearing stood at 9%, which corresponded to EUR 0.8 billion in terms of net financial debt. And now the gearing has increased to 23% at EUR 1.6 billion. So how do you -- where do you see your gearing in 2027? And I mean, we have the feeling that you are returning cash to shareholders at a good rate, but maybe through a higher leverage. So where do you see your financial position going forward? William Kadouch-Chassaing: Thank you very much, Alex, for your 3 questions. Let's start with private debt. We have a very, very good momentum in private debt. And when I say we have already reached the EUR 3 billion, it means that we are above where we're going to fundraise on EPD VII above target. That would make of Eurazeo the largest asset manager focusing on lower mid-market direct lending, which is an attractive category given the yields and the margins that we can generate in the industry. We also have a good momentum in the fundraising of our asset-based focused franchise. So, if you look at this franchise, just have in mind we continue to have a good momentum, and we think we are gaining share both in deployment and as well as fundraising in countries in terms of deployment where we were less present historically like the Nordics and the DACH region or Italy. And as a primary brand franchise, we, as a result, gained share with key large LPs, consultants distributing us across the group. So that music continues to go very well. Now to your point on the U.S., what's happening in the U.S. and the risk for the industry and for the franchise. Let me say, first of all, that we don't see any sign of weaknesses in our portfolio to date, i.e., the default rates continue to be very, very low. The default rates historically, and this continues to be the case, is about 20 basis points. It has increased a little marginally, but it is very low. And if you factor in that the recovery rate is 50%, then you have a de facto loss rate, which is very, very low. So that's a very important point because what you have seen in some cases in the U.S. is actual defaults. We haven't seen that in our portfolio for different reasons we can talk about. I would be cautious on extrapolating what's happening in the U.S. In a sense, it reminds me as an ex-banker, what happened in the securitization market, which exploded in the U.S. as a prime. In fact, the securitization market was very safe in Europe, and there's been some confusion here. So we are -- what we're seeing in the U.S. pertains to me more to a more relaxed, a loser regulation in terms of banking and insurance being able to buy CLOs and some direct lending assets which may be lack of proper framework and ending with some losses on their balance sheet, which is -- which raises the question in some minds as to the potential systemic risk. We are very, very far away from that in Europe. The restriction that is put on banks and interest to invest in these asset categories continues to be strictly supervised. And that's probably not a bad thing. So, I think we're talking about 2 different dynamics. The gearing. The gearing has increased but continues to be compatible with a quasi-investment grade or investment-grade category when we do our own sort of shadow rating, talking to banks and relevant bodies. Let me stress that 17% gearing. I'm talking about pro forma, the sales and exits announced in Q3 with CPP and UPD, it's a gearing that is very reasonable. And as you know, it does include close to EUR 200 million of debt at IMGP, which is totally nonrecourse. So, from a creditworthiness standpoint, the group remains very safe. That was not your question. The question is more going forward, what do we see towards 2027. And there you know the answer. The answer is that we see that gradually that gearing will reduce. And at some point, we will end up with excess cash on the balance sheet. Now excess cash before we distribute back money to our shareholders, which is what we've done. If you adjust the gearing to the EUR 1 billion, I mentioned before, you'll see that the company has virtually no gearing pertaining to its own operations. So that is something we monitor that idea that, number 1, gearing should always be well contained. In and of itself, I think some gearing is a good thing in reality. Fundamentally, the gearing will continue to go down through 2027. And 3, even with that approach, we should be able to continue to serve our shareholders through the share buybacks. Operator: [Operator Instructions] Unknown Executive: There is no other question on the line, I'm going to ask the questions that are the text that we've received. So, we already answered some of them. I will say David Cerdan from Kepler asks, how do you see 2026 for fundraising given the changes within the industry? And what are the initiatives on this for Eurazeo? William Kadouch-Chassaing: Well, thank you, David. I don't know if you're on the line but at least thank you for your question. A bit too early to communicate to the market on 2026 fundraising. But as you may imagine we have a quite good view as to what would be on the road and what we can achieve in 2026. So, I'd say it's more to say. We consider that given the diverse product offering that we have linked to that good performance, in particular, in terms of distribution to clients, given what we said on the back of the question of Oliver regarding the appetite for European mid-market, we should continue to gain market share and pursue the place of having good fundraising and better fundraising than the rest of the market. Of course, it's absent a major crisis. It is assuming still sluggish and somewhat polarized market environment that we referred to. So that's all that I can say at this stage. Now we will come back to you with the pipeline, but we had already mentioned some of it. We will be full steam fundraising case in point for low or mid-market buyouts. That's a hot market. The previous vintage is running at more than 30% IRR, very good quartiles across all metrics. So that should be a success that goes into 2026. We will have the beginning of the full steam fundraising of our second vintage of infrastructure fund. As you know, the first infrastructure fund had fundraised much above its initial targets. The performance of the fund is very good. Hence, what I mentioned about the metrics that should be successful fundraising. And as a case in point, we will continue to fundraise on Growth Fund IV, which has done its first closing this year. Given the performance of the fund already and in spite of the fact that growth and venture more generally continues to be asset classes for which LP appetite is a bit more nuanced we should have momentum because that's quite a differentiated performance. And so forth, we'll have asset back on the road. Wealth, we should have the benefit of the new Evergreen funds launch. So, without going into what we're going to articulate when we publish our full year results with a detailed product offering that will be on the road, you can see that we feel confident we have enough to offer to the market and so more of the same. Unknown Executive: Maybe we'll stay on the fundraising. A question from Isobel Hettrick from Bernstein Autonomous. She has a question on the buyout space, given the multiples that you have currently on Eurazeo Capital on IRR, MOIC and DPI and considering that it is now 4 years old, how are you thinking about fundraising for EC VI and the ability to attract third-party investors on this future funds? William Kadouch-Chassaing: We think investors will look at EC IV, which is more mature funds. And then we look at EC V when EC V has enough maturity because beyond the vintage, you should look also at the pace of deployment. EC V is deployed roughly 50%. So, it doesn't have as of yet, the granularity and that would lead to a full meaningfulness of the metrics. So, if you look at EC V, we are in the good metrics, particularly on DPI and very decent in IRR and cash on cash. And we have good assets in EC V, but it's a bit too early to call given that some of them have been invested recently like Mapal, but also ERS and BMS have been invested fairly recently. So, they are good assets with strong operational metrics, but we have been quite prudent in remarking these assets over time. So, all that in a nutshell, will lead you rather towards 2027, maybe end of '26, but certainly more '27 for a full steam fundraising EC VI. So, we'll see how we perform at this time. But right now, we are very confident given the quality of EC IV and given the early metrics that we see within the portfolio of EC V. Unknown Executive: So, we have one question from an investor that we will answer directly because it's pretty specific. And for the moment, I don't have any other question on the text line. If anybody has an overall question to ask, you can still raise your hand. Operator: The next question comes from Alexander Gerard from CIC Market Solutions. Alexandre Gérard: 2 follow-up questions on my side, please. The first one regarding the -- your corporate development opportunities. Can you maybe update us on that front? For example, you have a look at committed Advisors that has just been acquired by Wendel. Is secondary segment that is attractive to you? And going forward, where are your priorities if you were to strengthen your expertise through M&A? And secondly, at the time of the CMD, you had set also a goal in terms of improving your operating efficiency. Can we have an update on that? Can we have examples of what you did since November 2023 to make your -- improve your operating efficiency? William Kadouch-Chassaing: Thank you. Well, it is true that for -- on the quarter, we don't update on IRAs and margin, but always good to remind us that we are committed to improve operating efficiency on the asset management. Regarding corporate development, I mean, we are at a stage where the industry is clearly being divided into large platforms with our own identified market. Again, Eurazeo as a platform, has a right to win as a leader in European mid-market, as we said. And monoliners,ome of them will continue to be very successful and some of them, quite a few of them may find difficult to continue the journey. And hence, there is a tendency to -- for people to try to find a home within the platform. So yes, we are having a number of discussions very often generated by people themselves who want to meet with us that we didn't have in the past. Does it mean that we want to do deals? Not necessarily. We consider that we have a strong strategic rationale in pursuing our organic growth. But as we said many times, there may be cases that may justify looking at M&A if that would help us speeding up the scaling of some of our strategies and acquiring new franchises, client franchises that we don't have. So of course, I will not comment more. I will not comment as to whether we've looked at committed advisers. But I will just remind you of the fact that our secondary franchise is bigger than the one that just acquired. And it's very successful as a franchise, both with LPs and with wealth, close to 50% of the fundraising of that secondary franchise is nurtured by our wealth channels. Secondary together with debt a category that you absolutely need to have if you want to develop successfully into the wealth market. And we also have a strong mandate franchise and fund franchise. So, it's more an organic journey, an expansion of the international footprint of that franchise that we're looking for. Operational metrics. So, this is not a topic for the 9 months. But as you know, we have already increased quite materially the operating leverage of the company. We added close to 500 basis points of margin between 2022 and 2024. What we said -- so we will continue -- so we already reached the bottom end of our mid-term target. You referred to the CMD. At the time, we had said between 35% and 40% FRE margin. So, we already crossed the bar of 35%. So, I'd say, as you can see, we are very focused on that. We continue to be focused on that, being mindful though that we are also a company that has significant growth opportunities. So, we've invested in strengthening our sales force. We have invested in some reinforcing of our investment strategies. So, you have to be also managing that growth opportunities because a lot of will come -- of the operational efficiency will be associated to our capacity to increase our revenues. Unknown Executive: Maybe we have 5 more minutes. I will take the 2 questions that I have online. First, a question on AI, much on the topic. Do you perceive AI as an important game changer for your participations with middle- to long-term horizon? Can you comment on your strategy concerning the evolution linked to AI? And maybe just the other one, could we expect some IPOs in 2026 for some of the assets that are exposed to the balance sheet? William Kadouch-Chassaing: AI is a very important topic for us. And it will require certainly more time than this call. So, I'll try to really summarize it. AI for us pertains to 3 things. Number one, are we as a company using what AI can offer. I'm talking about as an asset manager. The answer is we're going full speed in using AI in our middle back office conversal operations. We consider that everything we can automate. But beyond automate, we also use some -- we have some test using agentic AI. We also have training for the people in the firm, including CEOs as to how to prompt. So that's clearly a focus, and this is linked to the question of Alexander regarding operational efficiency. We also use it. We have quite a few experiences now that we've made to test the quality of it and the outcome for our investment processes. AI can be very forceful if you use it right, to generate analysis of deal flows as well as to process some basic analysis on numbers, projections, market data that's obviously quite efficient. And we always have a limit. The limit being that AI can't do something which we expect our good investors to do, which is to assess quality of management. And then there is the core of what we look at when we think about AI, which is how much opportunity to grow the companies we invest into AI can give or on the contrary, how much of disruption can AI cause in the companies we invest to, the companies we have invested into. It's very important to have in each of the franchises that we operate in investments, people focusing on that. So, we have operational partners very focused on that topic of assessing the opportunities and risk linked to AI. It is also very beneficial to be a company that is able to have investors in venture, in growth equities through buyouts and more mature company -- these people have a constant dialogue because when you are a buyout investor, talking to your colleagues in venture to see a few innovations that may lead to impacting the portfolio companies you're looking at is obviously extremely important. The same applies, by the way, to health care. The fact that we have in the same house people who do seed biotech or med-tech companies at the same time that we have buyout investors that invest in more mature health care company. If you manage to get the dialogue and we manage to have this dialogue between the teams, that's very forceful. So, AI is something that, of course, will be front and center for all the companies we invest into. Nobody will be unaffected. And there may be a case that there is some eating in the investment speed in the infrastructure of AI, but there is absolutely no doubt that AI will be front and center going forward. So, the answer is yes. And the second question was -- Unknown Executive: IPOs in '26. William Kadouch-Chassaing: Don't expect IPOs in 2026 pertaining to our portfolios. Now what we observe is that the market of IPOs has improved in the U.S. There's been some improvement as well in Europe. And we have some companies, particularly in the growth portfolio that are getting more and more good cases for a potential IPO. But the timing of which, of course, we will not commit because we don't master the markets today. So '26 may be a bit too early. Unknown Executive: As we have no further questions, I think it's time to end this call. The next step for us is on the 11th of March for our full year results. Thank you very much for attending this call, and have a nice day. Bye-bye. William Kadouch-Chassaing: Thank you very much. Bye-bye.
Operator: Good day, and thank you for standing by. Welcome to the ATN International Q3 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Michele Satrowsky, Head of Investor Relations. Please go ahead. Michele Satrowsky: Thank you, operator, and good morning, everyone. I'm joined today by Brad Martin, ATN's Chief Executive Officer; and Carlos Doglioli, ATN's Chief Financial Officer. This morning, we'll be reviewing our third quarter 2025 results and our outlook for the remainder of 2025. As a reminder, we announced our 2025 third quarter results yesterday afternoon after the market closed. Investors can find the earnings release and conference call slide presentation on our Investor Relations website. Our earnings release and the presentation contain forward-looking statements concerning our current expectations, objectives and underlying assumptions regarding our future operations. These statements are subject to risks and uncertainties that could cause actual results to differ from those described. Also, in an effort to provide useful information for investors, our comments today include non-GAAP financial measures. For details on these measures and reconciliations to comparable GAAP measures and for further information regarding the factors that may affect our future operating results, please refer to our earnings release on our website, ir.atn.com or the 8-K filing provided to the SEC. Now I'll turn the call over to Brad. Brad Martin: Good morning, and thank you for joining us to discuss ATN's third quarter 2025 results. Before I dive into our performance, I want to take a moment to recognize the exceptional work of our teams across our markets. Today's results reflect their commitment to operational excellence, their dedication to building long-term value. Our third quarter results show the continued execution of our strategic plan and validate the operational improvements we've been implementing across our business segments. The 3% revenue growth and 9% increase in adjusted EBITDA year-over-year demonstrates the positive momentum we've been building and the effectiveness of our operational efficiency initiatives. During the third quarter, we grew our high-speed broadband homes path by 8% and increased our total high-speed subscriber base by 1% year-over-year. These operational metrics underscore the value creation potential of our fiber and broadband investments. Let me take a moment to review the performance of our 2 business segments in the third quarter. In our International segment, we continue to make steady progress on our key priorities: enhancing mobile networks, improving service quality and driving operational efficiency. The investments we've made in network quality and data capabilities are translating into measurable results. better customer retention and higher average revenue per user, preparing the segment for sustained profitable growth. Third quarter revenues were up 1%, with adjusted EBITDA growing 3%. The stronger EBITDA growth reflects the operational leverage we're achieving through improved efficiency initiatives. We remain focused on driving sustainable value across our international markets by deepening customer engagement optimizing operations and enhancing profitability. In our U.S. segment, we're seeing tangible benefits from our investments in carrier and enterprise solutions with new site activations from our carrier-related services efforts, and continued momentum in our fiber-fed deployments. We're particularly encouraged by gains in Alaska's enterprise revenue and consumer fixed wireless wins, demonstrating improved operational execution and stronger pipeline conversion compared with last year. Third quarter revenues in the U.S. segment increased 4.6% year-over-year with sequential improvement driven primarily by carrier services growth. Adjusted EBITDA for the quarter was up 19.6% compared with the same quarter last year, reflecting both our strategic transition from legacy revenue streams to higher growth, higher margin services and recovery from a challenging third quarter last year. We remain focused on our key priorities. Expanding fiber and fiber-fed fixed wireless across markets where we have a durable consumer presence, while growing our base of business and carrier solutions. We are aligning our network strategy and capital deployment with this long-term vision. And while the transition continues, we're building the foundation for a more resilient, higher-margin domestic business. Domestically, our broadband infrastructure expansion continues to progress as planned. With several government-funded projects advancing through key milestones during the quarter. These fiber network investments remain central to our long-term U.S. growth strategy. Enhancing our network capabilities while creating new revenue opportunities as deployments reach completion. We continue to actively monitor federal broadband policy developments and funding mechanisms, including BEAD. Which offer opportunities to further penetrate underserved areas. As always, we're maintaining our careful approach to capital deployment while positioning ATN for additional infrastructure opportunities. Across our international operations, we are tracking geopolitical developments and the conclusion of hurricane season in our Caribbean markets, with business continuity and network resilience remaining key priorities. Our network teams work collaboratively with local authorities and partners to address potential disruptions while maintaining our service standards. To support these strategic and operational initiatives, we remain focused on the strength of our cash flow from operations to support our business initiatives while preserving the financial flexibility needed to capitalize on growth opportunities. Looking ahead, we're encouraged by the steady momentum across our business segments and remain focused on executing our operational road map. The revenue growth in our domestic operations led by carrier managed services expansion, and targeted enterprise sales execution reinforces our confidence in the direction we've set. While internationally, we're seeing stabilization in mobility trends and improving operational metrics. With 3 quarters of solid execution behind us, we are refining our adjusted EBITDA outlook while reaffirming our guidance for revenue, capital expenditure and net debt ratio. We're methodically strengthening our operational foundation and improving our cost structure to position the business for sustainable growth as we move towards 2026. We remain confident in our ability to generate long-term value for our shareholders. With that, I'll turn it over to Carlos for a detailed review of our financial performance. Carlos Doglioli: Thank you, Brad, and good morning, everyone. I would also like to echo Brad's recognition of our team. Their disciplined execution has been critical in our third quarter results as well as in our stabilization efforts to better position us for the future. I'll walk you through our third quarter financial performance in more detail. Total revenues for the third quarter were $183.2 million, representing a 3% increase from $178.5 million in the prior year quarter. This growth was driven by increases across multiple revenue streams, including fixed services, career services, construction and other revenue categories, which more than offset the expected decline in mobility revenues as we continue our transition away from legacy products. Operating income improved significantly to $9.8 million in the third quarter, compared to an operating loss of $38.4 million in the same quarter last year. While this improvement was primarily driven by a $35.3 million goodwill impairment charge in Q3 2024. Our underlying operational performance improved year-over-year. Key drivers of the year-over-year improvement included a $5.1 million reduction in depreciation and amortization expenses reflecting our disciplined capital allocation strategy and the natural completion of certain asset depreciation schedules, a $3.3 million reduction in transaction-related charges compared to the prior year, and a $1.1 million improvement in cost of services to our ongoing cost reduction and containment initiatives. Net income attributable to ATN stockholders for the third quarter was $4.3 million or $0.18 per share. This compares with the prior year's net loss of $32.7 million or $2.26 per share. Adjusted EBITDA increased 9% to $49.9 million compared to $45.7 million in the prior year quarter. This improvement is the result of the company-wide efforts to improve cost management and drive margin expansion. Turning now to segment performance. Our International segment continues to deliver solid performance with Q3 revenues up 1% to approximately $95 million adjusted EBITDA growing 3% to $33.3 million. The investments we've made in network quality and data capabilities are translating into measurable results. Retention, sequential increase in postpaid customer base and higher average revenue per user. Combined with our cost management actions, these efforts are positioned in this segment for adjusted EBITDA growth. In the U.S. Telecom segment, third quarter revenues, excluding construction revenues, were $87 million, up 3.5% year-over-year. With improvement driven by carrier services and fixed business revenue growth. Adjusted EBITDA for the quarter was $21.2 million, up 19.6% compared with the same quarter last year. Our balance sheet position strengthened during the quarter. Total cash, cash equivalents and restricted cash increased to $119.6 million at September 30, 2025, up from $89.2 million on December 31, 2024. Total debt was $579.6 million, resulting in a net debt ratio of 2.47x, improving sequentially from 2.58x at the end of the second quarter. Our disciplined capital allocation continued during the quarter. Capital expenditures for the 9 months ended September 30, 2025, totaled $60.9 million, net of $67.3 million in reimbursable capital spending. Compared to $85.7 million in CapEx and $71.8 million in reimbursables in the prior year period. We also maintained our totally dividend of $0.275 per share paid in October. This dividend reflects our confidence in sustainable cash flow generation and our commitment to consistent shareholder returns. Based on our improved year-to-date performance and outlook for the fourth quarter, we are refining our adjusted EBITDA guidance for full year 2025, while reaffirming our other key financial metrics. Revenue, excluding construction revenue is expected to be in line with 2024's results of $725 million. Adjusted EBITDA is expected to be flat to slightly above 2024's result of $184 million. Capital expenditures are expected to be in the range of $90 million to $100 million net of reimbursements, down from 2024's $110.4 million. Net debt ratio is expected to remain flat with full year 2024 at approximately 2.54x with potential for slight improvement exiting 2025. Our refined guidance reflects our continued focus on cost containment and enhanced capital efficiency initiatives that we have been executing over the past several quarters. We expect some residual activity from these efforts in the fourth quarter, resulting in minor reorganization and restructuring costs anticipated to be less than $1 million. We remain confident in our execution capabilities and our path towards sustainable long-term value creation. With that financial overview, I'll turn the call back to Brad for closing comments before we open it up for questions. Brad Martin: Before we open the call for questions, I want to leave you with a clear takeaway. We are focused on disciplined execution, grounded in financial responsibility and confident in the strategic path we set. Our revenue and adjusted EBITDA improvements demonstrate that our key initiatives are gaining traction and translating into stronger performance. These results underscore our ability to execute effectively while adapting to evolving industry dynamics. Our long-term objective remains unchanged: to build a stronger, more efficient and more resilient ATN that delivers sustainable value for our shareholders. The foundation we've built through operational stability and strategic investments positions us well to achieve this goal. With that, operator, we'd like to open it up for questions. Operator: [Operator Instructions] Our first question comes from the line of Greg Burns of Sidoti. Gregory Burns: Are you being impacted in any way by the government shutdown? Is it affecting any -- awards for government subsidy programs or maybe like the rural health care market in Alaska? Are you seeing any impact from the shutdown in any of those areas? Brad Martin: Yes, really all payments. We've not seen any impact with regard to payments on programs, subsidies that we typically participate in. And we expect no impact here really through Q4. On that -- things preventing the future longer, things like permitting, we do a lot on Bureau brand management lands. Permitting things into '26 to pose some challenges. But as of right now, no. Gregory Burns: Okay. And it's not delaying the any like new awards? Or is there any other impact to maybe new business development? Brad Martin: No. So I mean, one of the primary areas we referenced in the call is BEAD and BEAD is still in the review cycle under [ NTIA ] expected results from that will be in January. So we're expecting those schedules to be held. But no, no impact does it yet. Gregory Burns: Okay. And you kind of mentioned maybe better pipeline conversion or execution in Alaska. Can you just maybe talk about some of the initiatives you put in place over the last year or so? Kind of get the close rates and the improvement in the execution in Alaska up and what you've done and what you're seeing there in terms of results from those initiatives? Brad Martin: Yes. So a couple of fronts there, Greg. And we've had a new team in Alaska. There has been new management in the last year. So with any new leadership team, they come in and really establish their ground game on the ground, and we're happy what the team is doing there. We are, we have been in the process of working with key partnerships. Keep partnerships with the LEO operators to help address more of the -- some of the rural health care opportunities that are in that market, it's a pretty large part of the telecom market in Alaska. And again, and that's some of the progress we're seeing here this year. Gregory Burns: Okay. And then just lastly, in terms of cash flow. It's obviously improving nicely this year. What are your priorities going forward -- are you okay with where the leverage is on the business? Or do you want to bring that down? Or do you have other priorities for the improved cash flow that you're seeing? Andrew S. Fienberg: Greg, this is Carlos. So look, we're happy with the way the cash flow is trending as you say, the operating cash flow is doing well. And with a more normalized level of CapEx, we expect to continue to trend leverage down. And at the same time, we are very pleased with the support that we're getting to the business with some of the grants on reimbursable programs that we have there. So we believe that things are working the way we have been expecting and we should continue to be able to push leverage down. Operator: Thank you. I am showing no further questions at this time. So I would like to turn it back to Brad Martin, Chief Executive Officer, for closing remarks. Brad Martin: Thank you, operator, and thank you all for joining us today. We appreciate your continued engagement as we execute our strategy. We look forward to sharing more progress on our fourth quarter call. Have a great day. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good afternoon. My name is Tyler, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 Holdings' Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] I will now hand the call over to Josh Yankovich, Investor Relations. Sir, please begin. Josh Yankovich: Thank you, operator. Good afternoon, everyone, and thank you for joining us for our third quarter 2025 conference call. With me on the call today are Matt Flake, our CEO; Jonathan Price, our CFO; and Kirk Coleman, our President, who will join us for the Q&A portion of the call. This call contains forward-looking statements that are subject to significant risks and uncertainties, including among other things, with respect to our expectations for the future operating and financial performance of Q2 Holdings and for the financial services industry. Actual results may differ materially from those contemplated by these forward-looking statements, and we can give no assurance that such expectations or any of our forward-looking statements will prove to be correct. Important factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in our periodic reports filed with the SEC, copies of which may be found on the Investor Relations section of our website, including our quarterly report on Form 10-Q for the third quarter of 2025 and the press release distributed this afternoon and filed in our Form 8-K with the SEC regarding the financial results we will discuss today. Forward-looking statements that we make on this call are based on assumptions only as of the date discussed. Investors should not assume that these statements will remain operative at a later time, and we undertake no obligation to update any such forward-looking statements discussed in this call. Also, unless otherwise stated, all financial measures discussed on this call other than revenue will be on a non-GAAP basis. A discussion of why we use non-GAAP financial measures and a reconciliation of the non-GAAP measures to the most comparable GAAP measures is included in our press release, which is available on the Investor Relations section of our website and in our Form 8-K filed today with the SEC. We also have published additional materials related to today's results on our Investor Relations website. Let me now turn the call over to Matt. Matthew Flake: Thanks, Josh. I'll start today's call by sharing our third quarter results and highlights from across the business. I'll then hand it over to Jonathan to walk through our financial performance and guidance. In the third quarter, we delivered strong financial results with revenue and adjusted EBITDA, both above our guidance. We generated revenue of $202 million, representing 15% year-over-year growth and adjusted EBITDA of $49 million or a 24.2% margin. We also generated free cash flow of $37 million in the quarter. In addition to the strong financial performance, we had the best third quarter in company history from a booking's perspective. As we shared earlier this year, we expected our larger deals to be weighted toward the second half, and we saw that begin to take shape with 7 total Tier 1 and enterprise deals in the quarter. This concentration, combined with a solid mix of new and expansion wins, drove the record third quarter bookings activity. Several of the Tier 1 and enterprise wins were net new, showcasing continued momentum in acquiring new customers, and all 3 major product lines contributed to the quarter's performance. On the digital banking front, we saw continued success upmarket, including a net new win with a bank exceeding $80 billion in assets that will begin by using our platform for retail and small business. We also signed a major expansion with a $60 billion bank that started with commercial and will now add retail. As demonstrated by these wins, our single platform approach, unifying retail, small business and commercial continues to differentiate Q2, help us compete more broadly and creates meaningful expansion opportunities over time. During the quarter, we also had 2 instances where a Q2 Bank was acquired by a larger institution. And in both cases, the acquiring bank selected Q2's platform to serve the combined entity. This is an indicator of our competitiveness and the scalability of our technology, especially as bank M&A activity continues. Our fraud solutions continued to gain traction as well. We signed the largest fraud deal in company history during the quarter, a significant expansion with an existing $200 billion digital banking customer. This win was for our check and ACH fraud solution, which continues to see robust demand in the market. With the cost and complexity of fraud growing, customers are increasingly turning to Q2 as a strategic partner to help them manage risk more efficiently and effectively. We also had our strongest relationship pricing quarter of the year, highlighted by multiyear renewals with 2 top 10 U.S. banks. Our relationship pricing solutions continued to be an important lever for financial institutions seeking to optimize yield, profitability and growth across both loans and deposits. Beyond our strong sales performance, we also recently hosted Dev Days 2025, our second annual conference for partners, customers and employees, who build on the Q2 platform using our APIs and SDK. While our annual client conference, Connect, is our venue to showcase production-ready innovation and customer adoption proof points, Dev Days is an event where we share architecture and technology enhancements and explore the next frontier of our platform. At this year's event, AI was front and center, and we showcased several ways we intend to bring leading AI capabilities to our platform for the benefits of bankers, account holders, developers and our fintech partners. We demonstrated a range of planned AI offerings that illustrate the breadth of our strategy. The first was an AI Copilot that can help account holders and bank staff alike, enabling account holders to receive guidance and manage money through natural language prompts and customer service representatives to retrieve and summarize information. We demonstrated AI-assisted coding in our SDK, which makes all of our developer documentation available via conversational developer tools and will help customers, partners and even Q2 go from idea to execution faster. We shared a customer-facing extension of our internal AI assistant that indexes the vast archives of our internal Q2 knowledge and makes it available through an LLM, which we believe will help our customers self-serve and get faster customer support outcomes. And finally, we shared a new partner data integration strategy that is intended to enable us over time to turn our wealth of 1,000-plus back-end integrations and more than 200 fintech partners into a unified data and capabilities ecosystem that will empower agentic innovation. The key takeaway from Dev Days was our customers need to invest in innovation, which requires mission-critical partners with expertise in handling highly regulated data and managing complex integrations to enable AI adoption. We believe we are well-positioned to be that partner of choice, as we have a proven track record of innovation, can leverage our network of customers, partners and integrations to build new capabilities on our platform, strengthening it with every generation of innovation. Our platform and the ecosystem that surrounds it can facilitate AI innovation in financial services. As technology and financial services continue to evolve, we believe advancements in AI will flow through Q2, not around it. Looking ahead, we feel very good about the success we've had heading into the final quarter of the year. Our pipeline remains solid. We expect demand to remain strong as we close out 2025. And as Jonathan will share in a moment, we're raising our financial outlook, reflecting our confidence in our ability to deliver on the full-year expectations we set earlier this year. Before I hand the call over to Jonathan, I wanted to share some exciting updates to our leadership team, which we believe will better align our talent and efforts with our long-term strategy. First, Hima Mukkamala has been appointed as our Chief Operating Officer, expanding his role to include our service delivery and customer experience functions. In Hima's time overseeing our engineering team since 2023, he has demonstrated operational excellence and an extreme focus on AI enablement, both to drive internal efficiencies as well as external innovation. In conjunction, Kirk Coleman will continue to lead our go-to-market functions as Chief Business Officer, reinforcing his focus on sales and customer success, leveraging his deep industry expertise to advance our product strategy and next phase of growth. I want to thank Mike Volanoski, our Chief Revenue Officer, for his contributions during his time at Q2, and he will remain with us through December 12 to ensure a smooth transition. With that, let me pass it over to Jonathan. Jonathan Price: Thanks, Matt. Our third quarter results demonstrate continued strong execution across several key metrics, including revenue and adjusted EBITDA, both of which exceeded the high end of our previously issued guidance. These results highlight the progress we have made towards our profitable growth strategy, reinforced by the strongest third quarter of bookings in our history and sustained margin expansion. I will now discuss our financial results in more detail and conclude with our guidance for the fourth quarter and full year 2025, as well as an updated financial outlook for 2026. Total revenue for the third quarter was $201.7 million, an increase of 15% year-over-year and up 3% sequentially. Our revenue growth was primarily driven by subscription-based revenues, which grew 18% year-over-year and 4% sequentially. Subscription revenue as a percentage of total revenue continued to increase, ending the quarter at 82%, highlighting the ongoing shift in our revenue mix towards this higher-margin revenue stream. The year-over-year and sequential revenue growth was primarily driven by a combination of new customer go-lives and expansion with existing customers. Our services and other revenues increased 5% year-over-year, reflecting an improvement compared to the prior quarter's year-over-year trends. This growth was driven by an easier comp versus the prior year as we lap the impact from First Republic Bank, which we indicated on the prior call. In addition to the easier comp, we benefited from higher professional services revenues from core conversions. These increases helped offset ongoing declines in more discretionary professional service offerings, which remain under pressure. Total annualized recurring revenue or total ARR grew to $888 million, up 12% year-over-year from $796 million at the end of the third quarter of 2024, driven by strength in our subscription ARR, which grew to $745 million, up 14% year-over-year from $655 million in the prior year period. Total ARR growth was fueled by continued strength in subscription-based bookings across both new and existing customers. As expected, subscription ARR growth also benefited from a normalization in churn following a concentration of churn in the second quarter, and we continue to expect churn in the second half to be more favorable than the first with full year levels remaining in line with or better than historical averages. Our ending backlog of approximately $2.5 billion increased by $161 million sequentially or 7% and $485 million year-over-year, representing 24% growth. Year-over-year and sequential increases were primarily driven by expansion with existing customers as well as solid net new activity and was broad-based. We entered the year expecting enterprise and Tier 1 opportunities to be more heavily weighted towards the back half, and that proved out with strong third quarter performance in those segments, which represented the majority of our booking's growth for the quarter. And as we have mentioned previously, the sequential change in backlog may fluctuate quarter-to-quarter based on the number of renewal opportunities available within that quarter. Gross margin was 57.9% for the third quarter, up from 56% in the prior year period and above the 57.5% we saw in the previous quarter. The year-over-year and sequential increases in gross margin were driven by an increasing mix of higher-margin subscription-based revenues. We continue to expect gross margin to expand in Q4 with full-year 2025 gross margin expansion of at least 200 basis points. Total operating expenses for the third quarter were $76 million or 37.7% of revenue compared to $73 million or 41.5% of revenue in the prior year quarter and $75 million or 38.2% of revenue in the second quarter. The year-over-year improvement in operating expenses as a percent of revenue was driven by G&A, which benefited from lower personnel-related costs and higher revenues, which impacted all categories. Total adjusted EBITDA was a record $48.8 million, up 50% from $32.6 million in the prior year period and up 7% from $45.8 million in the previous quarter. We ended the third quarter with cash, cash equivalents and investments of $569 million, up from $532 million at the end of the previous quarter. As we indicated on the prior call, the third quarter included a material cash payment, which drove the slight sequential decline in cash flow. In the third quarter, we generated $46 million in cash flow from operations, driven by improved profitability and continued effective working capital management and delivered $37 million in free cash flow. We continue to anticipate the fourth quarter will be our strongest free cash flow quarter of the year, consistent with typical seasonality. As announced in our press release, Q2's Board of Directors authorized a share repurchase program for an amount up to $150 million. Given the significant progress we have made on improving the balance sheet and our cash flow generation, we believe we are in a strong position to exercise all components of our capital allocation strategy. These priorities include investing in the business to elongate our subscription growth trajectory, evaluating opportunities for highly synergistic inorganic growth, retiring our convertible debt and opportunistically utilizing the share repurchase program over time. Let me finish by sharing our fourth quarter and updated full year 2025 guidance. We forecast fourth quarter revenue in the range of $202.4 million to $206.4 million, and we are raising full year revenue to the range of $789 million to $793 million, representing year-over-year growth of 13% to 14% for the full year. We forecast fourth quarter adjusted EBITDA of $47.2 million to $50.2 million and are raising our full year 2025 adjusted EBITDA guidance to $182.5 million to $185.5 million, representing 23% of revenue for the full year. Looking ahead, we are also providing an updated financial outlook for 2026. We expect full-year subscription revenue growth of approximately 13.5%, which is up from the approximately 13% we previously provided, reflecting the strong bookings momentum we've seen year-to-date and the durability of our subscription model. Total non-subscription revenue is expected to decline in the mid-single digits year-over-year in 2026, driven by ongoing secular pressure in bill pay and discretionary services revenue. In addition, we expect our full year 2026 gross margins to be at least 60%, and we expect adjusted EBITDA margin expansion of approximately 250 basis points. As a result, we are increasing our 2024 to 2026 3-year annualized average adjusted EBITDA margin expansion target to 450 basis points, up from our previous expectation of 360 basis points. Finally, based on our performance to date and anticipated second half strength, we reiterate our full year free cash flow conversion outlook of at least 90% for 2026. In summary, we delivered a strong financial performance, which exceeded the high end of our previously issued guidance. This performance, coupled with our outlook for the remainder of the year, has given us the confidence to raise our full year guidance on both revenue and adjusted EBITDA for 2025 and our improved 2026 outlook. We remain dedicated to delivering growth, profitability expansion and strategic capital allocation and believe that our results to date collectively illustrate our progress and potential as we continue to evolve our business and drive shareholder value. With that, I'll turn the call back over to Matt for his closing remarks. Matthew Flake: Thanks, Jonathan. Before we open it up for questions, I'll close with a few final thoughts. In summary, Q3 was another good quarter defined by strong financial results and record third quarter bookings. The record bookings execution was driven by broad-based sales performance with 7 total Tier 1 and enterprise wins. We also shared some exciting developments in our AI journey, showcasing several solutions in development at our Dev Days event that demonstrated how we're using leading-edge AI technologies to empower our customers, their account holders and partners in the months and years to come. Looking ahead, our record 3Q bookings performance and the strength of our pipeline gives me confidence that we'll close the year strong and enter 2026 positioned for continued subscription revenue growth and an improved profitability outlook. Thank you. And with that, I'll turn it over to the operator for questions. Operator: [Operator Instructions] And your first question comes from the line of Parker Lane with Stifel. J. Lane: Congrats on the quarter. Matt, some changes on the management team that you outlined here. I guess, coming off of bookings, a record bookings quarter here for 3Q. Maybe just talk about why now is the right time to make some of these changes to the structure of that organization? And what you expect the biggest changes we'll see in the near term are under the new leadership here? Matthew Flake: Yes. Thanks, Parker. For us, it's -- yes, you guys live quarter-by-quarter. We didn't just do this overnight. We've been trying to structure the business in a way to align the technical resources where our delivery support, the people that build the product and host the product are aligned because so much of that is connected to the engineering team. And so Hima is a proven commodity for us. We've been really impressed with him. Kirk hired him as a big advocate for him. And then putting Kirk in a position to do go-to-market and the product side of things, where he has deep experience. He's been a buyer. He's been a seller. He's been on our side as well. So it's just a perfect fit at this time, and we wanted to get it done before the end of the year, so we could put our plans together for '26 and beyond. So it's -- coming off a strong quarter just happened to be what happened. But really excited about these changes, and I think they put us in a position to really accelerate our products, our go-to-market as well as our initiatives around AI. And I'm sorry, what was the other part of the question? J. Lane: I think you touched on most of it there, Matt. Maybe just to pick up on AI, you highlighted some of the new development from the Dev Days. Obviously, AI is a huge focus area for every industry. But just wondering, if you look at year-end markets, what sort of appetite there is there, and more importantly, budget there is around AI? How much of a prioritization is this in your end markets? And what are you expecting the timeline to be there for contributions and benefits to your deal cycles as a result of it? Matthew Flake: Yes. Keep in mind, we've been using AI for fraud and cross-selling and products like that for a while. Our buyers were the most conservative business people in the country, arguably in the world. And so they are leaning in and learning. We're having a lot of conversations around it. We're trying to understand the problems they want to solve from a product's perspective. And so that's how you educate yourself and build the right products. The Dev Days, obviously, there's a lot of activity there. So encouraged by their engagement with us, and we think there's a lot of opportunity there. When it folds into the revenue and the cost side of things, I'm not in a position to share that at this point, but we definitely think there's going to be a lot of opportunity there on both of those lines. Operator: Your next question comes from the line of Terry Tillman with Truist. Terrell Tillman: Matt, Jonathan, Kirk and Josh, my first question, you actually have -- you beat me to it a little bit. I was going to have a lot to ask about AI. So you had a lot in your prepared remarks, and then, Parker had a good question on it. I guess, maybe another question kind of coming at this AI kind of angle or opportunity is, you talk about a single platform approach and how folks tend to cross-pollinate across commercial, small business and retail. Do you see maybe a quickening of the pace of, hey, we really need to clean up our digital banking front end though if we really want to do this AI stuff the right way? I'm not trying to put words in your mouth, but do you see this as potentially helping kind of accelerate some of this kind of brownfield replacement opportunities for digital banking before they actually buy some of these AI tools? And then I had a follow-up. Matthew Flake: Yes. I think a couple of things to understand about what I think are differentiators in our space, in particular. Everybody has horizontal and vertical software in the trash right now. I would point out some things about our industry in particular. Number one, I think incumbency and trust are both factors that provide meaningful and durable advantages for us. We have hundreds of customers. We have thousands of long-standing integrations to complicated back-office systems that require constant care and feeding. We have 20 years of compliance frameworks around securing the data that is accumulated on our single platform, as you mentioned, for retail, small business and commercial banking workflows. I think financial institutions need, and are going to require, a trusted partner to help them adopt AI safely and responsibly when you're talking about the buyers we're dealing with. And from -- and then there's a data and distribution advantage we have. We have 27 million end users, average of 3 accounts per user with probably an average of 7 years of history. That includes posted transactions, balances, payments, behavioral data, demographic data. And we're going to continue to use that data to enhance our customers' end-user experience, back-office operations, fraud prevention, cross-selling capabilities, efficiencies for us. And then you have a vast partner network that we believe will continue to work with us to distribute their AI solutions focused more on use cases that we will work to integrate into our workflows and complement the digital banking experience. And so that, coupled with the announcement we made today around the structure of this company in a way that it'll empower us to capitalize on the strategic advantages over the coming years. For us, the customers and Q2 team are excited about this opportunity. We just have to execute on our plans, which we have a track record of doing. So there's a lot of opportunity there. We're using it internally, externally with customers and everything else, and we're seeing real progress in that area. And we don't anticipate to sit on our hands and wait for somebody to come do this. But I do believe the incumbency and the trust aspect and the data and the distribution capabilities are significant tailwinds for us in this race. Terrell Tillman: That's great to hear. And I guess, I don't know if this is for you, Matt or Jonathan. And I'm not usually wanting to start looking at numbers and asking numbers questions on the calls. But it does look like it was a pretty substantial uptick versus the prior year on like RPO. And I know the subscription ARR picked up some, and I know some of this was kind of churn timing from last quarter. Where I'm going with this is we knew second half or we thought second half would be stronger than the first half on just the seasonality of your bookings. But I usually think of 4Q as the big quarter. Is there any tilt that's different potentially this year in 3Q to 4Q bookings? Matthew Flake: No, we are cautiously optimistic about the fourth quarter. We're focused on getting deals done. We have a lot of activity. I see a lot of good indications, but I don't know anything until it's done, but we are -- the pipeline is strong. We didn't drain it in the third quarter, and we're going to -- we intend to execute on those and continue to build the pipe for '26. Jonathan Price: Terry, the only thing I'd add is, as we talked about at the beginning of the year, the mix of first half versus second half was going to -- we predicted would be slanted towards Tier 1 and enterprise in the second half. The third quarter was a great start to the second half in that regard because we did see a really strong performance in that upper tier in that Tier 1 and enterprise segment and saw from a sub's ARR bookings perspective, by far, the strongest quarter of the year as that -- as we expected. And as Matt said, no feeling like we borrowed from the fourth quarter. So I feel good about the opportunity moving forward, but we got to execute on it. Operator: Your next question comes from the line of Andrew Schmidt with KeyBanc Capital Markets. Andrew Schmidt: Guys, good to be back on the call. Great results here. Great to see the sub ARR acceleration on top of a tougher comp. I wanted to ask about just the 2026 sub's ARR growth of 13.5% you outlined. Continue to see good long-term growth trends. But I guess you have to make some assumptions when you're providing that outlook. Obviously, you have good visibility given the recurring revenue base, but there's cross-sells, there is existing user growth and things like that. Maybe you could talk through just some of the assumptions that are in there. And then also, you commented on the bank M&A environment. Historically, it's been a positive for Q2, and we seem to kind of be in the sweet spot here given the current environment. Maybe talk about whether that's layered into those assumptions or whether that could be incremental? Jonathan Price: Yes. Thanks, Andrew. So, to hit the first part of the question, when we think about sort of the 13.5% for 2026 subscription revenue growth, that's mostly informed by the bookings outcomes year-to-date and the mix of those bookings, which gives us good visibility into 2024. When you think about what we do in the fourth quarter of this year, smaller deals, cross-sell, renewal activity, that can have an impact. But the bulk of it, we have visibility into based on actual bookings that we've obtained so far year-to-date. So we feel really good about that number, have conviction. And most importantly, the performance in the third quarter gave us the confidence to lift it from what we had predicted and communicated all throughout the year at 13% up to 13.5%. So it has assumptions around ongoing performance in line with what we've done when it comes to the near time to revenue levers, like cross and renewal activity, but there's no sort of incremental impact from the net new stuff that we're experiencing -- expecting significant impact in '26. From an M&A perspective, that's a little bit different. There, we don't really build that in from the standpoint of upside for our subscription revenue base. We do have some visibility, and we certainly make assumptions around services work tied to M&A. And I think that's informed a little bit in some of the non-subscription line item guidance we gave on the '26 front. But to the extent that goes more in our favor than it has historically, that would be upside to the plan. But we've seen a pretty strong year from an M&A standpoint. I mean, Matt talked about 2 deals this year, where we won up into the acquirer tech stack and for the combined bank, which is a great sign for us. But overall, M&A activity from a services perspective has been pretty high in 2025. And so we expect that to continue in 2026, but not necessarily to see the same growth we saw year-over-year relative to 2024. Andrew Schmidt: Perfect. And then if I could -- if I just could ask about just quickly on pricing, it's been a topic of conversation with investors. And I think typically, Q2 has been premium priced just given the value that you bring to clients. But maybe to comment if you're seeing anything different in the environment since it has been a discussion that's come up, not specifically Q2, but just broader in terms of the industry. But any comments there would be helpful. Matthew Flake: No, there's nothing abnormal. I mean, a lot of people that don't have the feature functionality we have, they use price as a tool to try to win deals. And sometimes banks go for that. We have a lot of discipline around that. We will walk from a deal if it doesn't fit our economic model and hope to pick them up later. But there's no significant change on the pricing side of things from what we've seen from people. Operator: Your next question comes from the line of Matt VanVliet with Cantor Fitzgerald. Matthew VanVliet: Curious on -- given your recent success of upselling, cross-selling your existing customers, how should we think about the renewal cohort over the next 5 quarters or so? Any differences in sort of the shape or size of the cohorts coming up for renewal? And within that, is there any outsized opportunities where maybe you're already on retail to sell commercial or commercial to sell retail and things of that nature? Jonathan Price: Yes. Thanks, Matt. I'll take that. I mean, to your last point, yes, we have lots of those opportunities, and that certainly make up some of the larger, what we call internally, cross-sales significant deals that are in the pipeline. But when it comes to the makeup of the '26 renewal cohort, we did -- we talked about this earlier in the year. But when you look at the performance on renewals in '23 and 2024 combined and look at the composition of that cohort and compare it to the '25-'26 cohort, it really is very, very similar, both in terms of number of opportunities and the mix within them. So we feel really good. It's not -- and it's not as though the renewal performance so far in 2025 has borrowed from '26 or anything like that. So we feel really good for the fourth quarter of 2025 and throughout '26 that the opportunity set in front of us, both in terms of number of deals and the size and shape of them, are comparable to what we've done in recent periods. Matthew VanVliet: Great. And then, as you look at the opportunity for Innovation Studio, not needing to build every little agent or AI widget out there by leveraging partners, seems like a big opportunity. And maybe as banks are a little more willing to accept AI technology is sort of where we're going, should we think about Innovation Studio maybe even further accelerating here now that you have at least one product in virtually all your customers? And how should we think about the overall revenue contribution in '26 versus still being a couple of years away from real materiality? Matthew Flake: Kirk, why don't you take the Innovation Studio product question, and then, Jonathan can take over. Go ahead. Kirk Coleman: Yes. From an Innovation Studio perspective, really 2 important points in there. One is that if we sort of think about our existing partner ecosystem and the new partners we're bringing to the ecosystem, it continues to be really important for them to have a partner like us who has great technology, great distribution, but also kind of like this very strong technical backbone on which to build their solutions to because you can have these features and functions that these fintechs deliver. But if you don't have all the data, all the APIs, all the integrations that we do, you really can't get as far with them. So that continues to be really important. If we think about it from an AI perspective, what we're seeing is those partners are really kind of continuing to come to Q2 to co-develop and distribute their AI solutions. And that's not just our existing fintech ecosystem, but it's also what our customers are building for themselves and also new players that you might see in the market like the services companies and others that want to build kind of specialized AI agents that they can distribute into the financial services. Again, all of that is really important for our Innovation Studio because if you think about the legacy financial services infrastructure, if you don't have a partner like us, it's really hard to scale any kind of solution into that environment. So that's where we see a lot of strength currently. Jonathan Price: And what I'll add up from a revenue growth perspective, '24-'25, we've seen phenomenal revenue growth from the Innovation Studio ecosystem. And you're right, we are seeing some use cases that are pretty exciting in terms of the adopted fintech partners and the entire ecosystem all thinking about AI in terms of their own point solutions and then us getting the benefit of that as there's adoption inside the platform. So we're excited about it. We think '26 will be another great year of growth from an Innovation Studio revenue perspective. And as a reminder, like that is very high-margin revenue. We're only recognizing it on a net basis. So it's a valuable revenue stream to us, and we are building a go-to-market apparatus and investing in the go-to-market team to try and capture that growth opportunity that you're asking about, Matt. Operator: Your next question comes from the line of Ella Smith with JPMorgan. Eleanor Smith: So first, I was hoping to ask about seasonal trends. Are there any seasonal trends to note when it comes to cross-sell from existing customers? And how long does it usually take cross-sell commitments to hit your revenue line? Matthew Flake: From a seasonality perspective, yes, the fourth quarter is usually our biggest cross-sell opportunity. It's the end of the year, people trying to fill out their budgets. I was really happy with the third quarter. Some of that was from our Connect conference that built up and the excitement from seeing the products. And then the fourth quarter should be as strong as cross-sell opportunity. Jonathan Price: Yes. And from a time-to-revenue perspective, unlike net new, these can go to revenue much, much faster. It just varies depending on the product. And so some of the stuff can get live really quick, especially when you're talking about cross-selling, let's say, an Innovation Studio partner that's already in production to certain products that maybe there is a, call it, 3- to 6-month timeline on the outside, in some cases, if it's not sort of a cross-sell of the digital banking component like retail to commercial or vice versa. So if it's an ancillary product, the timelines are faster. Eleanor Smith: That's very clear. And for my follow-up, can you speak to the appetite of existing and prospective customers to reinvest in technology? Is it changing given it's a somewhat lower interest rate environment? Matthew Flake: The demand environment has been strong, and it remains strong. I think interest rates, there's still uncertainty about what they're going to do. I think from a customer perspective, whether it's a bank or a credit union, they don't want to be caught in the situation they were in, in the 2012 to 2022, which is they were doing the loans, but they didn't have the operating accounts. So they learned their lesson, and they're trying to get the best digital banking, retail, small business, commercial solutions so that they can get the operating accounts when the lending environment comes back. And so they want to have the best product, and that's why we continue to win in that space, and I think we're going to continue to. So demand is strong, and I anticipate it continuing to be strong even as rates go down, assuming they will. Operator: Your next question comes from the line of Cris Kennedy with William Blair. Cristopher Kennedy: Just wanted to follow up on the gross margin outlook for next year. Can you just talk about some of the levers that you have to get to that 60% target? Jonathan Price: Yes. For sure, Chris. So the single biggest lever that we will see driving that upside in 2026 is the completion of our cloud migration project on the digital banking side. And so we'll be completing that here at the end of '25, very early in 2026. And so as we exit the data centers, you see that depreciation roll off, the very clear cost savings coming off. And then, as you think about operating in the environment that we're in from a cloud perspective, there's just so much opportunity for learning that environment and operating with more elasticity, more understanding of how to be efficient in that new world. And so we feel really good about the guidance we've given. But there's also all the other things that go into that in terms of revenue mix, AI efficiencies, all the things we're doing across support and delivery to become more efficient that are all accruing into that gross margin line. Operator: Your next question comes from the line of Alex Sklar with Raymond James. Jessica Wang: This is Jessica on for Alex. So sort of touching on what you've been saying about the strength in your risk and fraud solutions and your cross-sell, how should we be thinking about the contribution of risk and fraud to -- as a percentage of bookings year-to-date relative to previous years? Jonathan Price: We've never discreetly given projections around risk and fraud because so much of that solution is embedded within digital banking, but we can say that the growth of that business exceeds that of most of the other product lines that we have. And so you are seeing a greater mix in 2025 than we have historically in terms of the contribution from the fraud tech solutions. And I can say, as we think about the plans for 2026, we see a demand environment that suggests that will continue. Jessica Wang: Got it. And also, thinking about -- so we've been hearing some concerns in the end market about credit risk over the last couple of months. I think earnings have been turning up better than feared. But can you provide some color on what you're seeing from the health of your customer base? And any changes in demand patterns in terms of your solutions that may be are more focused on the credit side? Matthew Flake: Kirk, why don't you take that? Kirk Coleman: Yes. On the credit -- so if you sort of look broadly, and we -- again, we pull all the call reports on all of our customers. So we watch this really closely. The banks are really well reserved right now. I think we would start to start there, and that's -- if you look back kind of like even on a 10-year basis. So what we see is, although there's been a couple of banks that have had to report some losses here recently, if you kind of look more broad-based, even in those banks, they were well reserved to be able to handle those losses that they reported. And so right now, credit quality is actually holding up pretty well. Those credit provisions look like they're in a healthy range. What we see in our PrecisionLender relationship pricing line of business, continues to be very strong in terms of the demand for that product as customers are thinking about how do I reprice relationships as the interest rate environment changes, particularly since there's still a little bit of uncertainty in terms of exactly how that's going to play out and as they're thinking about '26 and what their growth trajectories look like. So don't see any red lights on the credit front yet. Operator: Your next question comes from the line of Charles Nabhan with Stephens. Charles Nabhan: Congrats on the results. A couple of quarters ago, you gave some real good metrics around the cross-sell opportunity between retail and treasury management. And I wanted to revisit that to get a sense for how much runway or wood there is to chop within the customer base in terms of cross-selling those 2 products. Also, I wanted to touch on whether you're seeing more uptake of both commercial and retail solutions on your newer deals. Jonathan Price: Yes. Thanks, Chuck. Yes. No, that's a metric we track closely. It's a huge -- you call it TAM or SAM opportunity inside our customer base. When you think about cross-sale of significance, what we call it internally, we still have, call it, in a customer -- Tier 1 customer base, so financial institutions over $5 billion in assets. Only 10% of them have all 3 of retail digital banking, commercial digital banking and PrecisionLender or relationship pricing as we call it now. And so that is a huge cross-sell opportunity. And that dovetails well into your second point. We still see a good mix of deals that start with commercial, go to retail. We had a great one like that this quarter, and we see that all the time. But you also have some really good. We had a great net new win that went for the full platform. And so it just -- it depends, and both of those were Tier 1 institutions. So it just depends on the strategy and the timing and the budget of the financial institution. But we feel really good about that. That's why we win a lot. That's a big differentiator for us. And again, from a cross-sell perspective, that continues to be a huge opportunity given how few of our Tier 1 institutions have all those different products. Charles Nabhan: Got it. And as a follow-up, I wanted to talk about your product roadmap and get a sense for how you balance M&A, partnership and organic growth as well as what specific products or areas you might look to as a means of either enhancing your existing functionality or broadening your TAM? Matthew Flake: Yes. I mean, I think the platform, we look at it and say, on the retail side, we want to make it more personalized for users as they log in and they can have things that are relevant to what their day looks like. From a business perspective, we want to continue to -- we want to add that functionality as well. Plus we want to add deeper commercial functionality that allows people -- the banks to go help there -- to go acquire larger businesses in their region. Fraud, obviously, we're investing heavily in that. Innovation Studio gives us a lot of scale in a lot of different products. And then, also the ability for us to cross-sell and market products. And then you have AI tied to all of this, whether it's operating efficiency for the bank, agentic AI to help people understand what they need to do. So there's all of these products that we have. We have a core modernization strategy with Helix. There's a lot of different things that we're doing that are going to expand our TAM and kind of grow with our customers as they try to get into new areas and sign new customers and gather more deposits. So strategically, we are really well positioned. Kirk, if you have anything to add, feel free to add. I don't know if I broadly covered it. Kirk Coleman: No, I think you broadly covered it. I mean, again, what we see from our customers, and we've had 3 really great customer events over the last 45 days, and they reinforced this in addition to our Customer Advisory Board, but they're really looking to us to help guide them through this current stage of innovation. We brought them through digital, we brought them through mobile, we brought them through cloud. We're going to bring them now into AI. And so having that trusted partnership and really being very interactive with us in terms of the feedback that they give us and the feedback we give them in terms of what the roadmap should look like is a really powerful kind of flywheel for us. Jonathan Price: And Chuck, to the first part of your question around build versus buy versus partner, I mean, we think about that all the time. It's an equation where we want to be able to exercise all of those different levers. And obviously, we're building products, and the Innovation Studio ecosystem along with some of our long-standing partnerships pre-Innovation Studio, we have a very robust partner strategy. And then when it comes to buying, I think it's obviously a part of our long-term strategy and one we've exercised in the past. But the bar has been raised for what it would take for why we need to own an asset and how we think about valuing the asset and what the financial criteria of those businesses would need to be. So all 3 of them are relevant, and Matt and Kirk covered the areas where we would be interested, and that would be the same in the context of M&A. Operator: Your next question comes from the line of Dan Perlin with RBC Capital Markets. Daniel Perlin: I just wanted to touch base on kind of the macro, kind of the state of what's been happening here as of late in that there's a bit of a dislocation, I think, happening with one of the large core providers. They're going to go through a lot of, I would say, change over the next couple of years in terms of their core consolidation. And I know we're not specifically talking everything on your business. But I'm just wondering how much kind of the derivative fallout from that could create some really interesting RFP opportunities for you guys over the next couple of years. And just how would you frame that in that context? Matthew Flake: Yes. Historically, as I've seen core consolidation happen over the last 25-plus years, it generates opportunities for us. So when a bank is forced to -- or credit union is forced to switch off of the general ledger they're running on, it pushes them to go evaluate all their technology and what they want to do because it's such a disruptive thing for them. So I -- RFP volume, I looked at it before, is similar to what it was last year right now, but this stuff is just kind of hitting the market now. So it's something to watch. Obviously, we're paying attention to it. For us, we know all the prospects in banks and credit unions. We're calling on them all the time, marketing to them and keeping our name in front of them. So when they do decide to take a look, hopefully, we get called. That's the objective. So other vendors have different challenges. We've all had challenges at different times. And I don't -- I expect those to get fixed. And so we can't rest on our laurels and think some of that stuff is going to be a problem. And so we're going to continue to attack the market we're going after and use our product and our customer experience and our culture as a differentiator. Daniel Perlin: Yes. No, that's great. Just a quick follow-up. On the '26 guide, if I'm just looking at the numbers, and they may differ a little bit, but like it looks like the incremental margin on EBITDA somewhere in the high 40s, low 50s versus kind of in the 60s kind of where you are maybe going to land this year. Again, maybe there's a little bit of squishiness in the numbers. But net-net, it looks like it's coming down a little bit. Is that because there's like this investment opportunity cycle that you're going into, especially given the fact that you've got this migration on the gross margin side, and it does feel like there's plenty of other opportunities for leverage? So I'm just wondering what's maybe a little bit more embedded in that. Jonathan Price: Dan, let me make sure I'm getting your question right. Are you referring to Q4 EBITDA? Daniel Perlin: No, '26 guide EBITDA, 250 basis point margin expansion year-on-year. Just the incremental margin on that would suggest it's probably closer to 50 versus maybe 60 that you're going to land on in 2025. Jonathan Price: Yes. I got to make sure I'm following you. When we look at our 2024 to 2026 financial framework, one of the metrics we talked about was EBITDA margin expansion. And what we talked about there was the 3-year average, '24 to '26 would see 360 basis points of improvement on average. With 2024 in the bag, and 2025, the guide we just provided, both well over 500 basis points of expansion each of those years, the implied 2026 EBITDA margin expansion before the color we gave today was quite low. It was sub-100 basis points in terms of the implied '26 margin expansion. In providing that 250 basis points of expansion, I think what we're trying to show is we actually expect more operating leverage in 2026 than what those numbers implied. So hopefully, that helps. I just -- I didn't reconcile that to the 40 to 50 number you were talking about. Daniel Perlin: Yes. No, that -- believe me, I'm not knocking on the 250 basis points. That's a great number. I was just referring to the incremental margin associated with that embedded for '26 versus '25, but we can have that in our follow-up call. Thank you. Jonathan Price: Okay. Operator: Thank you. There are no further questions at this time. This concludes today's call. Thank you all for attending, and you may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the Westwing Group SE Q3 2025 Earnings Call. [Operator Instructions] Now dear ladies and gentlemen, let me turn the floor over to your host, Andreas Hoerning. Andreas Hoerning: Good morning, everyone, and thank you for joining us for our earnings call on the third quarter of 2025. My name is Andreas Hoerning. I'm the CEO of Westwing. I'm hosting the call together with Sebastian Westrich, our CFO. Looking at today's agenda, I will begin by providing key updates on our business for the third quarter of 2025, after which Sebastian will share the details of Westwing's financial performance. After our investment highlight summary, we will be happy to take your questions. Let's take a look at the current state of Westwing. In Q3, we delivered growth and continued to improve profitability significantly. Our GMV increased by 5.4% year-over-year despite changes in product assortment. We improved our adjusted EBITDA by 73%, reaching EUR 6 million at an adjusted EBITDA margin of 6.1%. This marks an increase of 2.5 percentage points year-over-year. Free cash flow was positive at EUR 10 million in Q3, and we ended the third quarter with a net cash position of EUR 58 million. For the full year 2025, we expect free cash flow to be double-digit positive. Strategically, we are well on track with the implementation of our 3-step value creation plan. Our own product brand, the Westwing Collection grew 19% year-over-year, which resulted in an all-time high group GMV share of 66%. As part of our geographic expansion, we achieved our full year objective of launch in 10 new countries, and we continued our store expansion with the opening of 7 new stores this year. The operational progress is fully in line with our targets. We confirm our financial guidance for 2025 and are currently expecting the adjusted EBITDA at the upper end of this guidance. We also confirm our ambition for 2026, which is the return to a high-single to double-digit growth and further improved profitability. As always, let's have a look at our 3-step value creation plan, which we started executing in 2022. In terms of levers, we successfully completed the first 2 phases, the turnaround and strategy update phase, and the building of a scalable platform phase. 2025 marks a transition year for us, where we are focusing on the key growth levers of the third phase to be able to scale with operating leverage from 2026 onwards. As in the last earnings call, let me now briefly guide you through our progress across the key levers of the third phase of our plan, beginning with the latest developments of the Westwing Collection, then moving on to how we strengthen our market share in existing geographies, pushing the premium positioning of our brand and finally, the progress we've made in terms of international expansion. So starting with the Westwing Collection. The Westwing Collection is our gorgeous sustainable private label product brand, and we continue to be very pleased with its performance. It again delivered strong growth of 19% year-over-year, resulting in an all-time high group GMV share of 66%. This represented a total GMV of EUR 75 million in Q3. The strong development supports our top line as well as profitability since the products are very desirable and they allow us to achieve a higher contribution margin compared to third-party products. As we build Europe's premium one-stop destination for Home & Living, we're creating a unique product assortment for design lovers, consisting of our own brand, Westwing Collection and the best third-party design brands. We still have significant room for improvement on both sides. As outlined in our last earnings call, besides improvements in product assortment, we see offline store expansion as a lever for share gains in existing markets. In 2025, we opened a total of 7 offline stores. In Q3 alone, we successfully opened 3 stand-alone stores located in Munich, Berlin and Cologne as well as 2 store-in-stores, one in Dusseldorf and one in Copenhagen. Before I share an update on our geographic expansion, let me show you some impressions of our newly opened stores. In Munich, we opened a so-called warmup store. It is more than just a pop-up. It's a preview of our first permanent Munich store coming next year in the heart of the city. Munich is especially meaningful to us as it's where our journey began and where many of our central teams are based, enabling us to learn and refine the customer experience even faster. Next to Munich, we are also very proud to now have a permanent stand-alone store in Berlin. This is located on the iconic Kurfurstendamm, bringing Westwing to life in the heart of Berlin's western city center. On top, we opened our stand-alone store in Cologne, one of Germany's busiest shopping cities. Next to our stand-alone stores, we also opened 2 store-in-stores. One is located at Breuninger Dusseldorf on the prestigious Konigsallee. Following the successful pilot of our store-in-store concept in Stuttgart in 2024, we are proud to continue our partnership with Breuninger, arguably Germany's leading fashion and lifestyle department store chain. The other one is our very first store-in-store in Scandinavia at the iconic Illums Bolighus flagship store in Copenhagen. This opening marks a new milestone in our Nordics expansion following the successful launch of Westwing in Denmark, Sweden, Norway and Finland earlier this year. By partnering with Illums Bolighus, a destination known for timeless elegance and Danish design culture, we are strengthening our presence in the Nordics and connecting with a design-savvy audience in a uniquely meaningful way. Overall, offline stores help us to further strengthen brand presence, positioning and top line, providing a holistic shopping experience across the multi-touch customer journey supports Westwing's market share gains. In Home & Living, many customers combine online and offline experiences in their journey, especially for large furniture purchases. The latter mostly for the touch and feel and simply because basket sizes in furniture are often very large and require many touchpoints for conversion. On the next slide, you can see impressions of the official opening of our Berlin store, where we welcomed over 250 friends of the brand, key opinion leaders, press and content creators from the world of fashion, art, design and lifestyle. The event generated strong positive press coverage and a high volume of social content, amplifying our brand visibility. Let's move on from gaining market share in existing geographies and increasing our premium brand positioning to entering new markets. At the beginning of the year, we announced our plan to open 5 to 10 new countries in 2025. We are happy to announce that we successfully opened 10 new countries this year, reaching our full year objectives. As outlined in our last earnings call, geographic expansion allows us to offer our existing global product assortment to customers in the corresponding market segment for design lovers in other countries. This means selling more of the same products. All Continental European countries follow the same logic with low marginal costs of serving them, translation supported by AI, onboarding of last-mile delivery providers, local influencer marketing and performance marketing with attractive returns within a few months. Therefore, in the midterm, we aim to be present in approximately all European countries. We do not plan to open any additional countries until year-end as our focus is now fully on the most important season of the year in Home & Living. To provide for a glimpse into our 2025 country expansion, let me share some impressions of our Nordics launch event. At the end of August, we celebrated our Nordics launch with 200 guests, including brand partners and leading voices across fashion, design, art and lifestyle. From our styled steamboat experience to sculptural installations at the Westwing Villa, the event showcased our passion for timeless design and cultural connection. It generated extensive positive media coverage and inspired highly shareable social content across the region, achieving exceptional reach, both online and offline. This milestone marks the start of our journey in Scandinavia, bringing beautiful living to even more homes. Back to results. I now hand over to Sebastian for details on our financial performance. Sebastian Westrich: Thank you, Andreas, and good morning, everyone. I'm Sebastian Westrich, the CFO of Westwing. Let me start with details on our top line. Our GMV increased by 5.4% year-over-year, while revenue was at plus 3.4% year-over-year despite the negative impact of the changes to our product assortment. I want to highlight here again what Andreas mentioned earlier in this call. Our Westwing Collection business continued to grow by 19% year-over-year. Now let me also briefly comment on Q3 top line development on segment level. The DACH segment saw a revenue decline of 2.1%, (sic) [ 2.4% ], while the international segment's revenue increased by 10.8%. There are 2 major reasons for this difference in top line development. Firstly, we began introducing a largely global and more premium product assortment and related restructuring of our local business functions in the international segment as early as Q2 2024. The assortment offered in the DACH segment remained unchanged until late 2024. And as a result, last year's baseline for DACH is stronger than that of the international segment. Secondly, the international segment benefited from additional revenue generated by our geographic expansion with 10 new countries launched in the first 9 months of 2025. Regarding top line outlook for Q4, we remain cautious as the performance depends largely on the month of November, including the upcoming Black Friday sales events. Now let me continue with an overview of our profitability development. In Q3, we improved our adjusted EBITDA by EUR 3 million to EUR 6 million, which represents an increase of 73% year-over-year. In order to show profitability development before D&A, we have also included the EBIT development on an adjusted basis on the right side of the slide. It is also clearly positive at EUR 3 million and showed an even greater increase of EUR 4 million year-over-year. Excluding adjustments, Q3 showed a negative EBIT of minus EUR 4 million. The adjustment mainly includes the negative impact of a higher fair value of employee stock option programs due to the significant share price increase in Q3. The impact amounted to minus EUR 6 million, which was non-cash effective. It is important to highlight that we are actively reducing the number of outstanding stock options to reduce both dilution risk for our shareholders as well as negative P&L impact from potential further share price increases. Let us now take a look at our P&L margins. In the first 9 months of 2025, we realized an adjusted EBITDA margin of 7%. This is a significant improvement of 2.6 percentage points compared to the previous year's period in the absence of any scale effects. Let us now focus on the P&L development in the third quarter of 2025, which you can see here on the right-hand side. I am pleased to report that we improved our P&L structure in Q3 in almost all areas, leading to a strong improvement in adjusted EBITDA margin by 2.5 percentage points year-over-year to 6.1%. Our gross margin improved by 2.2 percentage points year-over-year, mainly due to strong Westwing Collection share gains. The fulfillment ratio improved slightly by 0.1 percentage points year-over-year. The fulfillment ratio includes negative effects from expansion as we accept lower logistics linehaul utilization from our central warehouse to the new countries in the beginning. This ensures short delivery times also for our customers in the new markets but comes at higher cost per order. With increasing scale, this negative effect will decrease. Overall, this led to an increase in contribution margin of 2.3 percentage points to 33.9%, a really strong result for our third quarter. Our marketing ratio increased slightly by 0.3 percentage points year-over-year to minus 13.4%. The main reason for the increase is our investment into expansion. Our G&A ratio, which includes other result, improved by 2.3 percentage points to minus 17.9%, reflecting the positive effects from our 2024 complexity reduction measures. This led to an adjusted EBIT margin of 2.6% in Q3, up 4.3 percentage points year-over-year. D&A decreased by 1.8 percentage points year-over-year, primarily driven by the full depreciation of legacy technology assets. Overall, as mentioned before, our Q3 adjusted EBITDA margin improved by 2.5 percentage points year-over-year to 6.1%. The adjustments made in Q3 were minor, except for the higher fair value of our stock option programs following the significant share price increase, which I mentioned before. An overview of these adjustments as well as the unadjusted consolidated income statements can be found in the appendix to this presentation and in our Q3 financial report. Let's move on to profitability on segment level. In Q3, which is displayed on the right-hand side of this slide, we saw a strong improvement in adjusted EBITDA margin in both segments. In the DACH segment, adjusted EBITDA margin improved by 3.6 percentage points year-over-year to 6%. In the International segment, we were able to improve our adjusted EBITDA margin by 1.2 percentage points year-over-year to 6.4%. The improvement in profitability reflects the successful implementation of our 3-step value creation plan across both segments. Let's also briefly look at our earnings per share development. What you can see on this slide is the last 12 months data since Q1 2024. The dark green bars showing unadjusted earnings per share, the light green bars showing earnings per share on an adjusted basis. Adjustment includes changes in fair value of the aforementioned employee stock option programs as well as restructuring expenses. We are happy to be able to show that the very positive development continued also in Q3 2025. The dent in the unadjusted earnings per share in Q3 stems again from the steep increase in Westwing share price in Q3. Let us now move from profitability to our balance sheet and take a look at our net working capital. By the end of Q3, net working capital stood at minus EUR 1 million, which is EUR 4 million higher compared to Q3 2024, but EUR 7 million lower versus the previous quarter. Compared to the previous year, we still had higher inventory, mostly driven by the newly introduced Westwing Collection items that we already mentioned in previous calls. Compared to the previous quarter, we managed to reduce inventory levels slightly despite the typical seasonal inventory buildup towards the high season, and we improved trade payables as well as contract liabilities. We expect net working capital to improve further in Q4 due to typical seasonal effects and the respective positive impact on cash flow. On the next slide, you can see CapEx and CapEx ratio for the first 9 months as well as for the third quarter of 2025 compared to the same period in 2024. CapEx remained broadly stable year-over-year in 2025, both for the first 9 months and in Q3 specifically. However, when comparing 2025 to 2024, we see a shift between investments into property, plant and equipment and intangible assets. While in 2025, we invested more into store openings, we were able to reduce CapEx for internally developed tech assets as we move to a SaaS-based tech platform. Let us now take a look at our net cash position. We are pleased to report a strong net cash position of EUR 58 million at the end of September, which is EUR 8 million more compared to the end of June. Overall, free cash flow was at EUR 10 million in Q3. Taking lease payments of EUR 3 million into account, we had a positive free cash flow after lease payments of EUR 8 million in Q3. Our balance sheet remains strong with no debt other than the IFRS 16 lease obligations and IFRS 2 liabilities from cash settled stock option programs. We remain confident to enable double-digit free cash flow for the full year 2025, driven by both profitability and net working capital. Given our seasonality, Q4 is expected to be the strongest quarter. On the next slide, I'll comment on the financial guidance for 2025, which we published at the end of March. Our performance in the third quarter and the first 9 months of 2025 in terms of both revenue and profitability is fully in line with our guidance. In terms of top line, we had, as expected, headwinds from our changes in the product assortment. These negative effects are expected to ease further towards the end of 2025. But as mentioned earlier, top line in Q4 depends largely on a successful November and the Black Friday sales event. In terms of profitability, we expect a typical seasonal peak in the upcoming fourth quarter. To summarize, we are well on track to deliver on our 2025 guidance in terms of revenue and profitability and also in terms of a clearly positive double-digit free cash flow. Given the strong performance in the first 9 months with an adjusted EBITDA margin of 7% so far, we currently expect to end the year at the upper end of the adjusted EBITDA guidance. This brings me to our midterm outlook, which was shared for the first time in our full year 2024 earnings call. I want to highlight again that our ambition is to return to significant growth in 2026 while continuously improving profitability. Significant growth means a high-single to double-digit growth rate driven by our expansion initiatives and the anticipated easing of negative impacts from the product assortment changes. In terms of profitability, we expect scale effects as we grow, as well as positive effects from our improved product assortment. We remain focused on executing our 3-step value creation plan with a clear goal of driving sustained improvements in profitability and cash flow. Combined with our return to meaningful growth, this will enable us to unlock the full value potential of Westwing. I'm handing over to Andreas now to conclude our presentation with our investment highlights. Andreas Hoerning: Thank you, Sebastian. Let me briefly recap the investment highlights. First, we have a unique relevant customer value proposition through the specific assortment and the way we serve our customers. Second, the market potential is huge, especially in our existing geographies, but also beyond. Third, we are developing the superbrand in design with high loyalty and true potential to grow further. Fourth, we have high and increasing margins as well as operating leverage while we scale. Fifth, we have a great balance sheet with a strong cash position and no debt, strong net working capital and low CapEx. All of this will lead us in the midterm to 10% plus adjusted EBITDA with a continued strong cash conversion. Sebastian and I are now happy to take your questions. Operator: [Operator Instructions] And we already have one person who wants to ask a question, this would be Volker Bosse from Baader Bank. Volker Bosse: Volker Bosse from Baader Bank speaking. So first of all, of course, great results and congratulations, especially that you are able to specify your guidance to the upper end in this challenging times, very an outstanding achievement. Perfect. I would have 3 questions, if I may, starting with your still decline in orders and number of active customers year-over-year. So how do you see the momentum evolving? Do you see an improving momentum, means is the worst triggered by the transformation process is behind you, so to say? I mean, your outlook on the forward-looking on these 2 KPIs, please, would be the first question. Second question is on your country expansion. Yes, great to hear that you achieved also here the upper end of your given guidance range, so to say, 5 to 10, so 10 new countries. Can you already share initial developments in the new countries? I think Portugal is most advanced as it was the first country which you opened. How do you see the acquisition of new customers and incremental sales is progressing here or in other countries? Perhaps you have first thoughts already for us on that. And the third question would be on the new physical stores, which you opened. Do you see here an increased online activity be it in click rates or be it in sales in the catchment areas of the stores. So do you have this granularity of data on hand to share basically the stores do what they are supposed to do, meaning drive sales and brand attention? Andreas Hoerning: Thank you, Volker, for your questions. And also, thank you for the congrats. We're also pleased about the development of the EBITDA. So the first question was related to decline in orders and number of customers, and your question was how this will be evolving, whether the worst is already over? So generally spoken, the decline in order and number of customers is expected to ease in the same way as the negative GMV effect from the change in product assortment is also expected to ease. And we did this in a phased approach. So first, we changed the product assortments quite heavily in -- especially in Italy and Spain, where we also closed offices and warehouses and went from a local -- very local assortment to a global assortment. And there, we saw a pretty steep decline in number of customers simply because the offering that we had there beforehand to customers was different to the one that we have today, and the churn in customers was quite significant. This has already eased in those countries quite significantly. We're actually happy with the development now. And then the subsequent development was that we also changed the product assortment in our larger markets, Germany and also CEE. By the way, so DACH and CEE a bit later. And this effect we are seeing this year this is also why we were so cautious with our guidance on top line this year. And at the moment, we are fully in line with that. And it stems from exactly your point, the number of orders and number of customers, it is the same reason. You can also see that in the increase in average order value that we are reporting because there you can see that with the shift from a more impulse buying and smaller products to more Westwing Collection and more furniture, we see a strong growth in average order value and the decline of the number of orders and number of customers as it eased in Italy and Spain, it is also easing in Germany or in DACH and in CEE. So we can expect that the worst is over, as you say. And into next year, we actually expect a much, much lower effect of that, if even any. I hope that answers your question number one. Number two was on country expansion. You were asking about the development here. So as you rightly said, Portugal was the first one. And when we look now at the countries that we opened this year, so the 10 new countries, we, of course, compare the development of those to the one that we saw in Portugal in the first months and quarters. And we're actually very pleased with the development. It's in line with what we saw in Portugal. We see new customer growth there. Everything that we report from there is obviously incremental. That's the beauty of opening new countries. And our kind of the first results in terms of absolute numbers that we won't share now. Next year, I think we will give a bit more indication because it's very early still. But when you look at the absolute numbers, we're actually really happy with what we see in Sweden, in Denmark, in Norway and in Croatia also. Despite Norway and Croatia actually being relatively small markets, but we see really nice developments there. We'll give more updates throughout next year when the numbers become more meaningful, because at the moment, though we are happy, the relation to our overall GMV is, of course, still very small. So that was the second question on country expansion. And the third one was on the physical locations on our stores. And here, you asked whether we see besides the top line that we make in the stores, whether we also see an increased online activity in the catchment areas, and that's exactly the case. We don't share any numbers on the online catchment area uplift also for the reason that we don't have an A/B test in place. What we do is we compare catchment areas with stores against the catchment areas without stores. And there, we can see a significant effect of the stores. But of course, it's not 100% proof of this effect. But for instance, when we had Hamburg and Stuttgart as the only stores in Germany, those 2 catchment areas were the best performing in the whole of Germany. The reason behind this is, obviously, what you also pointed towards is that we have sales in the stores themselves. And then we also have the effect that is what we call also a marketing effect. So when people walk past our stores, it's like a billboard that's out there or even when they walk into the store and they have a look at products, they don't necessarily decide straightaway to convert to a buyer. That often happens only after their visit to the store. We have found that, for instance, when customers decide to buy a sofa, there are roughly 30 touchpoints involved between the first -- very first one and the purchase in the end. So these are many, many online touch points and increasingly so also our offline touchpoints. But this explains why we see this catchment area uplift in the cities where we have the stores. So it's absolutely positive. I can confirm what you said, Volker. Does that answer your 3 questions? Volker Bosse: Yes. And I would have a follow-up, more general remark on your Page 23, you give an indication on '26 already, very much appreciated. On market, you have a stable or a flat arrow, so to say, or how to say. I mean the question is for -- do you see any -- do you see no market tailwind, but also no market headwinds for next year? So what is your general assumption behind your '26 guidance in regards to what is the market providing? Andreas Hoerning: Thanks Volker. Your question on market development, how we see that in 2026, I'm handing over to Sebastian. Sebastian Westrich: Volker, thanks for your question on our view on the overall market development. So we expect overall no tailwind from overall consumer sentiment and market growth. But of course, there will be regional differences. So there are some areas within Europe, CEE, for example, where I think the overall conditions are more promising compared to what we see, for example, in the DACH segment where when you look at consumer sentiment indicators, there is no real improvement. And that is why we remain cautious. And our outlook or ambition for 2026, as we already mentioned in earlier calls, is based on our strength and executing our 3-step value creation plan with the share gains in existing markets and the expansion to new countries. And so far, we feel very confident to achieve those targets based on the financial and operational progress that we achieved so far in 2025. Operator: Next question comes from Jose Antonio Perez Parada from NuWays AG. Jose Antonio Perez Parada: Congratulations again on the strong quarter. I would like to ask for -- I have a couple of questions, if that's okay, I will just land them. The first of them is if has anything changed regarding the capital allocation over the quarter or if there's anything it's important to know for the near future? The second question will be that we already understand or we see that there will be no further geographic expansions in the rest of 2025. But could you give us any notion on the direction of the geographic expansion in 2026, maybe towards any region? That's another one. And the third one is that, you told us earlier that fulfillment ratio included some negative effects from expansion. So I would like to ask you again, if you could please guide me through the underlying dynamic again. Sebastien clearly mentioned something about the centralized distribution center in Poland, but I would like to grab the logic again. That would be it. Andreas Hoerning: Thank you, Antonio, for your questions. I'm going to hand over to Sebastian for the questions on the change to -- on the capital allocation and on the fulfillment ratio. And before I do that, I'll just briefly comment on your question on expansion. So you were wondering what the expansion in 2026 might look like. We're not going to share any specifics, but our general ambition is to be present in nearly all countries in Europe. And this also includes Great Britain, but of course, Great Britain is a bit more complex because it's not in the EU, and it also requires a bit more complex logistics setup. So we will likely expand also geographically in 2026, and we'll share more details on that when the time is right to do it. Jose Antonio Perez Parada: That clearly answers my question. Andreas Hoerning: And I hand over to Sebastian for capital allocation and fulfillment. Sebastian Westrich: Okay. Yes. Thanks a lot for your question. Let me start with the fulfillment question related to our expansion countries. So linehaul means the trucks that we send from our central logistics center in Poland, for example, to Portugal, and for new markets, we decided to already send those trucks even though they might not be fully utilized. So that means, of course, that the cost per item that we ship is higher, but this allows us to ensure better shipping times for our customers. So we accept the higher costs for a better customer experience. As we scale those new countries, Portugal, Nordics, et cetera, of course, also then the utilization of those trucks improves. So the cost should go down. And this is the effect that we briefly mentioned earlier. Andreas Hoerning: And it's also the effect that we are seeing in Portugal because there we already have significant volumes. We also combine this with Spain. So in Portugal, we actually see a very low logistics costs. And the same will happen to, for instance, the Nordics region, because there we are also able to combine certain shipments. Sebastian Westrich: Then on your question on the capital allocation strategy, and if anything changed over the quarter. So no, our capital allocation priorities remain disciplined and focused on long-term value creation, of course. So in line with this approach, we have demonstrated our commitment to shareholder value already in the past when we performed some share buybacks. And we may consider further measures going forward, but this, of course, is subject to market conditions and also regulatory requirements. So overall, no change to our capital allocation strategy. Jose Antonio Perez Parada: Again congratulations on the strong quarter and lots of success for the closing of the year and the upcoming holiday season. Andreas Hoerning: Thank you so much, Jose. Operator: At the moment, there seem to be no further questions. [Operator Instructions] Once again, Jose Antonio, please state your question. Jose Antonio Perez Parada: Thank you very much. Just taking advantage of the final question. You already answered some of the question to Volker. But we understand the underlying dynamic of the customer and orders. However, if I could have a little bit more color on the underlying dynamics of customer number and number of orders, given that they decreased, for example, our expectation of number of customers was lower and the expectation of orders was a little bit lower as well. So how does it look like going forward? Or what can we expect? Sebastian Westrich: Jose, thank you for your question. Let me better understand. So the -- you want to have -- you would like to have an outlook on the development of this in the future in more specifics. Is this what you would like to have? Jose Antonio Perez Parada: Yes, that would be perfect. I fully understand the dynamic behind it that we are expecting less customers, less orders due to the less impulse buy from smaller ticket items. But how does it in general look like going forward? Or what can we expect in -- Sebastian Westrich: Yes. So what we absolutely see for the future is that we will return to active customer growth and also to the growth of the number of orders. So this is absolutely the plan, not just from the expansion countries where we, obviously, see every customer that we gain there is a new customer, right, but also for the existing markets. So we have a clear commitment also to share gains in existing markets. And this, in the end, we cannot do without also active customer growth. We believe that a better assortment, better marketing and last but not least, also our physical presence, for instance, in Germany, will drive this. And actually, we see the beginning of this. So the stores enable us also to convince our customers that we previously weren't able to convince maybe because they required an offline step in their journey to actually then purchase with us. And as we came from 9 off-line stores, for instance -- from -- sorry, 2 offline stores at the beginning of this year and are now at 9, you can imagine that the full year effect can only be seen next year and actually in the years to come because the store has a certain trajectory of the first 3, 4 years of its existence. It needs to establish itself, if you like, in a city. So this is actually one important reason why we believe that also in the existing geographies, we will be increasing the number of active customers. It's a matter of time. We believe that next year, so we're not going to give a guidance on this, but we believe that next year we'll look a lot more positive than this year due to the easing of the effect that you also mentioned beforehand and the growing effects from our expansion measures plus stores. So no specific -- we don't have a specific forecast here, but you can expect that this significantly improves. And absolutely, our commitment is to going back to increasing number of active customers and orders. Operator: [Operator Instructions] And for some final words, I would like to hand over back to the management. Andreas Hoerning: Thank you. As we haven't received any additional questions, we're ending today's earnings call. Thank you for joining, and goodbye.
Operator: Good morning, ladies and gentlemen. Welcome to Minerva Foods Earnings Video Conference for the Third Quarter of 2025. Joining us today are Mr. Fernando Galletti de Queiroz, CEO; and Mr. Edison Ticle, CFO and CRO. Please note that this presentation is being recorded and translated simultaneously. To listen to the translation, click the interpretation button. For those listening to the conference in English, you may mute the original audio by selecting mute original audio. The presentation is also available for download at ri.minervfoods.com/en under Presentations. [Operator Instructions] Please note that any forward-looking statements made during this conference regarding Minerva's business outlook, operational and financial targets consist of projections made by the company's Executive Board and are subject to risks and uncertainties. Investors should be aware that political, macroeconomic and other operational factors may affect the company's future performance and lead to results that differ materially from those expressed in such forward-looking statements. To start the Q3 2025 earnings video conference, I will now hand it over to Mr. Fernando Queiroz, CEO. Please go ahead. Fernando De Queiroz: Good morning, everyone. Thank you for joining Minerva Foods Q3 2025 Earnings Release Call. Minerva ended the third quarter of 2025 with a solid set of operational and financial results, reaffirming the consistency and discipline in the execution of our business strategy. Once again our company has shown that geographic diversification is a key pillar of the operational and commercial execution of our business model, reducing risk and maximizing our arbitration capacity while strengthening our corporate strategy as South America's largest beef exporter. In Q3 2025, we posted record gross revenue of BRL 16.3 billion and record EBITDA of BRL 1.4 billion with an EBITDA margin of 8.9%. In the 12 months ended in September, gross revenue also reached a record high of approximately BRL 54.4 billion and EBITDA totaled BRL 4.6 billion, the highest ever for the company over a 12-month period. In the third quarter of 2025, we successfully completed the integration of our newly acquired assets, which was originally scheduled to conclude only at the end of the year. This early completion reflects our operational efficiency and the strong commitment of our teams in capturing and materializing the expected synergies. The integration process was conducted in a very structured manner in alignment with our organizational structure enabling the consolidation of our management model and the standardization of our administrative, industrial, commercial and financial processes. Therefore, we reached a new level of revenue and operating performance setting historical records that reinforce the strength of our strategy and the resilience of our business model. Edison will dive into the performance of the new assets over this nearly 1-year integration period. Let's now return to our Q3 2025 performance. Starting with gross revenue, as I mentioned earlier, we reached BRL 16.3 billion in the third quarter and BRL 54.4 billion in the last 12 months, both record highs for the company. Exports accounted for 61% of consolidated gross revenue in the quarter and 58% in the last 12 months ending in September. These results reinforce the importance of exports as one of Minerva Foods main operational drivers and once again demonstrate our arbitration between markets and efficiently access a broad range of destinations through our South American production platform. In addition to the foreign market, it is worth highlighting that our domestic operations also benefit from origin-based arbitration allowing us to optimize margins and maximize profitability. Minerva Foods' geographic diversification, which integrates units across several South American countries, significantly enhances our operational flexibility. A good example is our Paraguay operation; which in addition to supplying key markets such as the U.S., Chile and Taiwan; also supports Brazilian domestic demand in a competitive and efficient manner reinforcing regional integration and complementary operations between our production platforms. This stresses the soundness of our business model and the company's ability to capture value both in foreign and domestic markets. Turning now to our operational profitability. Third quarter EBITDA also reached a record level of BRL 1.4 billion with an EBITDA margin of 8.9%. In the last 12 months, our adjusted EBITDA was BRL 4.7 billion, a record for a 12-month period, resulting in a margin of 9%. Net income for Q3 2025 was BRL 120 million bringing the 9-month year-to-date total to approximately BRL 763 million. Finally, regarding our capital structure and considering the pro forma 1-month performance of the new assets, we ended the quarter with a significant reduction in net leverage, which reached 2.5x net debt over EBITDA, the lowest level since 2022. This result is in line with our continued commitment to improving the company's capital structure and reinforces the financial discipline guiding our management. Also regarding our balance sheet, in the third quarter we maintained a solid cash position of BRL 14.9 billion. Edison will later go into more detail about financial performance. Continuing with the highlights of the quarter. In another financial liability management initiative, we carried out the 17th debenture issuance totaling BRL 2 billion, reinforcing our cash position and contributing to the ongoing improvement of our capital structure. We also had the subscription warrants arising from the capital increase totaling BRL 30 million between July and September. It is worth noting that there are still BRL 187.5 million subscription warrants outstanding representing BRL 969.3 million, which should help the company's cash flow over the coming years. Finally, we continued our financial liability management strategy and yesterday, we announced the repurchase and effective cancellation of BRL 76 million related to the 2031 bonds. In total, throughout 2025, the company bought back and canceled approximately BRL 385 million totaling BRL 2.3 billion related to the 2028 and 2031 bonds, an initiative that reinforces our commitment to a more balanced and efficient capital structure, reducing financial costs and strengthening the balance sheet's flexibility. Now regarding our sustainability highlights. We recently published our 14th sustainability report referring to fiscal year 2024. This report confirmed by independent auditors and aligned with key international standards reflects Minerva Foods commitments to the ESG agenda and the creation of sustainable value throughout our chain. It consolidates our progress and results from the past year reinforcing the integration of sustainability into our business strategy and into the company's day-to-day decisions. We also released the Animal Welfare Report, a document that includes data from our global operations, including the supply chain of animals and third-party's raw materials of animal origin. The report highlights policies, procedures and progress towards the goals set as part of our commitment to the topic. For traceability, we achieved 100% compliance in the socioenvironmental audit of cattle purchases in our operations in Paraguay for the sixth consecutive year, which demonstrates our leading position in traceability. Under the Renove program, we consolidated progress in implementing low carbon and carbon-neutral protocols at locations in Brazil, Uruguay and Paraguay with support from external audits to verify the carbon balance at each facility. We also made progress with our subsidiary, MyCarbon, achieving significant developments in carbon credit generation and trading projects with new partnerships and more than 145,700 hectares where we had detailed diagnostics of agricultural practices assessing the potential and opportunities for carbon project development. On Slide 4, we'll discuss our performance by origin. At the top of the slide, we have a breakdown of gross revenue by destination. Asia led accounting for 28% of gross revenue with China standing out at 17%. Next comes NAFTA, which represents 25% of our revenue for this period led by the U.S. with 21%. It's worth noting that this high share of U.S. revenue is mainly due to the impact of stock sales directed to the North American market in previous quarters. Following that, we have the Americas accounting for 24% of gross revenue with Brazil at 17% and Chile at 6%. I'd also like to highlight the importance of the domestic market, which maintains a consistent share in our revenue mix. The continued strengthening of our brand and expanded market penetration in Brazil have helped to reinforce our presence among consumers and support the sustainable growth of our local operations. In the lower left, we show export performance for our beef operations during the third quarter of 2025. Asia was the main destination accounting for 45% of export revenue for the quarter with China alone responsible for 36%. NAFTA comes next with a 14% share. Following that, the Middle East accounted for 11%; the European Union, the Americas and the community of independent states; and Africa contributed 3% of total exports. Looking now at the last 12 months ending in Q3 2025. Asia remained the top destination with 33% of exports. China accounted for 25% of that. NAFTA was second with 29% led by the U.S. at 23%. The Americas accounted for 12% of exports followed by the Middle East at 9%, the European Union at 8%, Eastern Europe at 7% and Africa with 2%. On the right side, we show the exports of our lamb operations in Australia and Chile. In the third quarter, NAFTA remained the main destination with a 43% share driven largely by the U.S., which alone represented 42%. Asia came next with 27%, Europe at 19% and the Middle East at 6% of quarterly exports. In the last 12 months ending in 3Q 2025, we had a similar picture. NAFTA led with 44% of exports followed by Asia with 25%, Europe with 17% and the Middle East with 7%. Let's now look at our revenue performance. The international market remained the main driver of our performance. Exports accounted for almost 70% of gross revenue in the third quarter and 64% in the last 12 months excluding the other category. Looking at a breakdown by operation. Brazil exported 68% of its production in the quarter and 59% in the last 12 months ending in the third quarter. In the LatAm operations excluding Brazil, the export rate was even higher, 71% both in the quarter and in the year-to-date 12-month period. For lamb operations in Australia and Chile, we had a similar scenario. Exports accounted for 65% of gross revenue in the quarter and 73% over the last 12 months. On the right hand side, we show gross revenue by origin. Brazil due to its strong cattle availability continues to be the main operational driver contributing 62% of gross revenue in the quarter and 55% in the last 12 months. Next are Paraguay and Uruguay, both at 10% in the quarter. In the last 12 months, Paraguay contributed 12% and Uruguay 9%. Argentina accounted for 7% in the quarter and 10% in the last 12 months. Australia contributed 3% in the quarter and 5% in the last 12 months. And Colombia had a share of 3% in the quarter and over the past 12 months. Lastly, the other category linked to our trading division represented 5% of revenue in the quarter and 6% in the last 12 months. Before diving deeper into the financial highlights, I'd like to emphasize how optimistic we are regarding the end of 2025 and the opportunities emerging in the global animal protein market. The ongoing imbalance between supply and demand continues to create a favorable environment for South American beef exporters. As we've highlighted in recent quarters, this scenario is mainly the result of supply constraints due to the cattle cycle in key producing regions. While South America continues to expand production and export volumes, other relevant markets faced supply constraints in the face of still resilient domestic demand. This dynamic has supported high price levels and driven increased imports, especially those originating from our continent. In China, the third quarter was marked by strong import volumes driven both by preparations for the Chinese New Year and the local cattle cycle, which is beginning to constrain domestic beef production and, as a result, is creating more space for international products. As we've been discussing, the U.S. market remains constrained with a still depleted herd and a clear impact on domestic beef output, a scenario that's expected to remain existing for the coming years. More recently, Europe has also begun to feel the effects of the global beef supply imbalance with major producers in the region such as France, Germany, Ireland and Poland beginning to experience herd and production challenges, which is already starting to reflect in export dynamics. The global beef demand environment remains positive even in the face of political uncertainty, creating favorable prospects for exporters from our continent. In this sense, Minerva Foods stands out for its strong arbitration ability between markets reinforcing our competitive positioning amid this highly volatile environment. Lastly, before handing things over, I'd like to underscore that our geographic diversification strategy continues to be one of Minerva Foods' greatest strengths. It allows us to mitigate risks, respond quickly to market shifts and maintain competitiveness even in a challenging global landscape. This strategic resilience supports the consistency of our results and reinforces our long-term vision, a vision in which we believe it's entirely possible to combine large-scale production with environmental preservation, technological innovation and social value generation. I'll now turn it over to Edison to walk us through this quarter's financial highlights. Edison de Andrade Melo e Souza Filho: Thank you, Fernando. Let's move on to Slide 6 where I will discuss the performance of the newly acquired assets. In line with our commitment to provide greater transparency regarding the performance of the newly acquired assets, since Q4 '24 we've been presenting a breakdown of volume and revenue between Minerva's legacy and newly acquired assets. This quarter Brazil once again stands out as the main highlight with a consolidated revenue of BRL 10 billion, of which BRL 3.6 billion came from the new assets. In Argentina, consolidated gross revenue was BRL 1.2 billion with the new plants contributing with BRL 278 million. While in Chile, the new sheep processing facility in Patagonia posted a revenue of BRL 31.1 million and other countries have maintained a regular course of their operations as no changes have occurred in their asset base. Consolidating all of our origins, we reached a total gross revenue of BRL 16.3 billion in Q3, up 80%; of which BRL 11.5 billion refers to Minerva Foods legacy assets and BRL 4 billion to the new assets. As Fernando highlighted at the beginning of the presentation, in Q3 '25 we successfully completed the integration process ahead of schedule. We initially expected the process to last 15 to 18 months, but we have managed to conclude it in less than a year. It's worth emphasizing that completing this phase ahead of schedule reflects the quality of the strategic plan we implemented, which enabled us to follow a clear road map with well-defined milestones, properly mapped risks, which naturally contributed to the company's ability to accelerate its deleveraging process. Let's now move on to Slide 7 for a closer look at the performance of the new assets. For today's call, we've prepared a new slide highlighting metrics on the normalized performance of the new assets. In other words, after the completion of the integration process. On the left hand side, you can see the results for the past 4 quarters of the new assets. Operations in Brazil reached a gross revenue of BRL 3.6 billion in Q3 and BRL 8.2 billion LTM. In Argentina, BRL 278 million in the quarter and BRL 914 million LTM. And in Chile, BRL 31 million in the quarter and BRL 82 million LTM. So altogether, the new assets contributed with BRL 3.9 billion in gross revenue in Q3 '25 and BRL 9.2 billion in the last 12 months. As Fernando mentioned earlier, this quarter marked the completion of the integration process with September being the first month in which the new assets operated under normalized conditions, that is operational and financial indicators that are in line with our historical base. Therefore, the fourth quarter '25 will be the first fully normalized quarter post integration with no plant ramp-ups and adequate sales mix and no further working capital needed or investment needs related to the new assets. With that in mind, we carried out an exercise to assess the expected performance of the new assets in Q3 '25 under normalized operating conditions. In other words, with the full integration and normalized operations. As a result, net revenue from the new assets would reach approximately BRL 4.3 billion. In other words, and also following the same concept of completed integration, annualized performance would have reached close to BRL 17.2 billion as shown in the table in the bottom right hand corner. As you know, Minerva Foods has historically delivered an EBITDA margin of around 9%, which was a rough average of the last 10 to 12 years. So using that same level of margin, which I consider to be very conservative because it doesn't consider the post-integration synergies. The idea is to have a conservative and intelligible reference so that you can understand the level of performance we can expect from the new assets now that we have completed the integration. So if we use the EBITDA margin historical level of 9%, that means we're talking about BRL 388 million coming from the new assets or roughly BRL 1.6 billion worth of EBITDA on an annualized basis, slightly above our initial EBITDA expectations. You may recall that when we announced the acquisition back in '23, our expectation was that the new assets would generate about BRL 1.5 billion in EBITDA including the Uruguayan operations which, as you know, were not approved by the regulators and therefore, not part of the current pro forma. So given these numbers, I'd like to draw your attention to how much was paid for this acquisition. There was so much controversy, so much debate in the last 24 months. Many people said it was expensive. But now in light of the asset's performance, it looks to me like this metric has become even more attractive. So we conducted a couple of analysis to illustrate this point. The first is the contractual value of the assets so what was on the contract; in other words, BRL 1.5 billion as an initial down payment and the remaining BRL 5.3 billion upon completion and final payment in October '24. So if we consider BRL 6.8 billion as the total value of assets, the acquisition multiple was 4.4x EBITDA. We can also try a more conservative approach and consider the cash impact of the acquisition. So the firm value of these new assets reflects not only the amounts that were on the contract, which were BRL 6.8 billion, but also additional disbursements with interest and working capital adjustments, which were worth about BRL 350 million, which adds up to BRL 7.1 billion in firm value. So the transaction multiple in conservative terms would be about 4.6x EBITDA. Historically, Minerva Foods multiple has traded at around 5x to 5.5x firm value over EBITDA. So it seems obvious that even from a purely financial standpoint if we don't consider the strategic side of the acquisition, it was a very attractive acquisition, which is accretive to the company given the evident discount to Minerva's historical multiple and what was paid in these 2 scenarios I've just shared with you. It's also important to emphasize that given the complexity of our sector and the size of this acquisition, this also includes other value generation strategic drives like capturing synergies over time, which further enhance performance and bring the acquisition multiple even further down and it will make the acquisition even more attractive. In summary, the acquisition of the new assets is not only financially accretive and positive, but also a strategic milestone that reinforces our leadership position and significantly expands our market arbitrage capacity. We're very optimistic about the future and we're confident that the synergies among our operations and the successful integration of these assets will continue to generate substantial value and sustainable growth for the companies over years to come. Let's now return to the results discussion and move on to Slide 8 to discuss net revenue and EBITDA. Starting with net revenue, it reached BRL 15.5 billion in Q3 '25, once again marking an all-time record for a single quarter. That's an 82% growth year-on-year and 11% compared to the previous quarter. Over the last 12 months ending in September, net revenue totaled BRL 51.3 billion, also the highest annualized figure ever recorded by the company. It's worth noting that we are already within the '25 net revenue guidance, which we announced earlier this year, which ranges between BRL 50 billion to BRL 58 billion in net revenue for the full year of '25. Turning now to profitability. EBITDA in Q3 '25 reached BRL 1.4 billion, the highest ever achieved in a single quarter, which accounts for a 71% increase year-on-year and 7% quarter-on-quarter with an EBITDA margin of 8.9%. I'd like to highlight once again the excellence in operational and financial execution consistently demonstrated by Minerva Foods over recent quarters even in light of such a highly complex and volatile global environment. Over the last 12 months, consolidated EBITDA including the pro forma effect of 1 month of the new assets totaled BRL 4.7 billion. Once again let me highlight that we delivered solid operational performance and profitability consistent with our historical levels, a direct result of robustness of our business model; specifically the benefits of our geographic diversification strategy, arbitration which are critical to our resilience and operational and financial performance especially amid the recent volatility. Now let's move on to Slide 9 to discuss financial leverage. We ended the quarter with a significant improvement in net leverage, which declined from 3.16x to 2.5x net debt over EBITDA last 12 months. This result reflects 2 key factors. First, our consistently solid operational performance with EBITDA reaching record levels both in the quarter and year-to-date, which is the result of not only favorable global beef market conditions, but also the successful integration and contribution of the new assets, which scaled up revenue and EBITDA while enabling the capture of synergies and greater operational efficiency as well as cost dilution. As a direct consequence, we also had the leverage and the generation of free cash flow in Q3 '25, which made a significant contribution to reducing our debt and reaffirmed our focus on financial discipline and our ability to convert results into cash. Combined, these factors underscore the company's commitment to operational efficiency, financial discipline and long-term value creation for shareholders. Our deleveraging trajectory reaffirms the strength of our balance sheet and the soundness of our capital structure, increasingly more balanced and sustainable. Now let's move on to the next slide to discuss net income and operating cash flow. We posted a net income of BRL 120 million for the quarter and year-to-date it's already reached BRL 763.3 million over the last 12 months reflecting the noncash impact of foreign exchange variation at the end of '24. Net income remains negative at BRL 804 million. On the right hand side of the slide, you can see the operating cash flow for the quarter, which was positive BRL 3.4 billion while the last 12 months totaled approximately BRL 6.3 billion in operating cash generation. Now on Slide 11, we're going to discuss one of our main priorities, which is free cash flow generation, which was a key highlight of Q3 '25. Building up Q3 '25's cash flow, we start from a record EBITDA of BRL 1.4 billion. Next, we released working capital worth BRL 2.5 billion in the period driven mainly by the reduction of inventories, particularly those associated with the U.S. and which accounted for BRL 1.6 billion released from the total. Additionally, the accounts payable line contributed approximately BRL 625 billion back to cash in line with the normal progress of the company's operating volumes and the growth of company's operations. As we mentioned last quarter, maintaining inventory in U.S. territory was part of our tactical strategy, which proved highly successful. Given the country's current tariff policy, volumes already imported were not subject to the full taxes, which directly benefited revenue and strengthened Minerva's competitiveness in the local market. Continuing with the cash flow buildup, CapEx totaled approximately BRL 340 million and focused mainly on maintenance investments and organic expansion projects. Cash-based financial expenses were negative BRL 609 million while cash-based derivative results consumed about -- which is basically hedge and debt indexes and consumed roughly BRL 517 million, which is a result of the mark-to-market effect on the hedge positions. As a result, we ended the quarter with a positive free cash flow of BRL 2.5 billion, the highest ever recorded in a single quarter. Looking at the last 12 months, free cash flow was also positive at BRL 2.9 billion. We started with an EBITDA of BRL 4.6 billion, CapEx of BRL 1 billion and release of working capital of approximately BRL 2.2 billion last 12 months. Cash-based financial expenses were negative at around BRL 2.8 billion. Adding up these effects, it gives us BRL 2.9 billion positive free cash flow for 2025. These results clearly demonstrate the consistency of Minerva Foods operational and financial performance with an accumulated free cash generation of approximately BRL 11 billion since 2018. This track record underscores the company's financial discipline and its strong ability to convert operating results into tangible free cash generation. Now on Slide 12, we review the bridge of our net debt. At the end of the previous quarter, net debt totaled BRL 14.2 billion. Now looking at the debt bridge in Q3, we have a positive free cash flow of BRL 2.5 billion, which contributed to debt reduction. Foreign exchange variation also decreased indebtedness in about BRL 139 million and about BRL 263 million related to noncash derivatives, which increased the debt and the impact of BRL 30 million from having exercised the subscription warrants this quarter and which naturally reduced the net debt. As a result, net debt stood at BRL 11.8 billion at the end of the period, down 17% from the previous quarter. Let's now turn to the next slide to discuss the company's capital structure. As mentioned earlier, net leverage measured by net debt over adjusted EBITDA stood at 2.5x at the end of the quarter, the lowest since 2022. Keeping our conservative cash management approach, we ended the third quarter with a comfortable cash position of BRL 14.9 billion and a debt duration of approximately 4.2 years with about 83% of total indebtedness in the long term as shown in the amortization schedule at the bottom of the slide. Regarding our debt profile, approximately 67% of the total debt is exposed to foreign exchange variation. And let me remind everyone again that Minerva's strict hedging policy currently requires the company to maintain at least 50% of long-term FX exposure hedged. In July, we completed our 17th debenture issuance totaling BRL 2 billion across 4 series with proceeds primarily allocated to debt buyback operations. In line with our liability management strategy, yesterday we announced the repurchase and cancellation of part of the 2031 bond amounting to approximately USD 76 million bringing total repurchases and cancellations in 2025 to approximately USD 385 million or BRL 2.3 billion. This is yet another step towards achieving a more balanced and cost efficient capital structure. In August, we also completed the capital reduction process to absorb accumulated losses from '24, which effectively cleans up the company's balance sheet and creates room to comply with our dividend policy come year-end. Finally, as previously mentioned, in Q3 '25 we exercised stock warrants arising from the capital increase totaling BRL 30 million with approximately BRL 969 million still available to exercise through 2028, which will naturally have a positive impact on the company's cash position and indebtedness. To conclude, I'd like to thank the entire Minerva Foods team for their tremendous efforts and dedication during this crucial integration period, always acting with great focus and in line with our management model. We'll continue to work on continuous improvement and the pursuit of opportunities in the global beef protein market. We are confident in our strategy and long-term business. I'll turn it over to the operator so we can start the Q&A session. Thank you very much. Operator: [Operator Instructions] Our first question is from Gustavo Troyano, Itau BBA. Gustavo Troyano: First, I would like to go back to the EBITDA margin in the quarter. I'd love to understand the consequences of this margin moving ahead. We know that in this quarter, you had accelerated inventory selling in the U.S. in these 3 months. So this may have an impact on the gross margin for the quarter. How much has the inventory sale added to the gross margin in this quarter? Along the same lines when we think about accelerating inventory sales in the U.S., I'd like to understand its impact on the SG&A because we saw bigger reductions than what we expected. So I'd love to understand that moving ahead since now we should see a lack of acceleration for that in the U.S. Secondly, I have a question about cash generation, which was the highlight for this quarter. I'd love to pick your brain on what you expect for the full year. We were saying that depending on the sale of inventory in the U.S., for 2025 we should see BRL 1.5 billion approximately according to our conversations. Do you expect this after this quarter? Are you expecting BRL 1.5 billion in working capital for this year or is there a new variable that changes our expectations for the whole year of 2025? Edison de Andrade Melo e Souza Filho: We'll try to answer everything briefly. For the gross margin, we don't have further comments. The gross margin is worse this quarter because of the price increases in cattle. Compared to the previous quarter, the average price went up by almost 25% in average. So it is only natural for us to see a worse gross margin. However, we should focus on the gain in scale. In spite of the gross margin, we had even better dilution. When it comes to costs and SG&A expenses, we were a little bit under 10% of our net revenue. It was around 14%. We believe that 10% is an optimal level moving forward. Of course we had sales that were above average from our inventory, which helped increase revenue and dilute costs. But in a more normalized scenario, our SG&A should be around 10%. So I don't have any further comments regarding the gross margin. Moving forward, prices are relatively stable. Cattle prices are a little bit higher. So looking forward when we think about the gross margin in our weekly forecasts, it is basically in line with what we saw in the third quarter. Regarding our working capital, what I can tell you is that we had performance that was better than what the market expected for the third quarter. For the 2025 numbers, what we expect is something in alignment with our forecast. It's going to be even better than our forecast. Doing very quick and conservative math, if we look at receivables, advanced payments, inventory; these numbers are going to be more normalized towards the end of the year. So we may have a [ payment ] of around BRL 1 billion in cash. So if we repeat our EBITDA of BRL 1.4 billion, repeat our BRL 600 million expenditure, our CapEx is also repeated and we have normalized numbers for the other parameters. And if we are very conservative and we have normalization of BRL 1 billion in our working capital, we're going to have BRL 500 million of cash burn. If we add that to our free cash flow, which is BRL 1.9 billion to BRL 2 billion, we're going to have a free cash flow of BRL 1.5 billion. We were discussing a free cash flow of around BRL 1 billion at the end of the year. So it's 50% better than our expected forecast at the beginning of the year. Now thinking about deleveraging. Our EBITDA is BRL 4.6 billion for the last 12 months. We're going to have BRL 950 million for the fourth quarter and we're going to get to BRL 5 billion, a little bit over BRL 5 billion of EBITDA for 2025. If we burn BRL 500 million in cash, we'll go from BRL 11.7 billion to BRL 11.2 billion in our debt. For our leveraging, our leveraging goes down a little bit more like 2.44x or 2.45x. So all these numbers are useful for us to leave the market at peace even in a more conservative forecast for the working capital for the end of the year. Sometimes analysts are waiting for the wolf to come around, but he never comes. So if we still have a negative working capital, we're still going to produce BRL 1.5 billion in our free cash flow and we're going to have leveraging under 2.5x. Operator: Our next question is from Leonardo Alencar, XP. Leonardo Alencar: First and foremost, congratulations. I know it's a bit sensitive to talk about the future, but you mentioned that you had strategic inventory in the U.S. and much of your results came from that, but it was a surplus. Is there still a surplus to be sold in Q4? Also, can this inventory be transferred to Q1 or would you have to pay tariffs between the U.S. and Brazil? Would you be able to transfer this inventory into Q1 to have a better position? What do you think? Also on the topic of Q4 and of course the impact of the cash flow generation. For China, you mentioned advanced volumes for the third quarter. Is this a matter of demand because of the Chinese New Year or do you have any safeguards thinking about any potential risks for the fourth quarter? And I have 1 last question. You've mentioned bigger quotas for Argentina, but it seems like you haven't really implemented that yet. So you're going to increase it to 80,000 tons, but I don't know if you've done this, if you're waiting, if you have dynamic preference. And I'd love to understand these 3 points for Q4. Fernando De Queiroz: Okay, Leonardo. For the U.S., we have a sales strategy based on our understanding of the market. So to answer your first question, yes, we may roll out our inventory. But definitely in many countries, you have the first in first served quota. So we should be sending out more shipments so that we're able to work with this quota in order for Minerva to fit into that. There's lots of uncertainty when it comes to what's going to happen with Brazil. However, obviously, we have 3 other countries that are exporting into the U.S. quota. China has been surprising with their volumes. You saw they had record volumes. So we've been having a few conversations regarding safeguards and we do believe that we could have news to share regarding China. But it's not going to be something that impactful to change our guidance with China as one of the main markets as maybe the first or second biggest markets. Regarding the quota from Argentina to the U.S., yes, indeed, we haven't reached a conclusion. In the U.S., they still have issues with their lockdown. As soon as we get over that, then we should see more official logistics. We'll understand how this is going to work in Argentina. We still don't know how this is going to play out. However, we're relying on Argentina with a 5x higher quota going from around 20,000 tons to around 100,000 tons. Operator: Our next question is from Lucas Mussi, Morgan Stanley. Lucas Mussi: First, I have a question about capital allocation. From the beginning of the year, we've been discussing this thoroughly talking about the potential return of dividend payments. As soon as the company is more comfortable with the leveraging level, we're talking about the historical levels of 2.5x. Our expectation was to reach this number by the first quarter of next year, but this is something that you were able to achieve 2 quarters earlier. Given the recent conversations regarding the taxation of dividends as of next year, could you please update us on what you're thinking about this regarding the distribution of dividends? Are you going to do it earlier? Again, I'm asking in light of recent developments. Is there any kind of priority? Are you still waiting for next year? I'd love an update on capital allocation given the current circumstances because you were able to achieve this goal earlier than expected with a very comfortable leveraging level. And we have the ongoing fiscal conversations in Brazil. Second, regarding China, China was one of the biggest drivers for the third quarter. We see that in industry data with very strong demand. However, we see reports that most of the growth in the third quarter compared to the second quarter also had to do with advanced stock with a stock buildup from importers in China because they were afraid of potential measures related to safeguards. And potentially in the fourth quarter, we could see lots of deacceleration for that. What do you think about this for China in the short term? Do you see this in your portfolio? Do you expect deacceleration for the fourth quarter or is it just noise? Edison de Andrade Melo e Souza Filho: Regarding dividends, what we discussed in the last quarter is that we're going to talk to the Board when we have the final numbers for 2025. As you put pretty well, we reached a leveraging level that allows for us to have a more flexible dividend payout policy maybe 2 or 3 quarters earlier than what we expected. So we're going to have this conversation as soon as we have the final numbers for 2025. And if this is within our policy, then we're going to comply with our policies as we have been talking about. Regarding tax changes, I'd like to say that our company is ready. Should changes be made and should we reach the conclusion that having advanced dividend payouts make sense, then we'll do it. But this hasn't happened yet. This is ongoing. We are discussing it, but we don't have anything that is concrete. In our meeting, we said that we would absorb all accrued losses and we would be open to dividend payouts at any point if the company decides to do so. Fernando will answer regarding China. Fernando De Queiroz: Lucas, yes, there have been advances there. We do believe that there may be something coming from the Chinese government not towards Brazil, but towards the whole import system to strike more balance. The main point is that Brazil is still the biggest, most competitive supplier for China. So you're right in assuming that, yes, we had record numbers from China, almost 200 million tons per month. So yes, depending on the measures that we see in the future, these numbers could go back to normal, let's put it this way. Now what I do find interesting and what we're following up on is the days of available inventory that we have in Chinese ports. This is at very low levels even with record imports. Partially, this is due to a reduction in local production. So we still have a positive flow, but we do see the impacts of the advance of some measures that China could implement. Operator: The next question is from Guilherme Palhares from Santander. Guilherme Palhares: I've got a couple of questions about the balance sheet. Edison, there's been some progress in the agreements line. The average cost was 1.54 each month, right? How are you thinking about that line given that there have been more recent debenture issuances, about 113 of the CDI and there seems to be a cost difference. So could you share the agreement strategy compared to a longer-term strategy? Also, you've released some more working capital. You've brought forward some clients from the energy and beef tradings. What of that is recurring in your balance sheet structure? Edison de Andrade Melo e Souza Filho: Well, the cost of agreement is there as a piece of information, but it's not our cost, that is passed on. So there's a misunderstanding that we offset that financial cost when we buy raw material. There's a discount when we buy raw material because I'm paying the client earlier and we also get more time from the financial institution. So we share that cost as a matter of record, but it's actually a benefit that you can see in the CNMV because of the lower cost of raw material. And beef client and energy trading advances, I mean the energy trading is becoming increasingly more relevant. It buys future energy in the market and at some point, it means using resources and at other times, it means receiving resources. So that's our trading operation at the energy desk. So because these other accounts payable have increased and we have shared all of that, that was because of the energy trading company. It was BRL 500 million to BRL 600 million worth of future energy sales, but receiving for it upfront. Those energy trading operations are longer-term operations so they're more stable. Once they're closed, their average duration is 3 years. So it's going to be in the cash and it's not going anywhere. Beef operations, as I've said many times, have to do with our sales mix. If there's an increase in China, our credit policy is we require payment in advance so a prepayment. So it's natural to have more funds available ahead of time as China's share with us increases. And the company has grown its top line by 80% year-on-year. Now if you look at it on a day-by-day basis in terms of billing, the beef advanced payment bill is about 22, 23 days. Now it's about 26 days. So they're not that different to our historical track record. The difference is because China is increasing its share when compared to other markets. Now if you want to be conservative and think about it in a normalized fashion, bring it down from 26 to 22. So there's about 3 or 4 days to normalize it, which is the calculation I did for the fourth quarter assuming that you have a normalization of the working capital accounts in Q4. Now as for the advanced payments for energy, we share that with you to provide you with more transparency so you understand how those advanced payments work. I think the inventory is about BRL 3.1 billion and its average duration is 3 years. So it's not going anywhere for the next 3 years. It's not leaving our balance sheet. Guilherme Palhares: Yes, that's a really interesting piece of information for us. Operator: Next question is from Thiago Duarte from BTG Pactual. Thiago Duarte: Can we go back to the revenue discussion, but not so much from the market standpoint and more from the company operations standpoint. In terms of slaughtering, in Brazil over 1 million heads were slaughtered this quarter. That's about 13% of the slaughter share in Brazil this quarter. You've already mentioned that the new assets will be running at a suitable level also from a volumes point of view. Now considering the location of the plants, both the legacy plants and the new plants and the cattle you have in those regions, are you considering that share level to be sustainable? Is that something we can consider looking forward in the context of cattle availability in Brazil? And my next question is about inventory monetization again. I know you've already talked about that in a previous question, but it wasn't clear to me. Looking at the company's inventory days, they've gone back to levels very similar to the consolidated historical levels. So last quarter, we talked about that to Edison. So it looks to me like you've made arbitrage tactical movements. Is my interpretation correct? Considering the information we have available right now, for lack of a better word, this revenue surplus that you've got from this inventory. Edison de Andrade Melo e Souza Filho: Well, Thiago, with regards to your first question, if there is more room, yes. That's the answer. We broke our record over September and October in terms of slaughtering in Brazil. So yes, we're just fine-tuning operations now so that we can become even more flexible and increase productivity even more. So yes, there is room for that and October is proof of it. As for the inventory levels, our strategy is based on the quota system. So there can be variations, but there won't be too much of an impact on the analysis. Most of our tactical movement was done in Q3. As Fernando said, there are normal variations to the operation. There may be a slight reduction in Q4 or if the domestic market becomes stronger or if the market becomes better in Q4 seasonably speaking, but the tactics that we've built up in the first and second quarter was realized in Q3. Operator: [Operator Instructions] The next question is from Mr. Henrique Brustolin from Bradesco BBI. Henrique Brustolin: I have a couple of follow-up questions. The first one is about the energy trading company. Looking at the ITR, it looks like the revenue is being multiplied by 3 year-to-date. At least that's what it looks like looking back and that operation seems to have a huge operation to your working capital. So my question is how should we consider that operation? Will it scale up looking forward or is the current level -- can we consider the current level to be recurrent for that line of business? And the second question, if I can take the opportunity. If you could please comment on the specific dynamics taking place in Uruguay and Paraguay. Realized prices in the quarter have been quite solid. So what are your prospects for these 2 markets looking forward? Edison de Andrade Melo e Souza Filho: It's not being multiplied by 3. It's gone from BRL 600 million to BRL 1.3 billion. I'm not going to say the top level, but it should stand at that level for the next 3 years. It shouldn't go too much up or down. So yes, please consider it to remain stable at that level based on the operations average ratio, which is about 3 years. About Paraguay, Uruguay, Argentina and Colombia excluding Brazil; beef is increasingly becoming a global commodity. So that price increase we've seen everywhere is a result of shortages in the Northern Hemisphere. So there will be market fluctuations. Some markets will change their behavior, but that geographical diversification is what allows Minerva to remain stable to capitalize on asymmetries and to exercise arbitrage among markets. So price level should go up and obviously we can choose between different destinations and different origins and we'll continue to do that. Henrique Brustolin: Great. I meant multiplying it by 3. I said the revenue in the trading company and not the advance payments, but that was very clear. Operator: This concludes the Q&A session. I will now turn it over to Mr. Fernando Queiroz for his closing remarks. Fernando De Queiroz: Thanks, everyone. Thank you for joining Minerva's earnings release conference call. And I would like to congratulate our team because we have been able to integrate assets in record time thanks to a lot of planning, a lot of clarity when it comes to different roles and a multidisciplinary team and work. Each unit was sponsored by a Minerva unit and that made sure that the culture, processes and management systems could be absorbed as quickly as possible. And I'd also like to highlight this shortage scenario in the Northern Hemisphere. The U.S. still hasn't started to retain females. In Europe, there's considerable shortage. Let's keep an eye out for Europe because it's going to become a massive destination. It should grow considerably next year. And that proves that our strength and our accurate strategy to be in South America works because South America is the main platform. And we also see some price movement in Australia. Prices are going up quite rapidly, which only attests to our competitiveness in the region because its main vocation is to produce soft commodities and more specifically speaking beef. We're here if you have any questions. Thank you. Operator: Thank you. Minerva's earnings release video conference call is now concluded. For further questions, please contact the Investor Relations team at ri@minervafoods.com. Thank you for joining us and have a great day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]